1. Overview
A scheme of merger, amalgamation, demerger, or other compromise or arrangement changes the ownership, capital structure, or asset base of the companies involved. Before shareholders, creditors, and the National Company Law Tribunal (NCLT or the Tribunal) can be asked to approve such a scheme, someone has to answer, in a defensible and transparent manner, what is being exchanged for what. That is the role of valuation in a scheme of arrangement: converting business and financial judgment into a share exchange ratio, an asset value, or an exit price that stakeholders can rely on and, where necessary, question. Vallore Advisory LLP provides valuation services for companies, promoters, and other parties involved in schemes of merger, amalgamation, demerger, and reconstruction under Sections 230 to 232 of the Companies Act, 2013, along with the related M&A valuation advisory that typically accompanies such transactions.
2. Scope of the Service
2.1 Valuation of Shares and the Exchange Ratio
At the centre of most merger and amalgamation schemes is the share exchange ratio, the number of shares that shareholders of the transferor company will receive in the transferee company. Arriving at this ratio requires valuing each company independently, on a consistent basis, using recognised approaches such as the income, market, and asset approaches, and reconciling the relative values into a workable ratio.
2.2 Valuation of Property and Other Assets
Where a scheme involves the transfer, demerger, or reorganisation of specific undertakings, properties, or asset classes, tangible or intangible, movable or immovable, those assets may need to be valued individually for accounting, disclosure, or Tribunal purposes.
2.3 Valuation for Exit Opportunities and Minority Protection
Certain schemes require a valuation to determine the price at which dissenting or minority shareholders may exit the company or receive alternative consideration, including exit pricing where a listed transferor company merges into an unlisted transferee company.
3. Why Valuation Matters in a Scheme of Arrangement
Valuation is not a formality attached to a scheme document; it is one of the principal safeguards built into the approval process. Shareholders and creditors vote on a scheme substantially on the strength of the valuation disclosed to them, and the Tribunal, before sanctioning a scheme, examines whether the process behind that valuation was reasonable and whether affected stakeholders had adequate information to assess it. Auditors, tax authorities, and, for listed companies, market regulators and stock exchanges also look to the valuation to assess whether a scheme achieves outcomes beyond its stated commercial purpose, such as an inequitable transfer of value between classes of shareholders. A sound, well-documented valuation reduces the risk of objections or delayed sanction; a weak one can become the largest point of contention in an otherwise sound transaction.
4. When the Service May Be Required
A valuation of this kind is typically required where:
- two or more companies propose to merge or amalgamate, under the standard Tribunal route under Sections 230 to 232 or the fast-track route for small companies and holding-subsidiary structures under Section 233;
- a company proposes a demerger, slump sale, or reconstruction involving transfer of an undertaking to a resulting or transferee company;
- a scheme involves both listed and unlisted companies, or otherwise affects the shareholding pattern of a listed entity;
- promoters or the board want an independent view on the exchange ratio before finalising terms with a merger counterparty;
- lenders or other creditors want an independent valuation opinion before voting on a scheme affecting their claims;
- shareholders, including minority or dissenting shareholders, wish to assess whether an exchange ratio or exit price reflects fair value.
5. Regulatory and Professional Framework
5.1 Companies Act, 2013 - Sections 230 to 232
Chapter XV of the Companies Act, 2013 governs compromises, arrangements, and amalgamations. Section 230 sets out the process for a company to apply to the NCLT for a compromise or arrangement with its creditors or members, while Section 232 addresses schemes involving the merger or amalgamation of two or more companies, including the Tribunal's powers to sanction such a scheme and give consequential directions.
Section 232(2)(d) requires that, where a meeting of creditors or members is called in connection with a scheme of merger or amalgamation, the notice be accompanied by a copy of the valuation report, if any, prepared by a registered valuer or other expert - placing the valuation squarely within the disclosure package stakeholders review before voting.
Section 232(3)(h) addresses a specific circumstance: where the transferor company is listed and the transferee company is unlisted, the Tribunal's sanction order may provide an exit opportunity for transferor shareholders who do not wish to hold shares in the unlisted transferee. The amount payable to such shareholders, whether under a pre-determined formula or a valuation, cannot be less than what is specified under the applicable regulations of the Securities and Exchange Board of India (SEBI).
5.2 The Registered Valuer Requirement
Section 247 of the Companies Act, 2013, read with the Companies (Registered Valuers and Valuation) Rules, 2017, requires that valuations conducted for purposes under the Act, including under Sections 230 to 232, be carried out by a valuer registered with the Insolvency and Bankruptcy Board of India (IBBI). This regime prescribes eligibility, independence, and conduct requirements intended to bring consistency and accountability to statutory valuations.
5.3 Additional Requirements for Listed Companies
Where a scheme involves a listed entity, additional requirements apply under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and the circulars SEBI issues from time to time on schemes of arrangement by listed entities. These generally call for a valuation report from a registered valuer, a fairness opinion from an independent SEBI-registered merchant banker, and review by the audit committee and committee of independent directors, before the scheme is filed with the stock exchanges and the Tribunal. As SEBI updates this framework periodically, the requirements in force should be confirmed at the time a scheme is undertaken.
6. Key Considerations
- selecting valuation approaches, income, market, asset, or a combination, appropriate to each entity's business and the information available;
- maintaining consistency in methodology and valuation date across the merging or demerging entities so the exchange ratio is defensible;
- applying particular care to related-party and promoter-linked structures, given the heightened scrutiny such schemes attract;
- aligning the valuation with the accounting treatment applicable under Section 133 of the Companies Act and relevant accounting standards for business combinations;
- documenting assumptions and judgment in a manner shareholders, creditors, auditors, and the Tribunal can follow.
7. Typical Applications
- determining the share exchange ratio for a merger between group companies or unrelated entities;
- valuing an undertaking or business division being demerged into a resulting company;
- assessing exit pricing for shareholders of a listed company merging into an unlisted entity;
- providing an independent valuation opinion to a board, audit committee, or creditor evaluating a proposed scheme;
- supporting valuation disclosures required in scheme documents filed with the Tribunal, the Registrar of Companies, and, where applicable, the stock exchanges.
8. Our Professional Approach
An engagement of this nature generally begins with understanding the commercial rationale and structure of the proposed scheme, followed by a review of the financial statements, business plans, and other information relevant to each entity involved. The valuation methodology is then applied with reference to the nature of the businesses, the quality and availability of information, and the disclosure requirements the resulting report must satisfy, with the analysis documented to remain transparent to the boards, shareholders, creditors, and regulators who will rely on it.
9. Who May Benefit
- companies and boards evaluating or structuring a proposed merger, amalgamation, or demerger;
- promoters seeking an independent, defensible basis for negotiating exchange ratios with a merger counterparty;
- creditors, debenture trustees, and lending institutions assessing the financial impact of a proposed scheme;
- shareholders, including minority shareholders, seeking to understand whether an exchange ratio or exit price reflects fair value;
- legal counsel and company secretaries coordinating a scheme before the NCLT, who require a valuation report to support disclosures mandated under Sections 230 to 232.
10. Conclusion
A scheme of merger or amalgamation stands or falls on the strength of its disclosures, and valuation sits at the centre of that disclosure. Vallore Advisory LLP works with companies, promoters, and other stakeholders to develop valuation analysis for schemes under Sections 230 to 232 of the Companies Act, 2013, that is methodologically sound, clearly documented, and suited to the scrutiny such transactions attract from shareholders, creditors, and the Tribunal.