CBDT to modify Income Tax Rule 11UA on Valuation of Shares

To bring the consideration received from non-residents for the issuance of shares under the purview of section 56(2)(viib) of the Income-tax Act, 1961 (the Act), which states that if the consideration for the issuance of shares exceeds the Fair Market Value (FMV) of the shares, it shall be chargeable to income-tax under the head “Income from other sources,” an amendment has been made to the Finance Act, 2023.

Following this revision, thorough discussions with stakeholders have taken place. According to the inputs, it is planned to modify Rule 11UA for the purposes of section 56(2)(viib) of the Act, and separate notices are also being issued to the companies to which the abovementioned provision shall not apply.

Proposed modifications to Rule 11 UA:

For resident investors, Rule 11UA currently specifies two valuation methodologies for shares, namely the Discounted Cash Flow (DCF) and Net Asset Value (NAV) approaches. In addition to the DCF and NAV techniques of valuation, it is suggested to incorporate 5 more valuation methodologies accessible to non-resident investors.

Further, where any consideration is received by a company for the issuance of shares from any non-resident entity notified by the Central Government, the price of the equity shares corresponding to such consideration may be taken as the fair market value (FMV) of the equity shares for resident and non-resident investors subject to the following:

To the extent the consideration from such FMV does not exceed the aggregate consideration that is received from the notified entity and The consideration from such FMV does not exceed the consideration that is received from the notified entity and

In a similar vein, price matching for investments made by venture capital funds or designated funds would be accessible to both resident and non-resident investors.

For the purposes of this rule, it is recommended that the valuation report from the Merchant Banker would be acceptable if it is from a date that is not more than 90 days before the issue date of the shares that are the subject of the value.

It is also suggested to give a safe harbour of 10% change in value to allow for FX fluctuations, bidding processes, variations in other economic indices, etc. that may alter the valuation of the unquoted equity shares during several rounds of investment.

The public will have 10 days to comment on the proposed rules before being notified of any changes.

Excluded entities’ notification

Additionally, it is suggested that non-resident investors belonging to specific kinds of people be informed that clause (viib) of subsection (2) of section 56 of the Act does not apply to them. This comprises:

Governments and government-related investors, such as central banks, sovereign wealth funds, international or multilateral organisations or agencies, including businesses under government control or when the government owns at least 75% of the company directly or indirectly.

Banks or entities engaged in the insurance business that are subject to the laws of the nation in which they were founded, incorporated, or have their primary residence.

Any of the following entities, who are citizens of particular nations or restricted territory with strong regulatory frameworks which are:

• entities listed as Category-I Foreign Portfolio Investors with the Securities and Exchange Board of India.
• Endowment funds linked to universities, hospitals, or charitable organisations;
• pension funds established or created under the laws of a foreign country or a specific territory;
• broad-based pooled investment vehicles or funds with more than 50 investors that are not hedge funds or funds that use a variety of complex trading strategies.

For Startup Investment

The Department for Promotion of Industry and Internal Trade (DPIIT) in the Ministry of Commerce and Industry is proposing to amend Notification No. S.O. 1131(E) dated 5th March 2019 to clarify that the provisions of Section 56(2)(viib) of the Act do not apply to the consideration received from anyone by start-ups covered by Paragraphs 4 and 5 of the Notification dated 19.2.2019.