A preferential allotment under Section 62(1)(c) or a private placement under Section 42 requires the company to determine the price at which the securities are issued. Where the price is not determined by a SEBI-regulated process, the company must obtain a valuation report from a registered valuer. The report is the basis for the pricing, and it is the document that the NCLT will scrutinise if the allotment is challenged as oppressive or as a breach of the company's constitution.
The Scope of the Report
The valuer must determine the fair value of the shares or securities being allotted. The valuation must apply a recognised methodology—the income approach (discounted cash flow), the market approach (comparable companies or transactions), or the asset-based approach—and the valuer must explain why the chosen methodology is appropriate to the company's business. The report must address the company's financial position, its future prospects, and any material contingencies.
The report is not a guarantee of the price's fairness. It is an expert opinion, and the NCLT will examine whether the valuer was qualified, whether the methodology was sound, and whether the assumptions were reasonable. A report that is based on unaudited figures, that ignores a material asset or liability, or that uses a methodology unsuited to the company's business is vulnerable to challenge.
The Grounds of Challenge
The most common ground of challenge is that the valuation was not independent. Where the valuer is related to the promoter or has a financial interest in the allotment, the report's reliability is compromised. The second ground is that the valuation methodology was not appropriate—for example, where an asset-based valuation was used for a company whose value lies in its future earnings. The third ground is that the valuation was based on incomplete or inaccurate information.
The NCLT has set aside preferential allotments where the valuation was not supported by a proper report or where the report was prepared without the valuer examining the company's books. The Tribunal's scrutiny is not a re-valuation; it is a review of the process and the methodology.
The Interface with Oppression
A preferential allotment at an undervalue can dilute the existing shareholders and transfer value to the allottees. Where the allotment is challenged under Sections 241 and 242, the valuation report becomes the central evidence. The petitioner must show that the price was unfair and that the unfairness was material. The respondent must show that the valuation was conducted by a qualified valuer using a recognised methodology and that the board acted in good faith.
A technically sound preferential allotment requires a valuation report that is independent, methodologically sound, and fully disclosed to the shareholders. A report that is obtained after the price has been agreed, or that is tailored to justify a predetermined price, is a report that will not withstand scrutiny.
Call to Action
Anuj Desai & Associates advises companies and shareholders on the registered valuer report for preferential allotment—from the selection of the valuer and the methodology to the defence of the report in NCLT proceedings and the challenge of an undervalued allotment. If you are planning a preferential allotment or challenging one, we can help you assess the valuation.
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