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    Rule 11UA

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    gaurav kumar maheshwari
    Rule 11UA was amended to prescribe additional valuation methods for calculating the fair market value of shares issued by closely held companies to non-residents. The key changes include introducing 5 additional valuation methods for shares issued to non-residents, prescribing rules for valuation of compulsorily convertible preference shares, and allowing a 10% variation for valuations using certain methods when issuing to residents or non-residents.

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    Rule 11UA

    Uploaded by

    gaurav kumar maheshwari
    35 views2 pages
    Rule 11UA was amended to prescribe additional valuation methods for calculating the fair market value of shares issued by closely held companies to non-residents. The key changes include introducing 5 additional valuation methods for shares issued to non-residents, prescribing rules for valuation of compulsorily convertible preference shares, and allowing a 10% variation for valuations using certain methods when issuing to residents or non-residents.

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    Rule 11UA was amended to prescribe additional valuation methods for calculating the fair market value of shares issued by closely held companies to non-residents. The key changes include introducing 5 additional valuation methods for shares issued to non-residents, prescribing rules for valuation of compulsorily convertible preference shares, and allowing a 10% variation for valuations using certain methods when issuing to residents or non-residents.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    35 views2 pages

    Rule 11UA

    Uploaded by

    gaurav kumar maheshwari
    Rule 11UA was amended to prescribe additional valuation methods for calculating the fair market value of shares issued by closely held companies to non-residents. The key changes include introducing 5 additional valuation methods for shares issued to non-residents, prescribing rules for valuation of compulsorily convertible preference shares, and allowing a 10% variation for valuations using certain methods when issuing to residents or non-residents.

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    Changes in Rule 11UA w.r.

    t to computation of FMV for issuance of shares by closely held companies


    Rule 11UA - provides for method of calculation of fair market value (FMV)

    Section 56(2)(viib) imposes income tax on closely held companies on consideration for issuance of shares where the issue price exceeds the face value and the FMV of the shares. In order to establish the
    principles for determining FMV of the shares, Rule 11UA of the Income Tax Rules was introduced. Earlier, for the purpose of arriving at the FMV of shares for the purpose of the s. 56(2)(viib), R. 11UA provided
    for only two methods of valuation, that is, NAV method and DCF method.
    As introduced in section 32 of Finance Act, 2023, pursuant to inclusion of non-resident investors within the scope of section 56(2)(viib), the valuation methodology prescribed in Rule 11UA(2) has been
    amended vide Income-tax (Twenty first Amendment), Rules, 2023. Now, (i) additional 5 methods have been prescribed that can be adopted by the merchant banker appointed for the valuation purpose in case
    of valuation of share issued to non-resident; (ii) valuation methods for CCPS has also been prescribed. This is based on public consultation on the draft rules. (PIB notification).

    Key Highlights Applicable rules for valuation of FMV

    1 Changes effective from - September 25, 2023 from the date of issue Applicable law

    2 Introduction of methods of valuation of FMV for CCPS


    Unquoted securities issued:

    Equity share Section 56(2)(viib) and (x)


    3 Validity of the valuation: - Equity shares and CCPS can be issued by a company on the basis of valuation report which is issued by
    read with rule 11UA(2)(A)
    merchant banker not earlier than 90 days from date of issue of equity shares/CCPS. and 11UA(1)(c)

    4 Safe harbour - Redeemable preference shares Section 56(2)(viib) and (x)


    - Shares can be issued at a price variation not exceeding 10 % of value where valuation has been done either by NAV method or (RPS) read with rule 11UA(1)(c)
    DCF by a merchant banker where the shares are issued to a resident.
    - Shares can be issued at a price variation not exceeding 10 % of value where valuation has been done either by NAV method or by Compulsorily convertible Section 56(2)(viib) read with
    a merchant banker following any of the remaining 6 methods mentioned in Table 1 where the shares are issued to a non resident. preference share (‘CCPS’) Rule 11UA(2)(B)

    5 Price matching / benchmarking: In case of shares issued to AIFs / VC fund / VC companies / notified entities, price at which the Optionally convertible Section 56(2)(viib) and (x)
    unquoted equity shares have been issued to these entities can be taken as FMV, subject to the following conditions: preference share (OCPS) read with rule 11UA(1)(c)
    - the consideration should have been received within the range of 90 days before / after the date of issue of equity shares in
    question; and Warrant Section 56(2)(x) read with
    - the total consideration received from the equity shares in question should not exceed the total consideration received from such rule 11UA(1)(c)
    entities. This point is also clarified by way of an illustration.
    Redeemable Debentures Section 56(2)(x) read with
    6. Valuation of CCPS: The FMV of CCPS can be calculated in either the following manner rule 11UA(1)(c)
    - Where issued to resident:
    - Valuation of CCPS in question using either DCF or Price Matching Method; or Compulsorily convertible Section 56(2)(x) read with
    - Valuation of the equity shares of the issuer using NAV, DCF or Price Matching debenture (CCDs) rule 11UA(1)(c)
    - Where issued to non resident:
    - Valuation of CCPS in question using any method except NAV OCDs Section 56(2)(x) read with
    - Valuation of the equity shares of the issuer using any method rule 11UA(1)(c)

    Email at: corplaw@vinodkothari.com Vinod Kothari & Company


    Reach us on social media
    Read our related article on amendment in section 56(2)(viib) here Kolkata |Mumbai | Delhi | Bengaluru
    Table: 1 Methods of valuation of shares (Equity + CCPS) for unlisted companies

    Erstwhile sub-rule 2 Amended sub-rule 2

    Resident Non-resident

    Formula driven

    Net Asset Value (NAV) Method ✔ ✔ ✔


    It should be noted that under sub-rule 2, NAV (at book value) is to be computed unlike Adjusted NAV (considering
    market value of jewellery, shares, immovable property) required under sub-rule 1. Sub-rule 1 is referred to for
    computation of FMV u/s 56(2)(x).

    To be computed by merchant banker

    Discounted Cash Flow (DCF) Method ✔ ✔ ✔


    This method determines valuation of shares by discounting the estimated cash flow.

    Comparable Company Multiple (CCM) Method x x ✔


    based on key financial indicators of other similar companies, like PE multiples etc.

    Probability Weighted Expected Return Method - x x ✔


    It determines value of share based on probability-weighted present value of various future outcomes.

    Option Pricing Method - for warrants / OCPS / OCDs. There are two parts - (a) for the cash flows from the x x ✔
    securities, DCF method may be applied, (b) for the option - option pricing models like binomial distribution or
    Black Scholes Model or Monte Carlo simulation may be carried out

    Milestone Analysis Method - milestone based achievement. Focusing on critical company milestones, this method x x ✔
    links valuation to key achievements such as product launches or market expansions.

    Replacement Cost Method -what will be the cost for similar earning capacity establishing today - this is only for x x ✔
    traditional business - difft for diff scenarios

    Price matching / Benchmarking Method

    - in case shares have been issued to AIFs / VCs etc during past / coming 90 days x ✔ ✔

    - in case shares have been issued to entities notified under clause (ii) of first proviso of 56(2)(viib) x ✔ ✔

    Email at: corplaw@vinodkothari.com Vinod Kothari & Company


    Reach us on social media Read our related article on amendment in section 56(2)(viib) here Kolkata | Mumbai | Delhi | Bengaluru

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