The valuation report is the evidentiary foundation of the share exchange ratio in a scheme. The NCLT does not conduct its own valuation, but it examines the report to determine whether the valuer was qualified, whether the methodology was appropriate, and whether the assumptions were reasonable. A valuation that fails these tests is vulnerable to challenge, and the scheme may be rejected or modified.
The Grounds of Challenge
The most common ground of challenge is that the valuer was not independent. Where the valuer is related to the promoter or has a financial interest in the scheme, the report’s reliability is compromised. The second ground is that the methodology was not appropriate—for example, an asset-based valuation for a technology company whose value lies in its future earnings. The third ground is that the assumptions were not supported by the company’s financial data.
The Standard of Review
The NCLT does not substitute its own valuation for the valuer’s. The Tribunal’s role is to determine whether the valuation process was sound, not to decide what the correct valuation should be. The NCLAT has held that the NCLT erred in interfering with a valuation conducted by experts using the DCF method, particularly where the profit-sharing ratio had been revised to address the discrepancy and the scheme had near-unanimous approval.
The Practical Consequences
A company that is planning a scheme should commission the valuation at the structuring stage, provide the valuer with complete information, and ensure that the valuer is independent. The report should disclose the methodology, the assumptions, and the limitations. A report that is obtained after the scheme is finalised, or that is tailored to a predetermined ratio, is vulnerable to challenge.
Call to Action
Anuj Desai & Associates advises companies on the valuation of a scheme—from the appointment of the registered valuer and the scope of the report to the defence of the valuation before the NCLT and the challenge of an inadequate report. If your scheme involves a valuation, we can help you ensure that it withstands scrutiny.
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