Merger Valuations: Conditional Under Company Law, Mandatory Under SEBI

A merger or amalgamation between companies proceeds as a Scheme of Arrangement under Sections 230 to 232 of the Companies Act, 2013: an NCLT-sanctioned process that, once approved and filed, binds the company and all its members and creditors.

The exact statutory text: the notice convening the Tribunal-ordered meeting must be accompanied by "the report of the expert with regard to valuation, if any."

That is conditional language, not a command. Compare it to Section 62(1)(c), where Rule 13(2)(g) explicitly requires a registered valuer's report before a preferential allotment's price can be fixed at all. Section 232 has no equivalent unconditional instruction. Nothing in the bare Section says a scheme must have a valuation report to proceed.

Rule 6 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 is often cited as making the valuation mandatory. Checked directly against the rule text, it does not. Rule 6 specifies who is qualified to prepare a valuation report if one is obtained: a registered valuer, addressed to the board with justification for the valuation. A transitional clause, from before the registered valuer regime under Section 247 became operative, allowed an independent SEBI registered merchant banker or a chartered accountant in practice with at least ten years' experience to do the same work.

Neither the Section nor the Rule independently obligates every scheme to commission a valuation. What Rule 6 governs is quality control over who is allowed to sign one, not whether the company needs one in the first place.

This is the same shape of finding as Share Buy-backs: The One Mechanism With No Valuer Mandate At All, arrived at for a different reason. A buy-back has no valuer mandate because there is no non-participating shareholder to protect. A merger has a conditional mandate for a more mechanical reason: the scheme has to state how many shares of the transferee company each shareholder of the transferor company receives, and that number cannot be produced without valuing both companies. The "if any" in Section 232(2)(d) is rarely tested in practice, because the transaction structurally requires the report regardless of what the statute compels.

Where company law leaves room, securities regulation does not. SEBI Master Circular SEBI/HO/CFD/POD-2/P/CIR/2023/93, dated 20 June 2023, makes the following unconditionally mandatory for a listed entity proposing a scheme of arrangement, before the stock exchanges will even give a no-objection to file the draft scheme with the Tribunal:

• A valuation report from a registered valuer.
• An Audit Committee report addressing the rationale for the scheme, the synergies expected, the impact on shareholders, and a cost-benefit analysis.
• A separate fairness opinion from a SEBI-registered merchant banker specifically on the valuation report, not merely a second signature on the same document.

Two different professionals, two different documents, both mandatory, before NCLT is even approached. Company law's conditional language does not survive contact with a listed company.

Merger valuations conventionally combine three approaches: the yield or income method, the asset or net-asset-value method, and the market value method, weighted together into a single exchange ratio. This is often described as an SEBI or ICAI requirement. It is neither, originally, and the mapping onto ICAI's own named methods is looser than it first appears, examined directly in Valuation Approach vs. Valuation Method: What the Words Actually Mean. Independent valuation for exactly this transaction, merger and restructuring schemes, is also the specific recommendation a 2005 government committee made eight years before Section 247 existed, covered in Why India Carved Out a Separate Profession Just for Valuation.

The three-method convention itself comes from the Supreme Court's 1996 ruling in Miheer H. Mafatlal v. Mafatlal Industries Ltd., where a reputed firm of Chartered Accountants had combined exactly these three methods to arrive at an exchange ratio, and the Court held that combining them was sound valuation practice.

The more consequential part of that ruling was about the limits of judicial review: once a scheme has been approved by the requisite majority of shareholders, a court will not substitute its own judgment for the exchange ratio, or reopen the valuation methodology chosen by a competent professional, unless fraud or mala fide dealing is shown. That deference is nearly thirty years old, predates the registered-valuer regime by two decades, and is the real reason the three-method convention has held: not because a rule requires it, but because it is what courts have already found defensible when tested.

Three layers, not one rule. Company law leaves the valuation conditional but the transaction mechanics make it universal anyway. SEBI removes the conditionality entirely for listed companies and adds a second professional's sign-off. The methodology everyone actually uses was settled by a Supreme Court bench decades before the current registered-valuer framework existed, and survives today because it has already been tested against judicial scrutiny and held.

A scheme of amalgamation is also exactly where a control-premium judgement has to be made and defended, since it is definitionally a change of control for at least one of the companies involved, covered in Control Premium: Explicit Duty Under IBC, Implicit Duty Everywhere Else.