(First published on Linkedin)
Valuation in a merger or demerger is not a one-size-fits-all exercise. Its role depends on the context: sometimes it is the central driver, at other times it is secondary to capital structuring or family understanding. The challenge lies in aligning commercial intent with regulatory and tax frameworks.
1. Typically, a fair valuation approach such as discounted cash flow or market multiples is used, since the assumption is that the business continues as a going concern; consequently, net book value is generally not considered relevant.
2. In intra-group mergers, where economic ownership remains unchanged, valuation is more of a capital structuring exercise. Still, it cannot be entirely ignored, as swap ratios need a logical foundation.
3. In mirror image or partial mirror image demergers, valuation has little significance. The focus shifts to determining the post-demerger shareholding pattern, and therefore, it is more of a capital structure issue than determining relative fair valuation.
4. In family arrangements, as clarified by a recent NCLAT ruling, fair valuation is not decisive. What carries weight is the commercial understanding among family members and the swap ratios agreed accordingly.
5. In a holding company collapse, where shares of the subsidiary are exchanged one-for-one against the holding company’s stake, valuation becomes irrelevant since there is no change in economic ownership.
6. In minority squeeze-outs, valuation becomes crucial. It serves as the benchmark for fairness and for protecting minority shareholders.
7. In mergers or demergers involving listed and unlisted companies, SEBI ICDR prescribes a floor price. This is the higher of the 90-day or 10-day average market price, or the actual fair value.
8. For companies that were acquired earlier but not fully owned, the acquisition price and commercial negotiations also become relevant in working out swap ratios.
9. When non-residents are involved, FEMA’s Non-Debt Instrument Rules require valuation based on internationally accepted methodologies.
10. From a tax perspective, provisions like Section 56(2)(x) and Section 50CA generally do not apply, since mergers and demergers are treated as tax-neutral.