​In the realm of corporate finance and compliance in India, understanding the roles of Registered Valuers and Merchant Bankers in valuation processes is crucial. Both professionals are authorized to assess the value of a company's assets or securities, but their functions, regulatory frameworks, and the contexts in which their valuations are required differ significantly.​

Registered Valuer:

A Registered Valuer is an individual or entity authorized under the Companies Act, 2013 to conduct valuations of assets, liabilities, or securities. The Insolvency and Bankruptcy Board of India (IBBI) oversees the registration and regulation of these valuers. Their primary responsibilities include:​

Private Placement of Securities: Under Section 42 of the Companies Act, a valuation report from a registered valuer is mandatory when a company issues equity shares, preference shares, or compulsorily convertible debentures (CCDs) through private placement. ​Preferential Allotment: As per Section 62(1)(c) of the Companies Act, companies must obtain a valuation report from a registered valuer for preferential allotment of shares to ensure fair pricing. ​

Mergers and Amalgamations: During mergers or amalgamations under Section 232, a registered valuer's report is required to determine the fair exchange ratio of shares between merging entities.

Merchant Banker:

A Merchant Banker is a financial institution or individual registered with the Securities and Exchange Board of India (SEBI), primarily engaged in underwriting, managing public issues, and providing advisory services related to securities. Their valuation services are particularly pertinent in:​

Income Tax Compliance: Under Rule 11UA of the Income Tax Act, a valuation report from a SEBI-registered merchant banker is necessary when a company issues shares at a premium and opts for the Discounted Cash Flow (DCF) method for valuation. This ensures compliance with tax regulations concerning the fair market value of shares. ​

Foreign Investment: For filings like FC-GPR under the Foreign Exchange Management Act (FEMA), a valuation report from a merchant banker or a chartered accountant is required when a company raises funds from foreign investors.

Key Differences:

Regulatory Authority: Registered Valuers are regulated by the IBBI under the Companies Act, 2013, whereas Merchant Bankers are regulated by SEBI under the SEBI (Merchant Bankers) Regulations, 1992. ​

Scope of Services: Registered Valuers focus on asset valuation for compliance under the Companies Act, while Merchant Bankers provide a broader range of services, including underwriting, portfolio management, and advisory services, in addition to valuation under specific circumstances like income tax assessments.​

When Required: Valuation by a Registered Valuer is typically required for corporate actions under the Companies Act, such as private placements and mergers. In contrast, Merchant Banker valuations are mandated for income tax purposes when issuing shares at a premium using the DCF method and for compliance with foreign investment regulations.​

Recent Regulatory Updates:

As of December 2024, SEBI has tightened regulations for merchant bankers, mandating that activities unrelated to merchant banking, such as valuation services, be segregated into separate legal entities with distinct branding. This move aims to prevent conflicts of interest and enhance transparency in financial services. ​

Frequently Asked Questions (FAQs):

When is a valuation report from a Registered Valuer required?

A valuation report from a Registered Valuer is required in scenarios such as private placement of securities, preferential allotment, mergers, and acquisitions under the Companies Act, 2013.

Who regulates Merchant Bankers in India?

Merchant Bankers in India are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Merchant Bankers) Regulations, 1992.

Can a Chartered Accountant provide valuation reports for foreign investments?

Yes, for foreign investment compliance under FEMA, valuation reports can be prepared by either a SEBI-registered Merchant Banker or a Chartered Accountant, depending on the valuation method and specific requirements.

What is the role of a Merchant Banker in income tax compliance?

Merchant Bankers provide valuation reports required under Rule 11UA of the Income Tax Act when companies issue shares at a premium using the Discounted Cash Flow (DCF) method, ensuring adherence to fair market value assessments for tax purposes.

Are there recent changes affecting Merchant Bankers' valuation services?

Yes, as of December 2024, SEBI has mandated that Merchant Bankers segregate non-core activities, such as valuation services, into separate legal entities to enhance transparency and prevent conflicts of interest.

Understanding the distinct roles and regulatory requirements of Registered Valuers and Merchant Bankers is essential for compliance and informed decision-making in corporate finance. Engaging the appropriate professional for valuation services ensures adherence to legal standards and facilitates smooth corporate transactions.

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