Acquisitions are good for the economy as it results in efficient allocation of resources. In case of an acquisition, the shares or business or assets of the target company are acquired by the acquirer.
The acquisition of shares of a listed company requires compliance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and that of unlisted company with Income Tax Law and RBI Regulations.
SEBI Regulations
SEBI Takeover code gets triggered when the shares of listed company get transferred beyond a threshold limit. It can also lead to change in control, thus requiring exit opportunity to the public shareholders by acquisition of their shares. For the purpose of determination of price of shares held by public shareholders, share valuation is required.
Under the SEBI Takeover Code, the shares are segregated based on their Trading volume into Frequently and Infrequently Traded shares.
Valuation for Frequently Traded Shares: The volume-weighted average market price of such shares for a period of 60 trading days immediately preceding the date of the public announcement as traded on the stock exchange where the maximum volume of trading in the shares of the target company are recorded during such period.
Valuation for Infrequently Traded Shares: The price determined by the acquirer and the manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies.
Income Tax Law
Applicable Provision for Transfer of Shares – Section 56(2)(x) read with Rule 11UA(1)(c) of the Income Tax Rules, 1962 Valuation Methodologies prescribed-
Quoted Shares: Market price on recognised stock exchange on the valuation date or on a date immediately preceding the valuation date where on the valuation date there is no trading in such shares and securities on any recognised stock exchange – Rule 11UA(1)(c)(a)
Unquoted Equity Shares: Adjusted net asset value (NAV) – Rule 11UA(1)(c)(b)
With effect from 1 April 2017, the rules have prescribed Adjusted Book Value method for transfer of shares of a closely held company. The fair value of Land & Building, Jewellery, Shares & Securities and Artistic property needs to be undertaken for this purpose. In this methodology, the value of investments in shares is to be undertaken based on Net Assets Value in all underlying companies, down the line which makes it a detailed process, specifically for Investment/Finance companies.
Unquoted Shares (other than equity shares): Price it would fetch if sold in the open market – Rule 11UA(1)(c)(c) – Any valuation methodology can be applied which can be substantiated.