CBDT Amends Rule 11UA Incorporating New Valuation Methods | Includes Norms for Valuing “CC Preference Shares”

Notification No. 81 /2023, dated 25-09-2023

The Finance Act, 2023 amended section 56(2)(viib) to bring into account the consideration received from non-residents for the issue of shares. The section provides that if the consideration for the issue of shares exceeds the Fair Market Value (FMV) of the shares, it shall be chargeable to income tax under the head’ Income from other sources’. Rule 11UA prescribes the manner to compute the FMV of such shares.

Pursuant to the Finance Act 2023 amendment, the Central Board of Direct Taxes (CBDT) released a draft notification proposing an amendment to Rule 11UA. The board also requested the stakeholders, as well as the general public, to provide suggestions/comments on the draft Rule 11UA

Now, the board has notified the Income-tax (Twenty-First Amendment) Rules, 2023, amending Rule 11UA. The final notification aligns with the provisions outlined in the initial draft rule. However, the board has also introduced additional guidelines for calculating the fair market value of compulsorily convertible preference shares (CCPS).

The changes notified in the Rule 11UA are mentioned below:

(a) FMV of compulsorily convertible preference shares shall be determined in accordance with the method prescribed by the amended rule.

(b) Five new methods have been introduced for calculating the FMV of unquoted shares, as determined by the merchant banker. These methods are exclusively applicable for determining the FMV of shares issued to non-resident investors.

(c) If a company receives consideration for issuing shares from a notified entity, the equity share price for other investors may be considered FMV. However, the company must receive consideration from the notified entity within 90 days before or after issuing the shares in question.

(d) Similarly, venture capital undertakings can use the equity share price issued to a venture capital fund, venture capital company, or specified fund as a reference.

(e) The valuation report by the Merchant Banker would be acceptable if it is of a date not more than 90 days prior to the date of issue of shares, which are the subject matter of valuation.

(f) If the price at which shares are issued is higher than the value determined per Rule 11UA, but the difference doesn’t exceed 10%, the issue price will be held as the fair market value.

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