Merchant Banker Valuation for Unlisted Shares — When It's Required and Why

The valuation of unlisted shares and securities presents unique challenges due to the absence of a liquid market. The Income Tax Rules, 2026 address this through Rule 57, which requires merchant banker valuation for certain categories of unlisted shares. Understanding when this requirement applies and why merchant bankers are preferred is essential for tax compliance.

When Merchant Banker Valuation Is Required

Unquoted Shares (Other than Equity)

Merchant banker valuation is required for unquoted shares and securities other than equity shares. This includes:

• Preference Shares: Shares that carry preferential rights to dividends and capital
• Debentures: Debt instruments that may be convertible or non-convertible
• Bonds: Debt securities that may have various features
• Other Securities: Any other securities that are not equity shares

What Is Not Covered

Merchant banker valuation is not required for:

• Unquoted Equity Shares: These are valued using the prescribed formula
• Quoted Shares: These are valued based on market prices

Why Merchant Bankers Are Preferred

Professional Expertise

Merchant bankers possess specialised expertise in valuation of financial instruments. Category I merchant bankers registered with SEBI have:

• Deep understanding of financial markets
• Experience in valuation of complex instruments
• Access to market data and comparable transactions

Regulatory Framework

Merchant bankers are regulated by SEBI, which provides:

• Professional standards and ethical guidelines
• Disciplinary mechanisms
• Quality assurance

Market Credibility

Valuations by merchant bankers carry greater credibility with tax authorities because:

• They are independent professionals
• They follow recognised valuation methodologies
• They are subject to professional standards

Valuation Methodology

Open Market Price

The merchant banker must determine the price that the unquoted shares or securities would fetch if sold in the open market. This requires:

• Analysis of comparable transactions
• Application of appropriate valuation methodologies
• Consideration of market conditions

Valuation Methodologies

Merchant bankers may apply various methodologies, including:

• Discounted Cash Flow Method: Valuing the instrument based on future cash flows
• Net Asset Value Method: Valuing based on the underlying assets
• Comparable Company Method: Valuing based on comparable listed companies
• Option Pricing Models: For instruments with option-like features

Merchant Banker Qualifications

Category I Merchant Banker

The merchant banker must be a Category I merchant banker registered with SEBI【56†L0】. Category I merchant bankers:

• Have the highest level of registration
• Are permitted to undertake all merchant banking activities
• Have the most stringent regulatory requirements

Professional Experience

The merchant banker must have:

• Professional experience of not less than ten years
• Annual receipt exceeding fifty lakh rupees in the year preceding valuation
• International presence (if applicable)

Practical Considerations

When to Engage a Merchant Banker

• For transactions involving preference shares, debentures, or bonds
• When the valuation is likely to be scrutinised by tax authorities
• When the transaction value is significant
• When the instrument has complex features

Documentation Requirements

Maintain:

• Merchant banker's valuation report
• Details of the valuation methodology applied
• Supporting data and assumptions
• Evidence of the merchant banker's qualifications

Timeline

The valuation must be as on the specified valuation date【56†L0】. The merchant banker's report should clearly state the valuation date.

Comparison with Registered Valuer

Expert Legal Guidance

Understanding the merchant banker valuation requirement is essential for tax compliance in transactions involving unlisted shares and securities. Anuj Desai & Associates provides expert advisory services on Direct Tax Code compliance, helping taxpayers engage appropriate merchant bankers and ensure compliance with valuation requirements.

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