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Sunday, May 19, 2002

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Valuation of unlisted shares

B. Venkatesh

THE Securities and Exchange Board of India (SEBI) has issued guidelines to mutual funds for valuation of unlisted equity shares. Why should SEBI direct the mutual funds to value shares? The answer lies in the problems associated with valuation of such shares.

You know that the value of Satyam's share is Rs 250 because it is listed in the stock exchange. If the share were not listed, every investor will have his or her perception of the share value.

Thus, if you want to sell shares in an unlisted company, you will have to use some model to value the shares to arrive at a sale price.

Suppose you take the book value of the company to value its shares. What if the fair value of the assets is higher than their carry cost in the balance-sheet?

You may demand a premium over the book value to account for the higher value of the assets.

Then, there is another problem. As the buyer cannot sell the shares in the exchange, she may demand a discount for the lack of liquidity. The point is that valuation of unlisted shares is very subjective. And that creates problems for the unit-holders of funds that invest in unlisted shares.

Why? Suppose Fund `A' values the unlisted share at Rs 100, while Fund `B' values the same unlisted share at Rs 150, the net asset value (NAV) of Fund `B' will be higher. You will, therefore, pay a higher price to buy the units of Fund `B'.

You may argue that it does not matter whether you pay a higher price for buying the units; for you will also receive a higher price when you redeem those units.

True, but it is preferable for all mutual funds to value unlisted shares in a uniform manner. And that is why SEBI has issued such valuation norms.

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