CBDT Proposes Changes in Rule 11UA – Introduces 5 New Valuation Methods for NR Investors

Press Release dated 19-05-2023

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’.

Pursuant to the amendment, the Central Board of Direct Taxes (CBDT) proposed changes to Rule 11UA for the purpose of the valuation of shares.

Currently, Rule 11UA outlines two approaches, namely Discounted Cash Flow (DCF) and Net Asset Value (NAV) methods, for valuing shares for resident investors. It is proposed to include 5 more valuation methods available for non-resident investors in addition to DCF and NAV methods of valuation.

Further, in case of receipt of consideration by a company with respect to the issue of shares from a non-resident entity notified by the Central Govt., the price of the equity shares may be taken as the FMV of the equity shares for resident and non-resident investors subject to the following:

a) To the extent, the consideration from such FMV does not exceed the aggregate consideration that is received from the notified entity and

b) The consideration has been received within a period of ninety days of the date of issue of shares which are the subject matter of valuation.

It is also proposed to notify certain classes of persons being non-resident investors to whom section 56(2)(viib) shall not be applicable. This includes:

a) Government and Government related investors including entities controlled by the Government or where direct or indirect ownership of the Government is 75% or more.

b) Banks or Entities involved in Insurance Business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident.

c) Any of the following entities, which is a resident of certain countries or specified territories having robust regulatory framework:

• • • Entities registered with Securities and Exchange Board of India as Category-I Foreign Portfolio Investors.
    • Endowment Funds associated with a university, hospitals or charities,
    • Pension Funds created or established under the law of the foreign country or specified territory,
    • Broad Based Pooled Investment Vehicle or Fund where the number of investors in such vehicle or fund is more than 50 and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies.

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