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Angel Tax Methods

CBDT Notification (Inviting public comments) dated 26th May, on valuation rule (Rule 11UA) that provides the method for computation of the fair market value of unquoted shares issued by a company in which the public is not substantially interested has prescribed five more valuation methods in addition to Discounted Cash Flow (DCF) and Net Asset value (NAV) methods, currently applicable for Resident investors.

Following methods are proposed in addition which shall be applicable to the consideration received from Non-resident investors and a summary about these methods is also provided alongwith.

  • Comparable Company Multiple Method
  • Probability Weighted Expected Return Method
  • Option Pricing Method
  • Milestone Analysis Method
  • Replacement Cost Methods


Comparable Companies Multiples ("CCM") Method

The value is determined on the basis of multiples derived from valuations of comparable companies, as manifested in the stock market valuations of listed companies. This valuation is based on the principle that market valuations, taking place between informed buyers and informed sellers, incorporate all factors relevant to valuation. Relevant multiples need to be chosen carefully and adjusted for differences between the circumstances.

Probability Weighted Expected Return Method

The Probability-Weighted Expected Return Method is a multi-step process wherein the value of shares is estimated based on the probability-weighted present value of various future expected outcomes.  

Firstly, the valuation specialist works with the management to determine the range of potential future outcomes for the company, such as sale, IPO, dissolution, or continued operation until a later exit date.  

Next, future equity value is estimated and allocated to each share class under each scenario mentioned above. Each outcome and its related share values are then weighted based on the probability of the outcome occurring.  The value for each share class is discounted back to the valuation date using an appropriate discount rate and divided by the number of outstanding shares in the respective class.

The PWERM is most appropriate to use when the period of time between the valuation date and a potential liquidity event is expected to be short.

The primary benefit of the PWERM:

This method allows the valuation specialist to make specific assumptions about the timing, range, and outcomes from specific future events, such as lower or higher values for a strategic sale versus an IPO.  


Benefit of The PWERM

Option Pricing Method (OPM)

The OPM is used for allocating equity value to multiple classes of securities in a company’s capital structure—it is not a method for estimating the enterprise value for the entire company. An overall equity value is estimated first using the valuation methods under the asset, market and income approaches before the OPM is applied. The OPM is a tool to allocate equity value; accordingly, the value of any debt should be deducted from the enterprise value.


Weighted Milestone Method or Earned Value Method

Milestone Analysis or Earned Value Method is a project management technique used to track the progress of a project based on predetermined milestones. It involves breaking down a project into key milestones and assessing the achievement of each milestone against predetermined criteria.

Here are the steps involved in conducting a Milestone Analysis:

Define milestones: Identify the key events, these milestones should be specific, measurable, achievable, relevant and time-bound (SMART).

Establish criteria: Determine the criteria against which the achievement of each milestone will be calculated.

Assign responsibilities: Assign responsibility to teams or individuals for achieving each milestone.

Track progress: Regularly monitor the status of each milestone based on the achieved progress.

Assess milestone completion: Evaluate whether each milestone has been successfully completed based on the predetermined criteria.

Adjust project plan: Make appropriate adjustments to the project plan if necessary. This may involve reallocating resources, revising timelines, or reassessing project priorities.

Communicate progress: Regularly communicate the progress of the project and the achievement of milestones to team members, stakeholders, clients, or management. 

By conducting Milestone Analysis, project managers can assess the progress of their projects, identify potential risks or issues, and make informed decisions to keep the project on track. 

Replacement Cost Method

The Replacement Cost Method, also known as the ‘Depreciated Replacement Cost Method’ involves valuing an asset based on the cost that a market participant shall have to incur to recreate an asset with substantially the same utility (comparable utility) as that of the asset to be valued, adjusted for obsolescence.