Valuation

 The Companies Act, 2013 does not mandate that the pricing of shares to be offered in is to be in a
determined on the basis of a valuation report [Section 62]. Neither the Companies (Share Capital and
Debentures) Rules, 2014 and nor the Companies (Prospectus and Allotment Of Securities) Rules, 2014
impose any such requirement.
 As per the NDI Rules, A person resident outside India and having investment in an Indian company
may make investment in equity instruments (other than share warrants) issued by such company as a
rights issue or a bonus issue, provided that inter alia the following conditions are met:
o Offer made by the Indian Company is in compliance with the provisions of the Companies
Act, 2013
o share holding on the basis of which the rights issue or the bonus issue has been made must
have been acquired and held as per the provisions of these (NDI) rules
o in case of an unlisted Indian company, the rights issue to persons resident outside India shall
not be at a price less than the price offered to persons resident in India
o such investment made through rights issue or bonus issue shall be subject to the conditions as
are applicable at the time of such issue; [Rule 7].
 As per paragraph 6.11 of the Master Direction 1, A person resident outside India having investment in
an Indian company is permitted to invest in the equity instruments (other than share warrants) issued
by such company as a rights issue or a bonus issue subject to inter alia the following conditions:
o The offer made by the Indian company is in compliance with the provisions of the Companies
Act, 2013;
o The issue does not result in a breach of the sectoral cap applicable to the company;
o The shareholding on the basis of which the rights issue or the bonus issue has been made
must have been acquired and held as per the provisions of NDI Rules;
o The equity instruments (other than share warrants) acquired by the person resident outside
India as bonus or rights issue will be subject to the same conditions including restrictions in
regard to repatriability as applicable to the original holding against which rights or bonus
issue has been made. Further, the nature of investment (FDI or FPI) shall remain the same as
that of original investment against which rights were issued;
o In case of an unlisted Indian company, the rights issued to persons resident outside India
should not be at a price less than the price offered to persons resident in India;
o Such investment made through rights issue or bonus issue is subject to the conditions as are
applicable at the time of such issue;
 As per Rule 21(2) of the Pricing guidelines prescribed in the NDI Rules, otherwise prescribed in these
rules, the price of equity instruments of an Indian company,
o issued by such company to a person resident outside India shall not be less than the valuation
of equity instruments done as per any internationally accepted pricing methodology for
valuation on an arm’s length basis duly certified by a Chartered Accountant or a Merchant
Banker registered with the Securities and Exchange Board of India or a practising Cost
Accountant, in case of an unlisted Indian Company.
o transferred from a person resident in India to a person resident outside India shall not be less
than the valuation of equity instruments done as per any internationally accepted pricing
methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant
or a Merchant Banker registered with the Securities and Exchange Board of India or a
practising Cost Accountant, in case of an unlisted Indian company.
 In the present case, the shares were offered to a non-resident (Codingal Inc) at face value which
renounced its right to subscribe to them. Subsequently, the Board issued them to LV Angel Fund (a
resident) at face value.
1
Foreign Investment in India issued vide RBI/FED/2017-18/60 FED Master Direction No. 11/2017-18 dated 4th
January.
 The question that arises is, whether the shares that were offered to Codingal Inc. were required to be
offered at a price determined on the basis of a valuation report? As the price at which they were
offered would be the price at which they would be issued, the answer seems to be yes. Further, if we
observe the procedure prescribed in the Companies (Share Capital and Debentures) Rules for issue of
shares on a preferential basis, it is seen that the Company is required to disclose the basis on which the
price has been arrived at along with report of the registered valuer in the explanatory statement to be
annexed to the notice of the general meeting called to pass special resolution for offer and issue of
shares through private placement. Hence, a corollary could be drawn that a valuation exercise was
mandatory to determine the price at which the shares were to be offered to Codingal Inc before the
offer was made.
 On the other hand, Section 62 (a)(iii) of the Companies Act (which allows the board to dispose the
shares offered in a rights issue which have been renounced by the shareholders) provides that:
“after the expiry of the time specified in the notice aforesaid, or on receipt of earlier
intimation from the person to whom such notice is given that he declines to accept the shares
offered, the Board of Directors may dispose of them in such manner which is not
disadvantageous to the shareholders and the company.”
It is unclear whether the power to dispose of the shares “in a manner not disadvantageous to the
shareholders and the Company” includes the power to decide the price at the shares are offered to
third-parties or of the board is required to offer the shares to third parties at the same price at which it
was offered to the shareholders. The existing literature 2 on the subject is also unhelpful in answering
this question. If we assume that the board has the power to decide a price lower or different than the
one at which the shares must be offered to the existing shareholders, then the actions of the Codingal
Technologies board in allotting the shares to LV Angel Fund at par will be valid.
2
See https://corporate.cyrilamarchandblogs.com/2021/08/rights-issue-is-the-boards-discretion-to-allot-
unsubscribed-shares-absolute/; https://nslr.in/wp-content/uploads/2020/07/NSLR-Vol-14-No-6.pdf;
https://taxguru.in/company-law/corporate-rights-board-exercise-absolute-discretion-disposing-unsubscribed-
shares.html and https://www.icsi.edu/media/portals/86/Geeta_Saar_vol_27.pdf.

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 The Companies Act, 2013 does not mandate that the pricing of shares to be offered in is to be in a

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