Valuation for Preferential Allotment Under Section 62

When a company wants to raise funds by issuing shares to selected investors, a preferential allotment can be an efficient way to bring in capital. But before issuing those shares, one important question needs to be answered: **What should the shares be issued at?
This is where valuation for preferential allotment under Section 62 of the Companies Act, 2013 becomes important.
A proper valuation helps establish a reasonable issue price and provides support for the company's regulatory and corporate approvals.

What Is Preferential Allotment?

Preferential allotment is the issue of shares or other securities to a select group of persons, rather than offering them proportionately to all existing shareholders.Section 62(1)(c) is relevant when a company proposes to issue further shares to persons other than existing equity shareholders or employees.

Companies may use preferential allotment to:

* Raise funds from private or strategic investors
* Bring a new investor into the company
* Issue shares to an existing investor
* Convert certain securities into equity
* Restructure the company's ownership

Since the securities are issued to selected persons, determining an appropriate issue price becomes important.

Why Is Valuation Important?

Valuation provides a financial basis for the price at which the securities are issued. For an unlisted company, this is particularly important because there is no readily available market price for its shares.

A valuation can help the company:

* Determine the fair value of its shares
* Support the proposed issue price
* Meet applicable valuation requirements
* Provide transparency to existing shareholders
* Support board and shareholder approvals
* Maintain documentation for auditors and future investors

In simple terms, the valuation helps answer: Why is the company issuing its shares at this particular price?

How Are Shares Valued?

The appropriate valuation method depends on the company's business, financial position, growth prospects, and the purpose of the valuation.

Discounted Cash Flow (DCF)
The DCF method estimates value based on the company's expected future cash flows. It is generally more useful when the business has reasonably predictable future cash flows.

Market Approach
This approach compares the company with similar businesses or transactions using relevant valuation multiples such as EV/EBITDA, EV/Revenue, or P/E.

Net Asset Value (NAV)
The NAV method focuses on the company's underlying assets and liabilities. It may be particularly relevant for asset-heavy businesses or companies where asset value is a meaningful indicator of overall worth.
A valuation professional may consider more than one approach before arriving at the final value.

Who Should Conduct the Valuation?

The valuation requirements depend on the company, securities, and applicable regulations. Where a Registered Valuer is required under the Companies Act and applicable rules, the company should obtain the valuation report from a Registered Valuer with the appropriate asset class.
For unlisted companies, an independent valuation can provide additional support for the proposed issue price and transaction documentation.

What If a Foreign Investor Is Involved?

A preferential allotment involving a non-resident investor requires additional attention. Apart from the Companies Act requirements, the transaction may also be subject to FEMA pricing and valuation requirements.
Therefore, a valuation prepared for Companies Act purposes should not automatically be assumed to satisfy FEMA requirements. The company should assess both sets of requirements before finalising the issue price.

Preferential Allotment vs. Rights Issue

Preferential allotment and rights issues are different methods of raising capital.
A rights issue generally gives existing shareholders an opportunity to subscribe to additional shares in proportion to their existing holdings. A preferential allotment allows securities to be issued to selected persons.
Because their structures are different, their approval, pricing, and valuation requirements can also differ.

A Quick Checklist

Before proceeding with a preferential allotment, the company should check:
* Is the company listed or unlisted?
* Who will receive the securities?
* What type of securities are being issued?
* Is a Registered Valuer's report required?
* Is a foreign investor involved?
* Which valuation method is appropriate?
* Does the proposed issue price have adequate valuation support?
* Have the required corporate approvals been obtained?

Valuation for preferential allotment under Section 62 helps a company establish and support the price at which shares or securities are issued to selected investors. For unlisted companies, a well-supported valuation is particularly useful because there is no market price to rely on. It can support the issue price, shareholder discussions, audits, and future due diligence.

However, the exact requirements depend on the company's structure, the securities being issued, and the identity of the investors. If a foreign investor is involved, FEMA requirements should also be reviewed separately. Getting the valuation right before the allotment can help the company complete the transaction with greater clarity, transparency, and compliance.