Valuation under SEBI, FEMA and Income Tax Laws

Understand Valuation under SEBI, FEMA and Income Tax Laws

Key rules to remember

SEBI ICDR floor price (frequently traded shares)

Floor price = higher of (90 trading days VWAP, 10 trading days VWAP) before the relevant date

The relevant date is fixed by the ICDR Regulations, linked to the date of the shareholders' meeting. The floor is the minimum price. You can issue at a higher price.

SEBI SAST open offer price

Offer price = highest of the prescribed reference prices (negotiated price, acquirer's look-back prices, 60 trading days VWAP, etc.)

Open offer is triggered at 25% voting rights or on acquiring control. The offer price can never be below the highest reference price.

FEMA pricing rule

Issue or sale to a non-resident: price ≥ fair value. Sale by a non-resident to a resident: price ≤ fair value

This applies to unlisted shares. Fair value is certified by a CA, SEBI-registered merchant banker or practising cost accountant. Listed shares follow SEBI norms.

Rule 11UA value of an unquoted equity share

FMV per share = (A + B + C + D − L) × PV ÷ PE

A = book value of assets other than jewellery, artistic work, shares, securities and immovable property. B = value of jewellery and artistic work. C = fair market value of shares and securities. D = stamp duty value of immovable property. L = book value of liabilities, excluding paid-up equity capital, reserves and surplus, tax provisions and contingent or unascertained liabilities. PE = total paid-up equity capital. PV = paid-up value of one equity share.

Taxability of shares received (1961-Act section 56(2)(x) logic)

No consideration: taxable if FMV > ₹50,000, whole FMV taxed. Inadequate consideration: taxable if (FMV − consideration) > ₹50,000, the difference taxed

The 10% tolerance applies to immovable property, not to shares. Check the section number in the Income-tax Act, 2025.

How to solve Valuation under SEBI, FEMA and Income Tax Laws questions

1. 1Identify the transaction: preferential issue, takeover, issue or transfer involving a non-resident, or gift or purchase of shares for tax purposes.
2. 2Identify whether the company is listed or unlisted, and whether the shares are frequently traded. This decides which price test applies.
3. 3Name the governing law: SEBI (ICDR or SAST), FEMA (Non-debt Instruments Rules) or income tax. A single transaction can attract more than one.
4. 4Apply the specific price test. For SEBI, take the higher of the reference prices. For FEMA, check the floor or ceiling based on who is the buyer. For income tax, compute the Rule 11UA value.
5. 5Compare the actual price with the required price. State clearly whether it is compliant or what the minimum or maximum price is.
6. 6Work out the consequence: a revised price, an open offer obligation, a breach of FEMA pricing or the amount taxable in the receiver's hands.
7. 7Name who must certify the value: a registered valuer, a merchant banker, a CA or cost accountant, as the law requires.
8. 8Write a short conclusion with your recommendation.

Quickest way: One-line test per law

Common mistakes in Valuation under SEBI, FEMA and Income Tax Laws

• Using the lower of the 90-day and 10-day VWAP as the preferential issue floor.

  Students assume a floor should be a conservative figure.

  Fix: The floor is the higher of the two. Underline the word higher in your notes.

• Applying the FEMA floor to both buying and selling by a non-resident.

  Students remember only the phrase not less than fair value.

  Fix: Ask who is the non-resident. Buyer or subscriber: not less than fair value. Seller to a resident: not more than fair value.

• Including paid-up equity capital and reserves in liabilities (L) under Rule 11UA.

  Students treat every item on the liabilities side as a liability.

  Fix: Exclude paid-up equity capital, reserves and surplus, tax provisions and contingent or unascertained liabilities from L.

• Using book value for immovable property and jewellery under Rule 11UA.

  Students put all assets into A.

  Fix: Immovable property goes in D at stamp duty value. Jewellery and artistic work go in B at valuer value. Shares and securities go in C at fair market value.

• Applying the 10% tolerance to shares under the section 56(2)(x) logic.

  Students mix the property rule with the share rule.

  Fix: For shares, test only whether the difference exceeds ₹50,000. The 10% tolerance is for immovable property.

• Quoting the Income-tax Act, 1961 section numbers as current law for the June 2027 term.

  Most study notes still use the old numbering.

  Fix: State the concept and the rule, and use the numbering in the Income-tax Act, 2025 text. If unsure, describe the provision in words.

Worked examples