Valuation for Mergers and Amalgamations
A merger valuation is a relative valuation: both companies, one date, consistent methods, explained weights.
In a merger the consideration is usually shares, not cash. Shareholders of the transferor company receive shares of the transferee in a fixed proportion, the share exchange ratio, and the valuer's job is to support that ratio with a relative valuation of both companies.
The answer is a relative value, not an absolute one. What matters is that both companies are valued on the same date, on consistent bases, and that the weights and methods are explained. That is also what the SFA exam tests.
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Where the Law Asks for a Valuation
Companies Act, 2013 and SEBI's master circular on schemes of arrangement (20 June 2023).
| Provision | What it requires |
|---|---|
| Section 230(3) | The notice of the court-convened meeting must be accompanied by a copy of the valuation report, if any. |
| Section 232(2)(c) | A directors' report explaining the effect on each class of shareholders, laying out the share exchange ratio and any special valuation difficulties. |
| Section 232(2)(d) | The report of the expert with regard to valuation, if any, circulated for the meeting. |
| Section 247(1) | Where the Act requires a valuation, a registered valuer does it, appointed by the audit committee or, if there is none, the Board. |
| Section 236(2) | A 90% majority buying out the minority must offer a price based on valuation by a registered valuer. |
| SEBI circular, para 4(a) | Every listed entity in a scheme submits a registered valuer's report showing workings, relative fair value per share and the fair share exchange ratio. |
| SEBI circular, para 2(d) | A fairness opinion by an independent SEBI-registered merchant banker on the valuation done for the listed and unlisted entity. |
What Goes Into a Merger Valuation Report
- check_circleThe same valuation date for both companies, and the relative value per share of each.
- check_circleThe approaches used and the weight on each, in the asset, income and market rows SEBI's Annexure II format asks for.
- check_circleAdjustments for surplus assets, contingent liabilities and dilution from convertibles or options before dividing by the share count.
- check_circleUnder SEBI's circular, no report is needed where the shareholding pattern of the listed entity does not change, for example a wholly owned subsidiary merging into its parent.
- check_circleThe valuer and the merchant banker giving the fairness opinion must be independent of each other and of the company, including no common directorships or partnerships.
How the Valuation Examination Tests This
Expect a case study with two companies' figures and three weighted approaches, then 2-mark questions on the value per share and the ratio. The common trap is inverting the ratio: decide first which company issues shares, then divide the transferor's value by the transferee's. One-mark questions test who appoints the valuer (the audit committee) and which report comes from whom (valuation from a registered valuer, fairness opinion from a merchant banker).
FAQs
Who prepares the valuation report for a merger in India?expand_more
A registered valuer under section 247 of the Companies Act, appointed by the audit committee or the Board. For a listed entity, SEBI also requires a fairness opinion on that valuation from an independent SEBI-registered merchant banker.
What is the difference between a valuation report and a fairness opinion?expand_more
The valuation report arrives at the relative values and the share exchange ratio. The fairness opinion is a second, independent view on whether that valuation is fair to shareholders; it does not redo the valuation.
Can different valuation methods be used for the two merging companies?expand_more
Yes, if there is a reason. ICAI VS 102 gives the example of a listed company merging with an unlisted one, where the market price method is relevant only for the listed company. The reason must be stated in the report.
Is a valuation report needed for every merger of a listed company?expand_more
No. SEBI's circular exempts schemes where the shareholding pattern of the listed entity does not change. Check the current circular before relying on the exemption.
Next steps
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