The Central Board of Direct Taxation (“CBDT”) vide Notification No. no. 81/2023 dated 25th September 2023 (“the notification”) has made an amendment to Rule 11 UA for the valuation of shares for the purposes of section 56(2)(vii b) of the Income Tax Act,1961 (“Act”). The amendment is introduced to keep aligned the commitment made by the Finance Act, 2023 to bring the consideration received from non-residents for the issue of shares by an unlisted company within the ambit of section 56(2)(vii b) which provides that if consideration for issue of shares exceeds the Fair Market Value (“FMV”) of the shares, it shall be chargeable to income-tax under the head ‘Income from other sources’.
The key highlight of the notification includes:
- The erstwhile Rule 11UA prescribed two methods for determining the FMV of equity shares issued to resident investors which were the Net Asset Value Method (“NAV”) or (“Discounted Cash Flow Method (“DCF” ). The amended Rule 11UA provides five more methods of valuation for the issue of unquoted equity shares or Compulsory Convertible Preference Shares (“CCPS”) to Non-resident investors which are the Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method and Replacement Cost Methods.
- The erstwhile Rule 11UA stated that the DCF valuation report to be issued by the Merchant Banker shall be as on the date of issue of shares. The amended Rule 11UA brings flexibility to face the practical difficulty by making valuation reports issued up to 90 days prior to the date of issue of equity shares or CCPS for computing FMV for both resident and Non-Resident investors.
- Valuation methods for calculating the FMV of CCPS in addition to Equity shares have also been provided.
- A safe harbor of 10% variation in value has been provided.
- Price matching facility introduced on meeting the stipulated conditions.
The initiative will align the valuation methodologies with the globally accepted methodologies and may impact Foreign Direct Investment, venture capital investments, and investments from notified entities in India.