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Understanding Valuation Rules for Share Transfers (Post Angel Tax Removal)

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    With the removal of Section 56(2)(viib), commonly known as Angel Tax, the landscape for startup funding and share transfers has significantly evolved. This update brings relief but also re-emphasizes the importance of complying with valuation norms under various regulatory frameworks. Here’s a simplified yet comprehensive guide to the valuation rules applicable for both primary and secondary share transfers in India.

    Primary vs Secondary Share Transfers: What’s the Difference?

    AspectPrimary Share IssuanceSecondary Share Transfer
    What it meansNew shares issued by a company to raise fundsSale of existing shares between investors
    Key ComplianceGoverned by Companies Act, FEMA, and Income Tax ActGoverned by FEMA and Income Tax Act
    Valuation RequirementRegistered Valuer (RV) report mandatoryNo RV required, but FMV must be justified

    Key Compliance Overview

    AspectPrimary Share Issuance (Fresh Issue by Company)Secondary Transfer (Sale of Existing Shares)
    Companies Act ComplianceSection 62 of Companies Act, 2013 – Valuation by Registered Valuer (RV) for preferential allotmentNo RV requirement for private transfers, but FMV should be maintained
    FEMA ComplianceRule 21 of FEMA (Non-Debt Instruments) Rules, 2019 – Price must be at or above FMV for foreign investorsRule 21 of FEMA (Non-Debt Instruments) Rules, 2019 – Price cannot be below FMV when transferring to a non-resident
    Income Tax ComplianceFMV determined as per Rule 11UA (NAV, DCF, and internationally accepted methods)FMV as per Rule 11UA; Capital Gains Tax applies (Short-Term or Long-Term)
    Valuation MethodRegistered Valuer Report based on:
    – Discounted Cash Flow (DCF): Projects future cash flows and discounts them to present value.
    – Net Asset Value (NAV): Determines share value based on net assets of the company.
    – Market Price Method: Applicable if shares are listed on a recognized stock exchange.
    FMV based on:
    – Rule 11UA Methods: Includes NAV, DCF, Comparable Company Multiple, Option Pricing Method, and other internationally accepted methods.
     
    Fair Market Value (FMV)FMV is based on Registered Valuer Report as per Companies Act and FEMAFMV is based on transaction price, Rule 11UA, and FEMA guidelines
    TaxationNo Angel Tax post Section 56(2)(viib) removalFuture sales attract capital gains taxCapital Gains Tax:
    – Short-term (STCG) @20%* if held < 24 months
    – Long-term (LTCG) @12.5%* if held ≥ 24 months (Indexation available)*plus applicable surcharge and cess

    Need Help Navigating Share Transfer Valuation Rules?

    With the removal of Angel Tax, the rules around share transfers have evolved. If you’re unsure about how to value shares or ensure compliance with the latest regulatory frameworks, our experts are here to guide you. Get in touch with us today to navigate the complexities of share transfer valuation and stay compliant with the latest tax regulations.

    About the Author
    Treelife
    Treelife
    Treelife Team | support@treelife.in

    We are a legal and finance firm with a deep focus on the startup ecosystem. We offer a wide range of services, including Virtual CFO, Legal Support, Tax & Regulatory, and Global Expansion assistance.

    Our goal at Treelife is to provide you with peace of mind and ease in business.

    We Are Problem Solvers. And Take Accountability.

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