CHAPTER.

1 INTRODUCTION OF VALUATION
OF SHARE
INTRODUCTION:
In financial markets, stock valuation is the method of calculating
theoretical values of companies and their stocks. The main use of these
methods is to predict future market prices, or more generally, potential
market prices, and thus to profit from price movement stocks that are
judged undervalued (with respect to their theoretical value) are bought,
while stocks that are judged overvalued are sold, in the expectation that
undervalued stocks will, on the whole, rise in value, while overvalued
stocks will, on the whole, fall.
In the view of fundamental analysis, stock valuation based on
fundamentals aims to give an estimate of the intrinsic value of a stock,
based on predictions of the future cash flows and profitability of the
business. Fundamental analysis may be replaced or augmented by market
criteria what the market will pay for the stock, without any necessary
notion of intrinsic value. These can be combined as "predictions of future
cash flows/profits (fundamental)", together with "what will the market
pay for these profits?" These can be seen as "supply and demand" sides
In the view of others, such as John Maynard Keynes, stock valuation is
not a prediction but a convention, which serves to facilitate investment
and ensure that stocks are liquid, despite being underpinned by an illiquid
business and its illiquid investments, such as factories.

Stock valuation methods

Stocks have two types of valuations. One is a value created using some
type of cash flow, sales or fundamental earnings analysis. The other value
is dictated by how much an investor is willing to pay for a particular
share of stock and by how much other investors are willing to sell a stock
for (in other words, by supply and demand). Both of these values change
over time as investors change the way they analyze stocks and as they
become more or less confident in the future of stocks.
The fundamental valuation is the valuation that people use to justify stock
prices. The most common example of this type of valuation methodology
is P/E ratio, which stands for Price to Earnings Ratio. This form of
valuation is based on historic ratios and statistics and aims to assign value
to a stock based on measurable attributes. This form of valuation is
typically what drives long-term stock prices.
The other way stocks are valued is based on supply and demand. The
more people that want to buy the stock, the higher its price will be. And
conversely, the more people that want to sell the stock, the lower the price
will be. This form of valuation is very hard to understand or predict, and
it often drives the short-term stock market trends.
There are many different ways to value stocks. The key is to take each
approach into account while formulating an overall opinion of the stock.
If the valuation of a company is lower or higher than other similar stocks,
then the next step would be to determine the reasons.

1.Earnings per share (EPS)

EPS is the net income available to common shareholders of the company
divided by the number of shares outstanding. Usually there will be two
types of EPS listed: a GAAP (Generally Accepted Accounting Principles)
EPS and a Pro Forma EPS, which means that the income has been
adjusted to exclude any one time items as well as some non-cash items
like amortization of goodwill or stock option expenses. The most
important thing to look for in the EPS figure is the overall quality of
earnings. Make sure the company is not trying to manipulate their EPS
numbers to make it look like they are more profitable. Also, look at the
growth in EPS over the past several quarters / years to understand how
volatile their EPS is, and to see if they are an underachiever or an
overachiever. In other words, have they consistently beaten expectations
or are they constantly restating and lowering their forecasts?
The EPS number that most analysts use is the pro forma EPS. To compute
this number, use the net income that excludes any one-time gains or
losses and excludes any non-cash expenses like stock options or
amortization of goodwill. Then divide this number by the number of fully
diluted shares outstanding. Historical EPS figures and forecasts for the
next 12 years can be found by visiting free financial sites such as Yahoo
Finance (enter the ticker and then click on "estimates").
2. Price to Earnings (P/E)
Now that the analyst has several EPS figures (historical and forecasts),
the analyst will be able to look at the most common valuation technique
used, the price to earnings ratio, or P/E. To compute this figure, one

divides the stock price by the annual EPS figure. For example, if the
stock is trading at $10 and the EPS is $0.50, the P/E is 20 times.
A complete analysis of the P/E multiple includes a look at the historical
and forward ratios. Historical P/Es are computed by taking the current
price divided by the sum of the EPS for the last four quarters, or for the
previous year. Historical trends of the P/E should also be considered by
viewing a chart of its historical P/E over the last several years (one can
find this on most finance sites like Yahoo Finance). Specifically consider
what range the P/E has traded in so as to determine whether the current
P/E is high or low versus its historical average.
Forward P/Es reflect the future growth of the company into the future.
Forward P/Es are computed by taking the current stock price divided by
the sum of the EPS estimates for the next four quarters, or for the EPS
estimate for next calendar or fiscal year or two.
P/Es change constantly. If there is a large price change in a stock, or if the
earnings (EPS) estimates change, the ratio is recomputed.
3. Growth rate
Valuations rely very heavily on the expected growth rate of a company.
One must look at the historical growth rate of both sales and income to
get a feeling for the type of future growth expected. However, companies
are constantly changing, as well as the economy, so solely using historical
growth rates to predict the future is not an acceptable form of valuation.
Instead, they are used as guidelines for what future growth could look
like if similar circumstances are encountered by the company. Calculating
the future growth rate requires personal investment research. This may
take form in listening to the company's quarterly conference call or

reading a press release or other company article that discusses the

company's growth guidance.
However, although companies are in the best position to forecast their
own growth, they are often far from accurate, and unforeseen events
could cause rapid changes in the economy and in the company's
industry.For any valuation technique, it is important to look at a range of
forecast values.
4. Price earnings to growth (PEG) ratio
This valuation technique has really become popular over the past decade
or so. It is better than just looking at a P/E because it takes three factors
into account; the price, earnings, and earnings growth rates. To compute
the PEG ratio, the Forward P/E is divided by the expected earnings
growth rate (one can also use historical P/E and historical growth rate to
see where it has traded in the past). This will yield a ratio that is usually
expressed as a percentage. The theory goes that as the percentage rises
over 100% the stock becomes more and more overvalued, and as the PEG
ratio falls below 100% the stock becomes more and more undervalued.
The theory is based on a belief that P/E ratios should approximate the
long-term growth rate of a company's earnings. Whether or not this is true
will never be proven and the theory is therefore just a rule of thumb to
use in the overall valuation process.
Here is an example of how to use the PEG ratio to compare stocks. Stock
A is trading at a forward P/E of 15 and expected to grow at 20%. Stock B
is trading at a forward P/E of 30 and expected to grow at 25%. The PEG
ratio for Stock A is 75% (15/20) and for Stock B is 120% (30/25).
According to the PEG ratio, Stock A is a better purchase because it has a
lower PEG ratio, or in other words, you can purchase its future earnings
growth for a lower relative price than that of Stock B.

5. Return on Invested Capital (ROIC)

This valuation technique measures how much money the company
makes each year per dollar of invested capital. Invested Capital is
the amount of money invested in the company by both
stockholders and debtors. The ratio is expressed as a percent and
one looks for a percent that approximates the level of growth that
expected. In its simplest definition, this ratio measures the
investment return that management is able to get for its capital.
The higher the number, the better the return.
To compute the ratio, take the pro forma net income (same one
used in the EPS figure mentioned above) and divide it by the
invested capital. Invested capital can be estimated by adding
together the stockholders equity, the total long and short term debt
and accounts payable, and then subtracting accounts receivable
and cash (all of these numbers can be found on the company's
latest quarterly balance sheet). This ratio is much more useful
when comparing it to other companies being valued.
6. Return on Assets (ROA)
Similar to ROIC, ROA, expressed as a percent, measures the
company's ability to make money from its assets. To measure the
ROA, take the pro forma net income divided by the total assets.
However, because of very common irregularities in balance sheets
(due to things like Goodwill, write-offs, discontinuations, etc.) this
ratio is not always a good indicator of the company's potential. If

the ratio is higher or lower than expected, one should look closely
at the assets to see what could be over or understating the figure.

7. Price to Sales (P/S)

This figure is useful because it compares the current stock price to
the annual sales. In other words, it describes how much the stock
costs per dollar of sales earned. To compute it, take the current
stock price divided by the annual sales per share. The annual sales
per share should be calculated by taking the net sales for the last
four quarters divided by the fully diluted shares outstanding (both
of these figures can be found by looking at the press releases or
quarterly reports). The price to sales ratio is useful, but it does not
take into account any debt the company has. For example, if a
company is heavily financed by debt instead of equity, then the
sales per share will seem high (the P/S will be lower). All things
equal, a lower P/S ratio is better. However, this ratio is best looked
at when comparing more than one company.
8. Market Cap
Market cap, which is short for market capitalization, is the value of
all of the company's stock. To measure it, multiply the current
stock price by the fully diluted shares outstanding. Remember, the
market cap is only the value of the stock. To get a more complete
picture, look at the enterprise value.
9. Enterprise Value (EV)
Enterprise value is equal to the total value of the company, as it is
trading for on the stock market. To compute it, add the market cap
(see above) and the total net debt of the company. The total net

debt is equal to total long and short term debt plus accounts
payable, minus accounts receivable, minus cash. The enterprise
value is the best approximation of what a company is worth at any
point in time because it takes into account the actual stock price
instead of balance sheet prices. When analysts say that a company
is a "billion dollar" company, they are often referring to its total
enterprise value. Enterprise value fluctuates rapidly based on stock
price changes.
10. EV to Sales
This ratio measures the total company value as compared to its
annual sales. A high ratio means that the company's value is much
more than its sales. To compute it, divide the EV by the net sales
for the last four quarters. This ratio is especially useful when
valuing companies that do not have earnings, or that are going
through unusually rough times. For example, if a company is
facing restructuring and it is currently losing money, then the P/E
ratio would be irrelevant. However, by applying an EV to Sales
ratio, one could compute what that company could trade for when
its restructuring is over and its earnings are back to normal.
11. EBITDA
EBITDA stands for earnings before interest, taxes, depreciation
and amortization. It is one of the best measures of a company's
cash flow and is used for valuing both public and private
companies. To compute EBITDA, use a company's income
statement, take the net income and then add back interest, taxes,
depreciation, amortization and any other non-cash or one-time
charges. This leaves you with a number that approximates how
much cash the company is producing. EBITDA is a very popular

figure because it can easily be compared across companies, even if

not all of the companies are profitable.
12. EV to EBITDA
This is perhaps one of the best measurements of whether or not a
company is cheap or expensive. To compute, divide the EV by
EBITDA. The higher the number, the more expensive the company
is. However, remember that more expensive companies are often
valued higher because they are growing faster or because they are
a higher quality company. With that said, the best way to use
EV/EBITDA is to compare it to that of other similar companies.

Factors affecting the value of an unquoted shareholding

A company is a separate legal person capable of perpetual succession,
and distinct from its shareholders who have no proprietary interest in its
underlying assets. The shareholders interest in the company is the
ownership of a bundle of rights, including the rights to receive dividends,
to vote and to receive surplus assets on winding-up. The exact rights vary
according to the class of shares held. They are defined in the Articles of
Association of the company. The bigger the bundles of rights, the more
valuable the shares. The most common types of shares are: ordinary,
preference and deferred shares.
Unlike quoted shares, unquoted shares are often subject to restrictions on
transfer. In some cases, the board of directors or the directors are
empowered to refuse to register transfer as they deem fit. The Articles of
Association of the company may provide an option for the other
shareholders of the company to buy the shares at a fixed price before they

can be sold to a non-member. Such a fixed price is not the open market
price for estate duty purposes.
As the vendor is a hypothetical person. He may or may not be a director
of the company or a member of the family that controls the company. He
is endowed only with the characteristics common to all hypothetical
vendors, namely, owning the block of shares in question. Given the
restrictions on transfer, the value estimated in accordance with section
13(5) of the Ordinance should be greater than the fixed price but less than
the price obtainable if the restrictions were removed.
There is no open market price for unquoted shares. The value of an
unquoted shareholding is affected by many factors including the nature
and size of the shareholding passing, the manner in which the remaining
shareholdings are held, the profitability and future prospects of the
business, the dividend policy and cover, the strength of asset backing of
the company, the prospect of capital gains, the quality of management
and so on.
The common methods of share valuation are dividend yield, price
earnings ratio and net asset basis. The choice of the appropriate method
will depend on the type and size of the shareholding and the nature of
business.
Information and documents required for preparing a share
valuation
Before preparing the share valuation, the following information and
documents should be available:

(a) Details of the issued share capital of the company at the date of death
and the change(s) in capital structure, if any, during the last three years
before death.
(b) The rights of the respective classes of shares in relation to voting,
dividend and on winding-up.
(c) Details of the shares to be valued and the manner in which the
remaining shareholdings are held.
(d) Details of the directors of the company and their relationship.
(e) Details of the business activities of the company.
(f) Annual reports and accounts for the last three years before the date of
death.
(g) Details of the investment and landed property held by the company as
at the date of death
Controlling shareholding method of valuation
In the case of a controlling shareholding, section 44(1) of the Ordinance
requires that the valuation be based on assets value instead of the
estimated open market price specified in section 13(5).
This special method of valuation is also applicable to cases where the
deceased held a 50% shareholding and had, in addition, at any time
during the three years ending with his death, a casting vote as chairman of
the company by virtue of the Articles of Association. He is deemed under
section 44(3) to have control of the company.
In broad outline, the basis of valuation is as follows. The value of the
companys assets, including goodwill, at the date of the deceaseds death,

is ascertained as prescribed by section 13(5) of the Ordinance, i.e. at the

price they would fetch if sold in the open market in the most
advantageous manner. From the aggregate value of these assets are
deducted the companys liabilities other than its share capital.
The net value of the assets so ascertained is deemed to be the value of all
the shares issued. The value of the shareholding passing is the
proportionate net value of the assets. In arriving at the valuation, no
discount is given for any restrictions on transfer. Neither is there any
allowance for the cost of realization.
Minority shareholding methods of valuation
Holding of less than 50% is regarded as a minority shareholding. A
minority shareholder has no say in the company. But the size of a
minority holding may affect its value. Holding of between 25% and 50%
allows the holder to block a special or extraordinary resolution and
prevent liquidation. As the holder could exert more influence in the
companys affairs, such an influential minority holding would have a
higher value per share than holdings below 25%.
Besides, size of the holding is relative. An identical holding might fetch a
different price in two comparable companies depending on the manner in
which the remaining shares are held. A holding of even only 10% may
have additional value to a holder of say 41% holding to whom it would
give control of the company. Where all of the remaining shares are owned
by another shareholder, an influential minority holding may only be
worth a small additional premium. If the deceaseds holding were the
single largest shareholding in the company, a greater premium would be
warranted. Each valuation must therefore be considered on its own
merits.

There is a proposition that holders of minority shareholdings were

mainly concerned with dividends. Hence, undistributed earnings should
not have any bearing on the valuation of an uninfluential minority
shareholding.
Another suggestion is that to value a minority holding by reference to the
underlying assets of the company is not in accordance with either the
legal view or common sense. The reasons are that a minority holding has
no say in the running of the company, and in policies on dividends,
retention of earnings and disposal of assets, and that the prospects of
receiving any distribution or realizing any capital appreciation are
entirely dependent on the will of others..
An investor in unquoted companies is different from an investor in
quoted shares. He should be more concerned with the future prospects of
the company and the long-term capital gain, rather than the immediate
return of profits in the form of dividends. In addition to the prospective
dividends, the main factors affecting the estimated value of a minority
holding include the earning capacity of the company and prospects of a
capital appreciation. Their order of importance varies depending on the
type of company in which the shares are to be valued.
Valuation of preference shares
Preference shares have the rights to:
(a) a fixed rate of dividend in preference to other shares;
(b) the payment of arrears of dividends; and
(c) return of capital on a winding up of the company. They usually have
no voting rights. Dividend yield provides a satisfactory basis of valuation
for cases where dividends are regularly paid.

The valuation process is comparatively simple because the dividend

percentage is fixed. The only difficulty is the expected yield. Comparison
may be made with the interest rate and fixed income products listed in the
Hong Kong Stock Exchange.
As the preference shares are low risk investment, the adjustment to the
quoted yield should be smaller. If the shares are entitled either to surplus
income or assets, it will be necessary to assess such entitlement. Where
the shares carry a voting right, a premium of 10% may be added. Where
the dividends are cumulative and in arrears, the valuation will be based
on the cumulative amount of the arrears plus the amount paid up, subject
to a discount for the delay in payment.

CHAPTER 2. INTRODUCTION OF VALUATION

OF GOODWILL

INTRODUCTION:
Section 3 of the Ordinance defines assets to include goodwill. Whenever
a company is valued on net assets basis, a separate valuation for goodwill
will need to be prepared. But if the business is unprofitable and has to be
valued on a break-up basis, the goodwill has no value.
Goodwill has been described as the benefit and advantage of the good
name, reputation and connection of a business. It is nothing more than the
possibility that the old customers will resort to the old place. By its
nature, goodwill can be inherent (generated by the location of the
business) or personal (generated by the personality and special skills of a
particular individual or group of individuals) or free (advantages attached
to the business other than the first two categories).
In commercial practice, goodwill is normally valued at a number of
years purchase of the companys estimated future super-profits,
according to the custom of the trade or the circumstances of the particular
business. Three factors will need to be determined, namely, the expected
profits, the required return from tangible assets, and the multiplier. For
simplicity, we normally value the goodwill at one years super profits.
The super profits are calculated by deducting from the assessable profits
(either a simple average of the last three years assessable profits, or in

the case of increasing / declining profits, the weighted average) a sum

which is equivalent to a 10% return on the net capital employed.
As our multiplier is only one, no question of excessiveness should
arise. Any objection on this ground would be refused unless there is
evidence to show that profits have been substantially reduced by reason
of the death of the deceased.
Goodwill in accounting is an intangible asset that arises when one
company acquires another, but pays more than the fair market value of
the net assets (total assets - total liabilities). The goodwill amounts to the
excess of the "purchase consideration" (the money paid to purchase the
asset or business) over the total value of the assets and liabilities. It is
classified as an intangible asset on the balance sheet, since it can neither
be seen nor touched. However, according to International Financial
Reporting Standards (IFRS), goodwill is never amortized. Instead,
management is responsible for valuing goodwill every year and to
determine if an impairment is required. If the fair market value goes
below historical cost (what goodwill was purchased for), an impairment
must be recorded to bring it down to its fair market value. However, an
increase in the fair market value would not be accounted for in the
financial statements.
Calculating goodwill
In order to calculate goodwill, the fair market value of identifiable assets
and liabilities of the company acquired is deducted from the purchase
price. For instance, if company A acquired 100% of company B, but paid
more than the net market value of company B, a goodwill occurs. In order
to calculate goodwill, it is necessary to have a list of all of company B's
assets and liabilities at fair market value.

Fair market value

Accounts Receivable

$10

Inventory

$5

Accounts payable

$6

Total Net assets

= 10 + 5 - 6
= $9

In order to acquire company B, company A paid $20. Hence, goodwill

would be $11 ($20 - $9). The journal entry in the books of company A to
record the acquisition of company B would be:
DR Goodwill

$11

DR Accounts Receivable

$10

DR Inventory

$5
CR Accounts Payable

$6

CR Cash

$20

Modern meaning
Goodwill is a special type of intangible asset that represents that portion
of the entire business value that cannot be attributed to other income
producing business assets, tangible or intangible.
For

example,

a privately

held software

company

may

have net

assets (consisting primarily of miscellaneous equipment and/or property,

and assuming no debt) valued at $1 million, but the company's overall

value (including brand, customers, and intellectual capital) is valued at

$10 million.
Anybody buying that company would book $10 million in total assets
acquired, comprising $1 million physical assets and $9 million in other
intangible assets. And any consideration paid in excess of $10 million
shall be considered as goodwill. In a private company, goodwill has no
predetermined value prior to the acquisition; its magnitude depends on
the two other variables by definition. While a business can invest to
increase its reputation, by advertising or assuring that its products are of
high quality, such expenses cannot be capitalized and added to goodwill,
which is technically an intangible asset. Goodwill and intangible assets
are usually listed as separate items on a company's balance sheet.
CHARACTERSTIC:
It belong to the category of intangible assets.
It is valuable assets.
It contributes to the earning of excess of profits.
Its value is liable to constant fluctuation.

Methods of Valuation of Goodwill

There are three methods of valuation of goodwill of the firm;
1. Average Profits Method
2. Super Profits Method
3. Capitalisation Method
1. Average Profits Method:

Under this method goodwill is calculated on the basis of the average

of some agreed number of past years. The average is then multiplied
by the agreed number of years. This is the simplest and the most
commonly used method of the valuation of goodwill.
Goodwill = Average Profits X Number of years of Purchase
Before calculating the average profits the following adjustments
should be made in the profits of the firm:
a. Any abnormal profits should be deducted from the net profits of
that year.
b. Any abnormal loss should be added back to the net profits of that
year.
c. Non operating incomes example. income from investments etc
should be deducted from the net profits of that year.
Explain this method with the help of a simple example.
A Ltd agreed to buy the business of B Ltd. For that purpose
Goodwill is to be valued at three years purchase of Average Profits
of last five years. The profits of B Ltd. for the last five years are:
Year

Profit/Loss ($)

2005

10,000,000

2006

12,250,000

2007

7,450,000

2008

2,450,000 (Loss)

2009

12,400,000

Following additional information is available:

1. In the year 2008 the company suffered a loss of $1,000,500 due
to fire in the factory.
2. In the year 2009 the company earned an income from
investments outside the business $ 4,500,250.
Solution:
Total profits earned in the past five years=

10,000,000 +

12,250,000 + 7,450,000 - 2,450,000 + 12,400,000 = $ 39,650,000

Total Profits after adjustments = $ 39,650,000 + $ 1,000,500 - $
4,500,250=$ 36,150,250
Average Profits= $ 36,150,2505=$ 7,230,050
Goodwill = $ 7,230,0503=$ 21,690,150
Thus A Ltd would pay $21,690,150 as the price of Goodwill earned
by B Ltd.

2. Super profits method:

Super Profits are the profits earned above the normal profits. Under
this method Goodwill is calculated on the basis of Super Profits i.e.
the excess of actual profits over the average profits. For examplle if
the normal rate of return in a particular type of business is 20% and
your investment in the business is $1,000,000 then your normal
profits should be $ 200,000. But if you earned a net profit of $
230,000 then this excess of profits earned over the normal profits
i.e. $ 230,000 - $ 200,000= Rs.30,000 are your super profits.
For calculating Goodwill, Super Profits are multiplied by the agreed
number of years of purchase.
Steps for calculating Goodwill under this method are given below:

i) Normal Profits = Capital Invested X Normal rate of return/100

ii) Super Profits = Actual Profits - Normal Profits
iii) Goodwill = Super Profits x No. of years purchased
For example, the capital employed as shown by the books of ABC Ltd is
$ 50,000,000. And the normal rate of return is 10 %. Goodwill is to be
calculated on the basis of 3 years puchase of super profits of the last four
years. Profits for the last four years are:
Year

Profit/Loss ($)

2005

10,000,000

2006

12,250,000

2007

7,450,000

2008

5,400,000

Total profits for the last four years = 10,000,000 + 12,250,000 +

7,450,000 + 5,400,000 = $35,100,000
Average Profits = 35,100,000 / 4 = $ 8,775,000
Normal Profits = 50,000,000 X 10/100 = $ 5,000,000
Super Profits = Average/ Actual Profits Normal Profits =
8,775,000 5,000,000 = $ 3,775,000
Goodwill = 3,775,000 3 = $ 11,325,000

3. Capitalisation Method:
There are two ways of calculating Goodwill under this method:
(i) Capitalisation of Average Profits Method
(ii) Capitalisation of Super Profits Method
(i) Capitalisation of Average Profits Method:
Under this method we calculate the average profits and then assess
the capital needed for earning such average profits on the basis of
normal rate of return. Such capital is called capitalised value of
average profits. The formula is: Capitalised Value of Average Profits = Average Profits X (100 /
Normal Rate of Return)
Capital Employed = Assets - Liabilities
Goodwill = Capitalised Value of Average Profits - Capital
Employed
For example a firm earns $40,000 as its average profits. The normal
rate of rteturn is 10%. Total assets of the firm are $1,000,000 and its
total external liabilities are $ 500,000. To calculate the amount of
goodwill:
Total capitalized value of the firm = 40,000 100/10 = 400,000
Capital Employed = 1,000,000 500,000 = 500,000
Goodwill = 500,000 400,000 = 100,000

(ii)Capitalisation of Super Profits:

Under this method first of all we calculate the Super Profits and
then calculate the capital needed for earning such super profits on

the basis of normal rate of return. This Capital is the value of our
Goodwill . The formula is: Goddwill = Super Profits X (100/ Normal Rate of Return)
For example ABC Ltd earns a profit of $ 50,000 by employing a capital
of $ 200,000, The normal rate of return of a firm is 20%. To calculate
Goodwill:
Normal Profits = 200,000 20/100 =$ 40,000
Super profits = 50,000 40,000 = $10,000
Goodwill = 10,000 100 / 20 = $50,000

CHAPTER 3. APPLICATION IN CORPORATE

SECTOR
Introduction
The growing importance of the Corporate Sector calls for greater
transparency and availability of data. Furthermore, the withdrawal of
direct regulatory functions by the Government such as industrial

licensing, import licensing, capital issues and exchange controls means

that a number of avenues of collection of data have ceased to exist while
the need for them has grown for indicative planning, forecasting and
research purposes. Finally, the onset of the knowledge-based sectors or
the new economy requires better reporting standards of certain attributes
to help monitor the national economic performance and to assess its
future prospects.
Frame
The responsibility for collection, compilation, maintenance and
dissemination of basic statistics on the Indian Corporate Sector is vested
with the Department of Company Affairs (DCA). The registered
companies are required to file certain documents and returns with the
Offices of various Registrars of Companies (ROCs) under the provisions
of the Companies Act, 1956. The most important of these are the Annual
Reports and Balance Sheets of the companies and returns on share
capital. Thus, the Corporate Sector Statistics maintained by the DCA are
basically a by-product of the administration of the Companies Act. No
regular or ad hoc surveys are conducted by the department to collect data
on corporate entities.
According to the available information, there are 5.44 lakh companies
registered with the Office of the Registrar of Companies (ROCs) as on 1
April 2000. Among them, 5.41 lakh companies are limited by shares and
the remaining are either guarantee companies or companies with
unlimited liabilities. During the last decade, on an average, around 34,000
new companies were added annually. A consolidated list of all the newlyregistered companies in the year with their names, addresses, industrial
activities and authorised capital is available month-wise. The distribution

of companies by various categories such as Government and nonGovernment, public and private, State of registration and industrial
activity is available. The capital raised by the existing companies is
available on a quarterly basis. This set of data along with that available in
the balance sheets of large-sized companies (companies with paid-up
capital Rs. 50 lakh or more) is used as an input for estimating the total
paid-up capital of the private Corporate Sector at the end of each financial
year and to identify large-sized companies.
Fact sheets containing selected financial parameters culled out from the
Balance Sheets and Profit and Loss Accounts filed by the companies in
the respective ROC offices are generated for:
(a) Large-sized non-Government companies,
(b) Government companies, and
(c) Indian subsidiaries of foreign companies.
Besides, certain basic information is maintained on the branches of
foreign companies, which have established their places of business in
India.
The number of financial parameters covered in the fact sheet for largesized non-Government companies has been enhanced from the year 199899. Data are available on companies liquidated and/or struck off under
Section 560 of the Companies Act detailing the names, paid-up capital,
industrial activity, State of registration, date of liquidation, etc. Similarly,
data on companies amalgamated or transferred from one State to another,
and companies, which have changed their names, are also available on a
monthly basis, and can be utilised in a suitable fashion.

Section 60 of the Companies Act, 1956, requires that the prospectuses

issued by or on behalf of companies or in relation to companies inviting
offers from the public and subscription or purchase of any share or
debenture be delivered to the Registrar of Companies for registration. The
prospectuses so registered in different ROC offices by non-Government,
non-financial public limited companies are analysed and company-wise
database created annually indicating the number of equity shares and
preferential shares or debentures set aside for the public, existing
shareholders, promoters, directors and associates, Non-Resident Indians
(NRIs), foreign collaborators, financial institutions, banks, employees,
mutual funds, underwriters and proprietors.
Further, these prospectuses are analysed with reference to the cost of the
project and its means of finance through public equity share capital,
reserves and surpluses of the company, subsidies, debentures and bonds,
deferred payment and loans from various financial institutions such as
Industrial Development Bank of India (IDBI), Industrial Financial
Corporation of India (IFCI), Industrial Credit and Investment Corporation
of India (ICICI), Unit Trust of India (UTI), Life Insurance Corporation
(LIC), State Financial Corporations (SFCs) and State Industrial
Development

Corporations

(SIDCs),

Banks,

General

Insurance

Corporation (GIC) and insurance companies, promoters, directors and

friends and others. This database created from the prospectuses is used by
the Reserve Bank of India (RBI) for further analyses and studies.
The Department of Company Affairs has signed a Memorandum of
Understanding with the Centre for Monitoring Indian Economy (CMIE)
to bring out important Corporate Sector Statistics on CD-ROM as well as
in book form, retrieving information from balance sheets, profit and loss

accounts and other relevant documents of public limited companies from

the year 1998-99 onwards.
Strengths and Weaknesses
There are more than five lakh companies registered in the
ROCs but the actual number of companies, which are operating, is not
known. This situation seriously affects the reliability of various estimates.
An exercise conducted in March 1999 indicated that about 47 per cent of
the registered companies filed their balance sheet for the year 1997-98
with the ROCs. RBI studies on Company Finances are based on the
annual reports and balance sheets of certain sample companies. In the
absence of a reliable population frame, the RBI is not in a position to
apply suitable sampling techniques. Further, the RBI is also constrained
by the poor response from companies and non-receipt of annual reports
directly from the ROCs. The RBIs findings are thus based mainly on the
data of responding companies and the Fact Sheets prepared by the DCA.
The reliability of the estimates of gross savings and investment in the
private Corporate Sector arrived at by blowing up the sample results
available from the RBIs studies in proportion to the coverage of the paidup capital (PuC) of the sample companies to the PuC of all companies has
been questioned time and again.
It is necessary that the DCA ensures supply of the company
Annual Reports to the RBI. Furthermore, there should be no objection to
the DCA supplying such Reports to private parties provided that, (a) wide
dissemination, and (b) authenticity and reliability in use are ensured. All
organisations that satisfy the above two requirements should have access
to the same facility. These conditions could be incorporated in
arrangements between the DCA and private parties.

The Working Group under Dr. Arun Ghosh on Modernisation of

Indian Statistical System strongly recommended a one-time census of all
genuine and operating companies to identify all bogus companies for deregistration. According to the group, the law may need an amendment and
perhaps an Ordinance may be passed initially, followed by a Bill for
presentation to Parliament, to enable this. Corporate winding up is a longdrawn procedure at present, but if the law provides for the disposal of
assets and liabilities, there could occur a massive cleaning-up operation.
The Working Group also recommended that after a grace period of 3
months, any company which does not submit its accounts for the previous
year be de-registered, and the fact be properly notified.
New Initiatives
The DCA has recently introduced a scheme of assigning a
unique 21-digit Corporate Index Number (CIN) for registration of
companies. The CIN has been designed to help easily identify or group
the companies by State, industry (whether listed or not), economic
activity, ownership and year of incorporation and will be applicable to all
companies registering themselves from 1 November, 2000. The older
companies will also be given the new registration number subsequently.
All the Registrars of Companies (ROCs) will be brought under a network
to facilitate the monitoring of the submission of various documents under
the Companies Act. This facility will enable the identification of defunct
companies, once the complete database is prepared. As computerisation is
being introduced in a phased manner, the availability of the database is
likely to take some time.

Another initiative undertaken by the DCA is the introduction of

an amnesty scheme, Company Law Settlement Scheme (CLSS) giving
an option to defaulting companies to file their requisite documents, by
paying a lump-sum fee. As an offshoot of CLSS, the DCA has initiated a
fast track exit route for de-registration of the defunct companies and has
also waived some of the conditions.
There is a need to have a proper system of entering the
information from the Annual Reports and Balance Sheets, in respect of a
minimum set of variables required for the purposes of monitoring the
frame, policy formulation and economic trend analysis. For this purpose,
necessary statutory provisions, if required, may be put in force, apart
from identifying an organisation from DCA, RBI, Security and Exchange
Board of India (SEBI), etc. which can be entrusted with this
responsibility. Suitable strengthening of statistical personnel wherever
required may be provided. It is imperative to have a suitable fallback
mechanism in the ROCs for administering the Act and monitoring the
frame.

FINDINGS
Valuation of share & goodwill is effective &
efficient way of calculate value of share &
goodwill.

Share & goodwill is important aspects of the

company.
It increase the productivity & efficiency of the
company.
CONCLUSION
In the project of

VALUATION OF SHARE & GOODWILL &

ITS APPLICATION IN CORPORATE SECTOR I conclude that

the valuation of share & goodwill is one of the Indias popular &
efficient method for valued share & goodwill. it shows that the
company has efficiency to improve the productivity of service &
products. It conclude that share & goodwill grow their efficiency &
productivity of the company .In the whole project point out the
arrow on shares & goodwill of companys improvement in the
emerging market , better services provided to the consumers , &
increase profitability day by day.

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