NEW DELHI: The Finance Ministry on Tuesday issued final rules on valuation methods for share sales by unlisted firms to non-resident and resident investors under new Angel Tax mechanism introduced in the Finance Act 2023.
The amendments include valuation methods, simplifying valuation date consideration, incentivising venture capital investments, facilitating investments from notified entities, providing clarity on compulsory convertible preference shares and encouraging foreign investments.
Experts say new rules make compliance less onerous, and provide flexibility to investors. Angel tax is imposed when an unlisted firm issues shares to an investor at a price higher than its fair market value (FMV). Initially applicable only to resident investors, the Budget for 2023-24 proposed extending angel tax to non-resident investors starting from April 1, 2024.
The new rules prescribe five methods for valuing investments made by non-resident investors -- the comparable company multiple methods, probability-weighted expected return method, option pricing method, milestone analysis method, and replacement cost method. For resident investors, the discounted cash flow (DCF) method and Net Asset Value method remain applicable.
When a firm receives consideration for issuing shares to a non-resident entity specified by the government, the price of the equity shares of that consideration may be considered as the FMV for both resident and non-resident investors. Price matching between resident and non-resident investors will be allowed with reference to investments by VC funds or specified funds. A valuation report provided by a merchant banker will be valid if it is dated not more than 90 days before the issuance of the shares being valued.
Compliance less onerous in new rule
Experts say new rules make compliance less onerous, and provide flexibility to investors. Angel tax is imposed when an unlisted firm issues shares to an investor at a price higher than its fair market value. Applicable only to resident investors, the Budget 2023-24 proposed extending to non-resident investors