Write a short note on the necessity of valuation of shares.

Ans.

MEANING OF VALUATION OF SHARES

Valuation of shares means such assessment of value at which they are purchased, sold, transferred or considered for tax assessment. It also provides correct information and states about the position of share capital to the shareholders and various other parties. Here it is worth mentioning that as per Section 2 (84) of Companies Act, 2013, “Share” means a share in the share capital of a company and includes stock.

FINDING OUT VALUE OF SHARES

The shares which are included in the list of stock exchanges are put on the websites of stock exchanges, communicated in electronic media and are quoted in the newspapers. However, the shares which are not quoted, are valued and their value is found out by various methods. On many occasions even the value of quoted shares is also found out because fluctuations in the prices of shares at stock exchange is influenced by a number of factors and many a times they do not determine the fair value of shares. According to Pickles, from accounting point of view valuation of shares is a difficult problem. Though the underlying principles are by no means difficult but their application calls for a considerable knowledge of ethnical points.

NECESSITY OF VALUATION OF SHARES

In the following cases valuation of shares is necessary:

(1) When absorption of a company takes place, valuation of shares is made.

(2) When some companies are taken over by the Government, compensation is paid by the Govt, to the shareholders of such companies and on this occasion valuation of shares is made.

(3) When two or more than two companies amalgamate, valuation of shares is made.

(4) When some shareholders do not give their consent for reconstruction of a company, their shares are valued for the purpose of acquisition.

(5) If the property consists of shares, these shares are valued for the purpose of wealth-tax.

(6) Valuation of shares is made when shares of one type are converted into shares of another type.

(7) When one company wants to become holding company of another company, it acquires more than 50 per cent shares of that company and on this occasion valuation of shares is made.

(8) On many occasions shares of trust companies and finance companies are valued.

(9) On the sale of business of a private company in order to find out its correct financial position its shares are valued.

(10) Valuation of such shares is made which are not quoted in stock exchange.

(11) In any other cases where valuation of shares is required as per requirements of the particular case, valuation of shares is made.

(12) When bank gives loans on the security of the shares of a company the shares of such company are valued.

TYPES OF VALUE OF SHARES

Value of shares may be of the following types:

1. Par value, 2 Book value, 3. Market value, 4. Cost value, 5. Capitalized value, 6. Intrinsic value, 7. Fair value.

(1) Par Value: The amount of each share of a company is mentioned in the Memorandum of the company, this amount is called par value of the share. More than par or face value is premium and less than face value is discount.

(2) Book Value: When capital of a company shown by its books is divided by its number of shares the result so arrived at is called book value of the share. Share capital and reserves including profit combined together is called capital of the company as per its books.

(3) Market Value: Market value of a share means that value at which this share is sold and purchased in the share market.

(4) Cost Value: The price which a shareholder has to pay in order to acquire a share is called its cost value. It includes market price and brokerage etc. paid for the purchase of the share.

(5) Capitalized Value: Average of profits of the company is capitalized at normal rate of return, this is called Pcapitalized value of the shares. This amount is divided by a number of shares of the company in order to find out the Capitalized Value of each share of a company.

(6) Intrinsic Value: Realizable amount of real assets of company on a particular date is found out. Amount of external liabilities is deducted from realizable amount of real assets; The balance is known as intrinsic value of shares. This intrinsic value is divided by number of shares and the result is intrinsic value of one share.

(7) Fair Value: Total of intrinsic value and yield or market value of a share is divided by two in order to find out fair value.

FACTORS AFFECTING VALUE OF SHARES

Following factors affect value of shares:

1. Nature of business.

2. Earning capacity of the Company.

3. Dividends declared by the Company in previous years.

4. Net tangible assets of the Company.

5. Capital structure of the Company.

6. Goodwill of the Company.

7. Investment of other parties in this Company.

8. Nature and extent of competition.

9. Number of shareholders.