Necessities for Valuation of Shares
Valuation of shares is the process of determining the fair value of the company shares. Share valuation is defined as the technique for calculating the estimated value of companies and their stock, with a specific end goal to foresee moves in the market and resulting share costs. In most cases, shares are quoted on the stock exchange; and for ordinary transactions in shares or debentures or Government securities, the price prevailing on the stock exchange may be taken as the proper value. Share valuation is done based on quantitative techniques and share value will vary depending on the market demand and supply. There are various reasons for adopting a particular method for share valuation; it generally depends upon the purpose of valuation. One of the important reasons is when you are about to sell your business and you wanted to know your business value.
The following are the circumstances where the need for the valuation of shares arises:
(1) For formulating an amalgamation scheme. Where companies amalgamate or are similarly reconstructed, it may be necessary to arrive at the value of shares held by the members of the company being absorbed or taken over.
(2) For purchase or sale of controlling shares (stock exchange quotations are valid only for regular lots). Where shares are held jointly by the partners in a company and partnership firm dissolved, it becomes necessary to value shares.
(3) Where a portion of the shares is to be given by a member of the proprietary company to another member as the member cannot sell it in the open market, it becomes necessary to certify the fair price of these shares by an auditor.
(4) For the valuation of the assets of a finance or an investment trust company. When a loan advanced on the security of shares, it becomes necessary to know the value of shares on the basis of which loan has been advanced.
(5) For security purposes, e.g., where loans are raised on the security of shares of a company. When shares are given in a company as a gift it may be necessary for the purpose of assessing gift tax, to place a value on the shares.
(6) When preference shares or debentures are converted into equity share it becomes necessary to value the equity shares for ascertaining the number of equity shares required to be issued for debentures or preference shares that are to be converted.
(7) When equity shareholders are to be compensated on the acquisition of their shares by the government under a scheme of nationalization then it is necessary to value the equity shares.