Unpaid Share Money: Prorated by One Method, Subtracted by Another

Rule 11UA(1)(c)(b) of the Income-tax Rules, 1962, the net asset value formula fixing the fair market value of an unquoted equity share, computes FMV as (A+B+C+D−L) × PV/PE. The Explanation defines the two terms doing the work: "PV = the paid up value of such equity shares" and "PE = total amount of paid up equity share capital as shown in the balance-sheet."

Net worth is not divided by the number of shares outstanding. It is divided by total paid-up capital, then multiplied by the specific share's own paid-up value. A share only 60 per cent called carries a PV that is 60 per cent of a fully-paid share's, and receives 60 per cent of the notional per-share net worth. Nothing is subtracted afterward. Proportionality is built into the formula, not applied as an adjustment.

The technique taught in Indian accounting practice for the net assets method runs the other way on the same facts. Within a single class of shares carrying a single face value, it first adds the uncalled amount back to net assets, as though every share had been paid in full, then divides by the total number of shares to reach a notional fully-paid intrinsic value. The partly-paid share's value is then fixed by direct subtraction: intrinsic value of a fully-paid share, minus the uncalled amount per share.

Checked against the worked mechanics, that is not mathematically equivalent to scaling by the paid-up proportion. Recompute the same figures under the two methods and they diverge, sometimes widely, because a flat rupee subtraction and a percentage haircut agree only by coincidence.

The net assets method is not committed to flat subtraction as a matter of principle. Where a company has more than one class or face value outstanding, the standard technique first splits net assets between classes in the ratio of their respective paid-up capital, dividing by share count only within each class afterward.

That split-by-paid-up-capital step is structurally the same operation as Rule 11UA's PV/PE mechanism, performed once across classes rather than continuously across every share. The flat subtraction appears specifically inside a single class of otherwise-identical shares. Move across a class boundary and the same tradition reaches for proportionality.

The dividend-yield method runs its own formula: value per share equals the rate of dividend divided by the normal expected rate of return, multiplied by the paid-up value of the share. A share paid up to 80 per cent of face value gets 80 per cent of the fully-paid figure, because paid-up value is a direct multiplicand rather than a base subject to later adjustment.

On this question the yield method and Rule 11UA's PV/PE formula reach the same structural answer by entirely different routes: one a statutory tax formula, the other a market-based income approach with no statutory anchor at all.

Outside Rule 11UA's closed statutory mechanism, nothing fills the gap. ICAI Valuation Standard 303, the standard governing financial instruments, and International Valuation Standards likewise, address market, income and cost approaches to financial instruments generally, credit-risk and liquidity adjustments among them. Neither names partly-paid shares, calls in arrears, or uncalled capital anywhere in its text.

A Section 247 valuer asked to value a partly-paid share outside a Rule 11UA engagement is choosing between two long-standing but uncodified accounting traditions that disagree on the exact question that matters.

Section 68(2)(e) of the Companies Act, 2013 conditions a buy-back on "all the shares or other specified securities for buy-back are fully paid-up." A partly-paid share is not a harder buy-back to price. It is not an eligible buy-back at all.

Neither the Section, the applicable rules, nor the commentary checked for this piece states a reason for the exclusion, but the practical effect lines up with the finding in Share Buy-backs: The One Mechanism With No Valuer Mandate At All: a buy-back keeps finding ways to avoid the judgement calls that make other share transactions need a valuer.

Company law rarely legislates the economics of a partly-paid share directly, but where it does, the direction is proportional. Section 51 lets a company pay dividends in proportion to the amount paid-up on each share, where its articles authorise it.

That is an optional, board-level mechanism rather than a mandatory default. It is not a valuation rule and does not resolve the net-assets question. It is, however, the clearest signal in the Act of which convention company law's drafting instinct favours when it engages with partly-paid shares at all.

State the convention in the report and justify it from the method being run, rather than treating either answer as settled. Under Rule 11UA the formula decides for you. Outside it, a flat subtraction and a proportionate haircut are both defensible and produce materially different numbers, so an unstated choice is the real exposure.

Rule 11UA and the yield method prorate. Traditional net-asset practice subtracts flatly within one class, then reverts to proportionality the moment a second class appears. ICAI's standards and IVS never take a position.

Which convention applies turns on which method the valuation is already running under. No rule was ever written to answer the question directly.