1. Overview
Preferential allotment is one of three routes by which a company having share capital can issue further shares under Section 62 of the Companies Act, 2013 — the other two being a rights issue to existing shareholders under Section 62(1)(a) and an offer to employees under a stock option scheme under Section 62(1)(b). Section 62(1)(c) governs every other issue of shares or convertible securities to selected persons, whether new investors, promoters, strategic partners or lenders converting debt into equity.
Because a preferential issue does not carry the pro-rata protections built into a rights issue, the law places the burden of establishing a fair price on an independent valuation. This is the function that share valuation under Section 62(1)(c) performs: it produces a documented, methodology-based basis for the price at which new shares are allotted, so that the transaction can be explained and defended to existing shareholders, statutory auditors, tax authorities and, where applicable, market regulators.
2. What the Service Involves
At its core, valuation under Section 62(1)(c) requires a qualified professional to examine the company's financial position, business prospects and comparable market evidence, and to arrive at a value per share or per convertible security using recognised valuation methodologies. Depending on the nature of the company and the purpose of the issue, this may draw on the income approach (such as discounted cash flow analysis), the market approach (comparable companies or comparable transactions), the asset approach (net asset value), or a combination of these, with appropriate weightings and professional judgement applied to reflect the specific facts of the business.
2.1 Unlisted Companies
For unlisted public companies and private companies, Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 requires that the price of shares or other securities issued on a preferential basis, whether for cash or for consideration other than cash, be determined by the valuation report of a registered valuer. Where convertible securities are issued with an option to convert into equity shares at a later date, the price of the resultant equity shares must also be determined upfront, at the time of issuance of the convertible instrument, on the basis of a valuation report.
2.2 Listed Companies
Rule 13 carries a specific proviso: a listed company is not required to obtain a registered valuer's report to determine the price of a preferential issue. Instead, listed companies follow the pricing framework set out in Chapter V of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, which prescribes a minimum issue price generally derived from the volume-weighted average market price of the shares over specified look-back periods, with separate provisions depending on whether the shares are frequently or infrequently traded on a recognised stock exchange. Even where a registered valuer's report is not mandated for pricing, listed companies and their boards frequently seek an independent valuation opinion to support the fairness of the disclosed pricing and to satisfy internal governance expectations, particularly where the SEBI formula permits a range of outcomes or the transaction involves related parties.
3. Why the Service Matters
A preferential issue changes the ownership structure of a company, and if priced incorrectly, can transfer value between existing and incoming shareholders in ways that are difficult to reverse. An issue price set too low dilutes existing shareholders unfairly and can expose directors to questions about their fiduciary duties; a price set without a proper basis can equally deter a genuine investor or invite disputes at a later stage, including during a subsequent fundraising round or an exit.
Beyond the immediate transaction, the valuation report has downstream consequences. It forms part of the documentation examined by statutory auditors, and it is frequently relevant to income-tax positions, including provisions of the Income-tax Act, 1961 concerning the taxation of share premium and the issue price of unquoted shares, where valuation evidence is often called for. A properly reasoned, independent valuation report therefore protects the company, its board and its shareholders, and reduces the likelihood of the transaction being questioned later.
4. When the Service May Be Required
Businesses typically require this valuation when raising primary capital from new or existing investors outside a rights issue; when promoters or strategic partners are being allotted shares in recognition of a business combination or a technology or asset contribution; when convertible instruments such as compulsorily convertible debentures or compulsorily convertible preference shares are being issued with a pre-fixed conversion price; when outstanding debt is being converted into equity as part of a restructuring or settlement; or when shares are being issued for consideration other than cash, such as against the transfer of a business, an asset, or intellectual property. It is equally relevant whenever a company's Articles of Association and a special resolution authorise an issue to a defined set of allottees rather than pro rata to all shareholders.
5. Regulatory and Professional Framework
5.1 Section 62(1)(c), Companies Act, 2013
Section 62(1)(c) permits a company having share capital to offer further shares to any persons, whether or not they are existing shareholders, provided the offer is authorised by a special resolution and the price of the shares is determined by the valuation report of a registered valuer, subject to compliance with the applicable provisions of Chapter III of the Act, which deals with prospectus and allotment of securities, and any other prescribed conditions.
5.2 Rule 13, Companies (Share Capital and Debentures) Rules, 2014
Rule 13 sets out the detailed conditions attaching to a preferential offer, including the requirement for a valuation report from a registered valuer for unlisted companies, the corresponding exemption available to listed companies, the treatment of consideration other than cash, and the requirement that the resultant equity price under convertible instruments be fixed upfront on the basis of a valuation report.
5.3 Section 247, Companies Act, 2013 and the Registered Valuer Framework
Section 247 provides that any valuation required under the Companies Act must be carried out by a person registered as a valuer and holding membership of a recognised valuer organisation, appointed by the audit committee or, in its absence, the board of directors. The Companies (Registered Valuers and Valuation) Rules, 2017 operationalise this requirement, and the Central Government has delegated the functions of the authority under these Rules to the Insolvency and Bankruptcy Board of India. Registered valuers operate under defined asset classes, and the valuation of shares for a preferential issue under Section 62(1)(c) falls within the "Securities or Financial Assets" asset class.
5.4 Section 42, Companies Act, 2013 — Private Placement Conditions
Because a preferential issue is a form of private placement, it must also satisfy the conditions of Section 42, including the statutory cap on the number of persons to whom an offer can be made in a financial year for each kind of security, the requirement to keep application money in a separate bank account and to apply it only after the return of allotment has been filed, and the completion of allotment within the prescribed period from receipt of the application money.
5.5 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 — Listed Companies
For listed companies, Chapter V of the ICDR Regulations governs eligibility conditions, pricing, lock-in and disclosure requirements for a preferential issue, operating in addition to, and not in substitution of, the applicable requirements of the Companies Act, 2013.
6. Key Considerations
The choice of valuation approach depends heavily on the nature of the business, its stage of growth, the availability of reliable financial projections, and whether comparable listed or transacted companies exist. For early-stage or loss-making businesses, income-based methods often need to be supplemented or cross-checked against market evidence, and the assumptions underlying any discounted cash flow model — growth rates, discount rates and terminal value — deserve particular scrutiny, since these assumptions have the greatest bearing on the resulting value.
Where shares are being issued for consideration other than cash, the valuation of the non-cash consideration itself becomes a distinct and equally important exercise, since the accounting treatment of the transaction depends on it. Related-party transactions, and issues involving promoters or persons connected with them, generally call for a more conservative and better-documented approach, given the closer scrutiny such transactions typically attract from shareholders, auditors and regulators. Finally, the valuation date, the assumptions disclosed to the board and shareholders, and the internal consistency between the valuation report and the explanatory statement to the special resolution should all be aligned before the transaction is finalised.
7. Typical Applications
This valuation is commonly required when a private company closes a funding round with a new investor; when a startup issues equity to an incoming strategic or financial investor at a fixed price per share; when a group company allots shares to another group entity or to promoters as part of an internal restructuring; when a lender or creditor converts part of its debt into equity under a settlement or resolution arrangement; when a company issues shares against the transfer of a business undertaking, technology or other identifiable asset; and when a listed company undertakes a preferential allotment to institutional or strategic investors and requires an independent view on pricing to support its board's disclosures.
8. Our Professional Approach
An engagement of this nature generally begins with an understanding of the company's business, the purpose of the proposed issue, and the terms already discussed between the company and the prospective allottees, followed by a review of historical and projected financial information, applicable accounting records and relevant agreements. The valuer then selects and applies the methodology, or combination of methodologies, appropriate to the facts, tests the resulting value against available market evidence, and documents the basis, assumptions and limitations of the exercise in a report suitable for submission to the board, the audit committee, shareholders and, where relevant, statutory auditors or tax authorities.
Throughout, the valuation is approached as an independent professional exercise, distinct from the commercial negotiation between the company and the proposed allottees, so that the resulting report can stand on its own merits if examined at a later date.
9. Who May Benefit
Boards and promoters preparing for a preferential allotment, startups and growth-stage companies raising capital from new investors, companies restructuring debt through equity conversion, group entities undertaking internal reorganisations, and listed companies seeking an independent pricing opinion to support disclosures to shareholders, may all find this service relevant to their specific transaction.
10. Conclusion
Share valuation under Section 62(1)(c) is not a formality appended to a fundraising or restructuring transaction; it is the mechanism through which the law protects the interests of existing shareholders while giving a company the flexibility to raise capital or restructure its ownership outside a rights issue. Approached with appropriate rigour, it gives the company, its board and its investors a documented, defensible basis for the price at which shares change hands. Vallore Advisory LLP works with companies to bring the analytical discipline and independence this exercise requires, so that the resulting valuation supports the transaction at every stage — from board approval through to any subsequent scrutiny by auditors, tax authorities or regulators.