Valuation rules for Angel Tax amended

FMV of equity shares can be computed using either of the following methods, at the option of the issuer company (Existing Methods):

1.1

Book-value based Net Asset Value method (NAV Method); or

1.2

Discounted Free Cash Flow Method (DCF Method).

For preference shares, FMV shall be the price it would fetch if sold in the open market.

Further, the existing Rule 11UA required computation of FMV on the share issuance date.

Additional valuation methods for equity shares: In addition to the Existing Methods (supra), the Updated Rule 11UA gives an option to the issuer company to choose any of the following methods also:

1.1

Where a venture capital undertaking (VC Undertaking)2 issues shares inter-alia to a venture capital fund or a venture capital company or a specified fund[2] (Specified Investors) [VC Method]: The price at which equity shares are issued to Specified Investors can be treated as the FMV of equity shares issued to other investors to the extent aggregate consideration received from other investors does not exceed aggregate FMV of shares issued to Specified Investors*. In other words, the valuation used at the time of Specified Investors’ investment can be taken as a benchmark for other investors’ investment also. For this purpose, the Notification provides the following illustration:

“Illustration: If a venture capital undertaking receives a consideration of fifty thousand rupees from a venture capital company for issue of one hundred shares at the rate of five hundred rupees per share, then such an undertaking can issue one hundred shares at this rate to any other investor within a period of ninety days before or after the receipt of consideration from venture capital company.”

1.2

Where shares are issued inter alia to prescribed investors (Notified Investors)[3] [Notified Investor Method]: The price at which equity shares are issued to Notified Investors can be treated as FMV of equity shares issued to other investors to the extent aggregate consideration received from other investors does not exceed aggregate fair value of shares issued to Notified Investors*. In other words, the valuation used at the time of Notified Investors’ investment can be taken as a benchmark for other investors’ investment also.

*Both VC Method and Notified Investor Method can be opted only if consideration is received from Specified Investors / Notified Investors, as applicable, within 90 days (before or after) from the date of issue of shares to other investors.

1.3

Residuary Methods (applicable only for shares issued to non-resident investors): For equity shares issued to non-resident investors, one more additional valuation approach has been prescribed in the Updated Rule 11UA. The FMV can be computed using any of the following methods (computed by a merchant banker): (i) Comparable Company Multiple Method; (ii) Probability Weighted Expected Return Method; (iii) Option Pricing Method; (iv) Milestone Analysis Method; (v) Replacement Cost Method.

Valuation methods notified for Compulsorily Convertible Preference Shares (CCPS):

2.1

Per the Updated Rule 11UA, FMV of CCPS for Angel Tax provisions can be computed using: (a) DCF Method; or (b) VC Method (if CCPS are issued by a VC Undertaking to inter-alia Specified Investors); or (c) Notified Investor Method (if CCPS are issued to inter-alia Notified Investors); or (d) Residuary Method (available only where CCPS are issued to a non-resident investor).

2.2

Alternatively, FMV of CCPS can be computed based on FMV of equity shares using any of the aforesaid prescribed methods for valuation of equity shares.

Valuation Date: Updated Rule 11UA provides an option to the issuer company to undertake the FMV valuation as on any day up to 90 (ninety) days prior to the share issuance date. However, it is pertinent to note that this flexibility is available only where a report is required from a merchant banker (i.e. for DCF Method and Residuary Method). Consequently, if the taxpayer opts for NAV Method, the valuation will still need to be undertaken as on the share issuance date only.

Safe Harbour: Updated Rule 11UA has also introduced a tolerance range of 10% i.e. if the issue price does not exceed the FMV as per prescribed method (NAV method, DCF method and Residuary Method) by more than 10%, the issue price shall be deemed to be the fair value. It is pertinent to note that this relaxation is not available where the valuation method adopted is VC Method or Notified Investor Method.