G.L. Sulatnia and another; H. L. Somany and Others & R.K. Somany and Others v. SEBI (2007) 137 Comp Cas 658 (SC)
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Valuation of infrequently traded shares came up for the consideration of the Supreme Court in the case of G.L. Sulatnia and another; H. L. Somany And Others & R.K. Somany And Others v. SEBI (2007) 137 Comp Cas 658 (SC). In that case, the grievance of the appellants before the Securities Appellate Tribunal (SAT) was that the Securities and Exchange Board of India (SEBI) as well as the concerned merchant banker had not properly valued the shares of the target company in accordance with the parameters laid down in regulation 20(5) of the SEBI Takeover Regulations.

In the words of the Supreme Court,” What the aforesaid regulation, however, mandates is that the parameters expressly laid down therein must in all cases be considered by the valuer since they are basic and essential to the valuation of infrequently traded shares of a company. If the valuation report discloses non consideration of any of the enumerated parameters, the report shall stand vitiated for that reason. That however does not prevent the valuer from considering other relevant factors according to accepted principles of valuation of shares”.

In other words, what the apex court has stipulated is that every valuer is required to strictly adhere to the requirements of the said regulation 20(5) and any failure on the part of the valuer to take cognizance of any of the parameters stipulated therein could prove fatal to the valuation. At the same time, it should also be noted that no single parameter can itself be decisive. What it implies is that due weightage should be given to the different factors that go into the process of valuation. However, as remarked by the apex court, the exact factors would have to be left to the wisdom, experience and knowledge of the experts in the field of share valuation.

Therefore, it is pertinent to remember the words of the apex court that, “Mathematical precision and exactitude are not the attributes of share valuation, for at best the valuation arrived at by an expert is only his opinion as to what the value of the share should be. No doubt the variation may not be very wide between two valuations prepared honestly by two valuers applying the correct approach and the correct principles, but some variation is unavoidable.

In case of any doubt about fair valuation, SEBI has been empowered to get valuation of such shares done by an independent merchant banker.