Key takeaways
- ICAI Valuation Standard 103 requires all three approaches to be considered and the rejection of those not adopted to be explained. That disclosure is where most reports are weak.
- Section 247 of the Companies Act 2013 and the Registered Valuers Rules restrict who may value what; registration is granted for a specific asset class, not generally.
- DCF suits forecastable operating businesses, market multiples provide the reality check, and asset-based methods fit holding, real estate and wind-down situations or a value floor.
- Terminal value often exceeds half of enterprise value in a standard model. A terminal growth rate above long-run nominal GDP growth needs an explicit defence.
- Discounts for lack of control or marketability must match the level of value the method produced, or they double-count. The basis and evidence should be stated in the report.
Valuation disputes rarely turn on arithmetic. They turn on method selection. Two competent professionals given the same company and the same data will produce different values largely because one has chosen a discounted cash flow model and the other a market multiple, and each has reasons that sound defensible in isolation. The discipline lies in knowing which approach the asset, the purpose and the regulation actually call for — and in being able to explain why the others were rejected.
In India that discipline is now partly codified. The ICAI Valuation Standards, the registered valuer regime under the Companies Act 2013, and the pricing rules under income-tax and FEMA each constrain what a valuer may do and how the work must be documented. Understanding the constraints first makes the method choice considerably simpler.
Three approaches, several methods
Valuation theory recognises three approaches. Every named method sits inside one of them.
- Income approach. Value derives from expected future economic benefit, discounted to present value. Methods include discounted cash flow (free cash flow to firm or to equity), capitalisation of earnings, and relief-from-royalty for intangibles.
- Market approach. Value derives from prices observed for comparable assets. Methods include comparable companies (trading multiples), comparable transactions (deal multiples), and prior transactions in the subject company’s own securities.
- Cost approach. Value derives from what it would cost to recreate or replace the asset. Methods include net asset value, replacement cost and, in a wind-down context, liquidation value.
ICAI Valuation Standard 103 sets out these approaches and requires the valuer to consider all three and to disclose the reason for the method adopted and for those rejected. That disclosure requirement is the practical heart of the standard: a report that presents a DCF with no explanation of why the market approach was set aside is incomplete regardless of how well the model is built.
The regulatory frame
Registered valuers under the Companies Act 2013
Section 247 of the Companies Act 2013, read with the Companies (Registered Valuers and Valuation) Rules 2017, requires that valuations under the Act be conducted by a registered valuer. Registration is with the Insolvency and Bankruptcy Board of India as the authority, through a registered valuer organisation, and is granted for a specific asset class — securities or financial assets, land and building, or plant and machinery. A valuer registered for land and building cannot value shares.
Situations under the Act that call for a registered valuer include, among others, further issue of shares on a preferential basis under Section 62(1)(c), non-cash transactions involving directors under Section 192, schemes of compromise or arrangement under Sections 230 to 232, and purchase of minority shareholding under Section 236. Under the Insolvency and Bankruptcy Code 2016, the CIRP regulations require the resolution professional to appoint registered valuers to determine fair value and liquidation value, with a third valuer where the two estimates diverge significantly.
ICAI Valuation Standards
The ICAI Valuation Standards, issued in 2018, apply where no other statutory standard is mandated. The structure is worth knowing because report reviewers navigate by it: the 100 series covers definitions, bases of value and approaches and methods; the 200 series covers scope of work, analysis and evaluation, and reporting and documentation; the 300 series covers specific assets, including business valuation, intangible assets and financial instruments.
The international equivalent is the International Valuation Standards issued by the IVSC, which many cross-border engagements reference alongside or instead of the ICAI set. Where a valuation feeds financial reporting, the applicable accounting framework also governs — Ind AS 113 or IFRS 13 for fair value measurement, with its three-level input hierarchy, and ASC 820 under US GAAP.
Tax and exchange control
Two further regimes commonly bind. Under the Income-tax Act, valuation of unquoted equity shares for the purposes of Sections 56(2)(x) and 50CA is governed by Rule 11UA and Rule 11UAA, which prescribe a net asset value computation and, for certain purposes, permit a discounted cash flow determination by a merchant banker. The permitted methods and the classes of investor to which each applies have been amended more than once; the operative version of the rule on the valuation date should be confirmed rather than assumed. the version of Rule 11UA in force on the valuation date, and the methods it permits for the transaction and investor class in question
Under FEMA and the Non-Debt Instruments Rules, pricing of shares issued to or transferred from a non-resident must be supported by a valuation carried out on an arm’s-length basis using an internationally accepted pricing methodology, certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant. The result is that a single transaction can require the same company to be valued under two different rule sets with two different floors and ceilings, and the transaction must satisfy both.
Choosing between the methods
| Method | Applies well when | Breaks down when | Inputs that drive the answer |
|---|---|---|---|
| Discounted cash flow | Cash flows are forecastable with reasoned support; business has a distinct growth or investment phase; intangible-heavy or asset-light models | Forecasts are speculative, history is short, or the business is cyclical at an unrepresentative point | Revenue and margin trajectory, working capital and capex intensity, WACC, terminal growth rate |
| Comparable companies | Listed peers exist with similar business model, scale and geography; the metric is meaningful across the set | Peers differ in capital structure, accounting policy or growth; the company is loss-making on the chosen metric | Peer set construction, multiple choice, illiquidity and size adjustments |
| Comparable transactions | Recent, disclosed deals in the same sector and size band; control valuation required | Deal terms are undisclosed, stale, or reflect benefits available only to one specific buyer | Transaction date, deal structure, whether the multiple reflects buyer-specific benefits |
| Net asset value | Holding companies, real estate, investment entities; a statutory computation is prescribed | Value sits in brand, technology, people or customer relationships not on the balance sheet | Fair value of individual assets, contingent liabilities, tax on unrealised gains |
| Liquidation value | Distress, insolvency, wind-down; downside floor in a resolution process | Used as a proxy for going-concern value | Realisation assumptions, time to sell, cost of disposal, security ranking |
| Relief from royalty / excess earnings | Purchase price allocation, brand and technology valuation | No observable royalty market; contributory asset charges omitted | Royalty rate benchmarks, remaining useful life, tax amortisation benefit |
Where DCF earns its place
DCF is the default for an operating business with a credible plan, and the credibility of the plan is the whole exercise. The model should be built from operational drivers — units, price, capacity, headcount — not from a growth percentage applied to last year’s revenue. Free cash flow to firm should reconcile to the projected balance sheet, meaning the model carries a full three-statement structure rather than a P&L with a working capital assumption bolted on.
Two inputs dominate the outcome. The discount rate, typically built through CAPM with a risk-free rate from the government securities yield curve, an equity risk premium, a beta relevered to the subject’s target capital structure, and where justified a size or company-specific premium. And the terminal value, which in a standard ten-year model frequently accounts for more than half of total enterprise value. A terminal growth rate above long-run nominal GDP growth is an assertion that the company outgrows the economy forever, and should be defended explicitly or reduced.
Where market multiples earn theirs
Comparables provide the reality check a DCF cannot provide for itself. Peer set construction is where the work lies: screen on business model and revenue driver first, then size, then geography, and document exclusions. Match the multiple to the metric — enterprise value against EBITDA, EBIT or revenue; equity value against earnings or book value. Pairing an enterprise value numerator with an equity denominator is a common and consequential error.
In the Indian mid-market the constraint is usually the absence of clean listed comparables at similar scale. The honest response is either a wider peer set with disclosed adjustments, or a reduced weighting on the market approach, rather than a forced comparison.
Where asset-based methods are appropriate
The cost approach is right where value genuinely resides in the assets: investment and holding companies, real estate vehicles, and entities being wound down. It is also the prescribed computation in certain tax contexts irrespective of commercial logic. It is inappropriate as a primary method for a profitable operating business, where it will systematically understate value by excluding everything the balance sheet does not capture. It remains useful as a floor.
Reconciliation, discounts and premia
Where more than one method is applied, the reconciliation should be reasoned rather than mechanical. A weighted average with weights of 50, 30 and 20 per cent and no explanation is a common weakness in reports that otherwise hold up. State which method best reflects how a participant in this market would price this asset, and treat the others as corroboration.
Adjustments to the indicated value must be applied consistently with the level of value the method produces. A DCF on entity cash flows generally produces a control, marketable-equivalent value; trading multiples from listed peers produce a minority, marketable value. A discount for lack of marketability applied to a valuation that already reflects a private-company peer set double-counts. Where a discount for lack of control or a discount for lack of marketability is applied, the basis and the supporting evidence should be stated. Ranges observed in practice for marketability discounts on unlisted minority stakes are wide and highly fact-dependent; a specific percentage should be supported by study data or transaction evidence relevant to the subject, not adopted by convention. a discount supported by a recognised marketability study appropriate to the company and the holding being valued
Errors that recur
- Mismatching the basis of value to the purpose. Fair value under Ind AS 113, fair market value under tax rules and investment value to a specific buyer are different concepts producing different numbers.
- Discounting the wrong cash flow with the wrong rate. Free cash flow to firm discounted at cost of equity, or post-tax flows discounted at a pre-tax rate.
- Double-counting the capital structure. Deducting debt from an equity-value output, or building interest into cash flows already reflected in WACC.
- Terminal value assumptions inconsistent with the explicit forecast. Terminal capex below depreciation while assuming perpetual growth.
- Ignoring surplus and non-operating assets. Excess cash, idle land and investments must be valued separately and added.
- Treating the management plan as evidence. The valuer’s obligation is to assess reasonableness against historical achievement, capacity and market size, and to document that assessment.
- Weak documentation. Under ICAI VS 202, working papers must support the conclusion. Reports fail review far more often on documentation than on judgement.
- Valuation date drift. Using information that was not knowable at the valuation date, particularly in disputes and tax matters.
What a defensible report contains
Scope, purpose and intended user. Basis and premise of value. Valuation date. Sources of information and extent of verification. Approaches considered, with reasons for rejecting those not adopted. Full workings for the adopted method. Sensitivity analysis on the inputs that move the answer most. Discounts and premia with basis. Assumptions and limiting conditions. Registration details where a registered valuer is required.
Artham Fintech provides business valuation services for transactions, regulatory filings, financial reporting and dispute support, including DCF modelling, peer benchmarking and purchase price allocation. If you are working through which basis and method fit a particular purpose, we are happy to talk it through before the engagement is scoped.