Valuation Certification in Buy-Back by Private Companies: Chartered Accountant or Registered Valuer?
In the world of corporate finance, buy-back of shares by a company is a significant event – both financially and from a compliance perspective. One of the most common queries that arise when a private limited company undertakes a buy-back is:
“Do we need a valuation certificate from a Chartered Accountant (CA) or a Registered Valuer (RV)?”
The answer depends on the legal framework under which the buy-back is being evaluated: the Companies Act, the Income Tax Act, and FEMA if non-residents are involved.
Understanding Buy-Back: A Snapshot
A buy-back is a corporate action where a company repurchases its own shares from shareholders, usually at a premium. This helps reduce outstanding shares, enhance earnings per share (EPS), and improve return on equity (ROE).
In case of Private Limited Companies, buy-back is regulated by:
- Section 68 of the Companies Act, 2013
- Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014
- Section 115QA of the Income Tax Act, 1961
- FEMA regulations, if NRIs/foreign shareholders are involved
Companies Act, 2013: Is Registered Valuer Required?
Interestingly, under Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014, there is no mandatory requirement that valuation must be done by a Registered Valuer (RV) for private companies undertaking buy-back.
Instead, what is expected is that the company ensures the buy-back price is justifiable and reflects fair value.
Best Practice:
To justify the buy-back price, companies typically get a Valuation Certificate from a Chartered Accountant (CA) – especially one experienced in valuation methods like:
- Net Asset Value (NAV)
- Discounted Cash Flow (DCF)
- Comparable Company Multiples
Thus, for compliance with the Companies Act, a CA’s valuation certificate is adequate and widely accepted.
Income Tax Act, 1961: Buy-Back Tax and Valuation
From June 1, 2013, all buy-backs by unlisted companies attract buy-back tax under Section 115QA, which is levied on the company at 20% on distributed income (i.e., buy-back price minus issue price).
Do you need a Registered Valuer under the IT Act?
No, the Income Tax Act does not mandate valuation by a Registered Valuer in case of buy-back.
However, disputes may arise if the department suspects overvaluation of buy-back price to evade tax or transfer wealth. A CA’s valuation report can help substantiate the fairness of the buy-back price and defend against potential scrutiny.
FEMA and RBI Guidelines: When Non-Residents Are Involved
If the company is buying back shares from non-resident shareholders, the situation changes.
RBI’s Master Direction on Pricing Guidelines (FDI Policy):
Buy-back should be done at a price:
“not exceeding the price determined as per any internationally accepted pricing methodology for valuation of shares on arm’s length basis, duly certified by a SEBI-registered Merchant Banker or a Chartered Accountant.”
Important:
Even here, a Registered Valuer is not mandated. A CA’s certificate or SEBI Category-I Merchant Banker’s report suffices.
Summary Table: Who Can Issue Valuation Certificate?
| Law/Context | Valuation Required | Who Can Issue? |
| Companies Act, 2013 (Sec 68 & Rule 17) | Not mandatory but advisable | Chartered Accountant |
| Income Tax Act (Sec 115QA) | Not mandated, but useful for audit/scrutiny | Chartered Accountant |
| FEMA (NRI/Foreign Shareholders) | Mandatory pricing compliance | CA or SEBI Registered Merchant Banker |
| SEBI Buy-Back Regulations (For Listed Cos) | Mandatory | SEBI Registered Merchant Banker only |
Sample Use Cases
Case 1: All Indian Shareholders
ABC Pvt Ltd wants to buy back 10,000 shares at ₹1,200 per share. The shares were issued at ₹100 each.
- Requirement: Valuation by Chartered Accountant using NAV or DCF method
- Purpose: To justify fair price for Board/shareholder approval and audit trail
Case 2: Involvement of NRI Shareholder
XYZ Pvt Ltd wants to buy back shares from an NRI at ₹2,500 per share.
- Requirement: Fair value must be certified by a CA or Merchant Banker
- Purpose: To comply with RBI/FEMA pricing regulations
Valuation Methodologies Commonly Used
- Net Asset Value (NAV): Popular for asset-heavy companies
- Discounted Cash Flow (DCF): Used for growth-stage or revenue-generating firms
- Market Multiple: If comparable private/public companies are available
- Recent Transaction Price: If recent share transfers have occurred
The Way Forward: Compliance + Substance
With increased regulatory scrutiny and digitization of financial records, authorities now cross-reference ROC filings, Form SH-9, SH-11, and ITRs with buy-back activity.
Board minutes and audit trails must clearly record basis of buy-back price. Though a CA certificate suffices in most cases, where the valuation is sensitive or large sums are involved, seeking a second opinion from a Merchant Banker can add further robustness.
Key Takeaways
- For private limited companies, CA’s valuation certificateis generally sufficient for buy-back compliance.
- Registered Valuer (RV)is not mandatory for buy-back under Companies Act or Income Tax Act.
- In cases involving NRIs or foreign shareholders, ensure pricing is justified as per FEMA via CA or Merchant Banker
- Maintain proper documentation including board approvals, valuation method used, assumptions, and working papers.
