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?
| Aspect | Primary Share Issuance | Secondary Share Transfer |
| What it means | New shares issued by a company to raise funds | Sale of existing shares between investors |
| Key Compliance | Governed by Companies Act, FEMA, and Income Tax Act | Governed by FEMA and Income Tax Act |
| Valuation Requirement | Registered Valuer (RV) report mandatory | No RV required, but FMV must be justified |
Key Compliance Overview
| Aspect | Primary Share Issuance (Fresh Issue by Company) | Secondary Transfer (Sale of Existing Shares) |
| Companies Act Compliance | Section 62 of Companies Act, 2013 – Valuation by Registered Valuer (RV) for preferential allotment | No RV requirement for private transfers, but FMV should be maintained |
| FEMA Compliance | Rule 21 of FEMA (Non-Debt Instruments) Rules, 2019 – Price must be at or above FMV for foreign investors | Rule 21 of FEMA (Non-Debt Instruments) Rules, 2019 – Price cannot be below FMV when transferring to a non-resident |
| Income Tax Compliance | FMV 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 Method | Registered 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 FEMA | FMV is based on transaction price, Rule 11UA, and FEMA guidelines |
| Taxation | No Angel Tax post Section 56(2)(viib) removalFuture sales attract capital gains tax | Capital 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.
