Understanding the Meaning of Valuation of Shares

A listed company’s share price updates every few seconds on the stock exchange. Anyone with a trading app can check what one share of Reliance or Infosys costs at any given moment. But what about the thousands of private limited companies, family-run businesses, and unlisted startups that don’t trade on an exchange? Nobody quotes their share price on a ticker. That is where valuation of shares comes in, and it is a concept every commerce student needs to understand clearly before moving into the technical methods used to calculate it.

What does valuation of shares actually mean? 🔗

Valuation of shares is the process of estimating what a company’s share is genuinely worth, using financial data, company performance, and accepted valuation techniques rather than relying on a market quote. It is not a random guess or an opinion. It is a structured, quantitative exercise where an expert examines the company’s assets, earnings, cash flows, and growth prospects to arrive at a defensible figure.

For companies listed on a stock exchange, this exercise is largely unnecessary for everyday purposes because the market itself does the pricing. Share prices for listed companies reflect the collective judgement of investors reacting to demand, supply, and available information, so the “value” is visible in real time. Unlisted and private companies do not have this luxury. There is no daily trading, no public order book, and no ticker symbol to check. Someone has to sit down and work out the value using accepted financial techniques.

Why market price alone isn’t enough for private companies 🔗

The public market does the job for listed shares 🔗

When a company is listed, buyers and sellers constantly negotiate a price through the exchange. That price already factors in the company’s earnings, its debt levels, industry sentiment, and macroeconomic conditions. Investors rarely need a separate valuation exercise just to know what a share is worth on a given day.

Private companies need someone to do the math 🔗

Private and closely held companies have no such mechanism. Their shares change hands occasionally, often between promoters, family members, or a small set of investors, and there is no continuous price discovery process. Determining a fair value requires an expert to study the company’s books, apply one or more recognised valuation approaches, and arrive at a figure that both parties can trust. This is precisely why valuation of shares becomes a specialised subject in corporate accounting rather than a simple lookup.

When does a company actually need a share valuation? 🔗

Valuation is not something companies do for fun. It is triggered by specific business, legal, or regulatory situations. Some of the most common scenarios include:

In India, this need is backed by law. Section 247 of the Companies Act, 2013 requires that wherever a valuation of shares, securities, goodwill, or other assets is needed under the Act, it must be carried out by a qualified, registered valuer appointed by the audit committee or board of directors. The valuer is legally bound to make an impartial and diligent assessment, and cannot value assets in which they hold a personal interest.

Who is actually qualified to value shares? 🔗

Share valuation is not something any accountant can casually attempt. It calls for specialised training in financial analysis, statutory rules, and valuation methodology. In India, the regulatory push toward professionalising this role began with the introduction of the registered valuer framework.

The Central Government notified the Companies (Registered Valuers and Valuation) Rules, 2017, and delegated its powers under Section 247 to the Insolvency and Bankruptcy Board of India (IBBI), which now oversees the registration and conduct of valuers across the country. Depending on the purpose, a valuation may be conducted by:

• IBBI-registered valuers, mandatory for valuations required under the Companies Act.
• Chartered accountants, who bring deep knowledge of financial statements and accounting standards.
• SEBI-registered merchant bankers, typically involved in IPO pricing and capital market transactions.

The Institute of Chartered Accountants of India (ICAI) has also played a significant role in shaping valuation practice through its guidance material. ICAI’s Technical Guide on Valuation, first issued in 2009 and later revised, remains a widely referenced resource not just for chartered accountants but for valuation professionals across disciplines, especially as valuation-related provisions expanded under the Companies Act, 2013 and the Ind AS framework.

What does the valuation process actually involve? 🔗

Since share valuation isn’t a single formula plugged into a calculator, professionals follow a structured process before arriving at a number.

Financial statement analysis 🔗

The valuer studies the company’s balance sheet, profit and loss account, and cash flow statement to understand its financial health, profitability trends, and asset base.

Ratio analysis 🔗

Key financial ratios help benchmark the company against peers in the same industry, revealing whether it is performing above or below sector norms.

Assessing market and economic conditions 🔗

Broader factors such as industry outlook, interest rates, regulatory changes, and investor sentiment are also weighed in, since these influence how much a buyer is willing to pay.

Selecting the right method 🔗

Finally, the valuer chooses one or more valuation approaches depending on the purpose of the exercise and the nature of the business. A capital-intensive manufacturing company might lean more on asset-based valuation, while a fast-growing services company might be assessed primarily on future earnings potential.

A quick look at the broad valuation approaches 🔗

Detailed methods deserve their own dedicated discussion, but it helps to know the three broad families of approaches at this stage:

The price-to-earnings ratio remains one of the most widely used relative valuation techniques, indicating how much an investor is willing to pay for every rupee of a company’s earnings, while a low or high reading relative to peers signals whether shares are potentially undervalued or overvalued.

Why the purpose of valuation changes the outcome 🔗

It’s worth remembering that valuation is not a single universal number. The same company’s shares can carry different values depending on why the valuation is being done. Different laws in India prescribe different valuation methodologies for different purposes, with income tax rules following one mechanism for share transfers while foreign exchange regulations require pricing on an arm’s length basis under internationally accepted norms. A valuation done for an ESOP grant, for instance, may look quite different from one done to satisfy tax rules on a related-party share transfer, even for the same company on the same date.

This is precisely why understanding the meaning and purpose of valuation matters before diving into calculations. Getting the “why” right shapes which method a valuer chooses and how the final figure should be interpreted.

What do you think? 🔗

What do you think? If two valuers looked at the same private company but were asked to value it for two different purposes, such as an ESOP grant versus a bank loan, do you think they should arrive at the same figure? And should India move toward a single, uniform valuation methodology across company law, tax law, and securities regulations, or does the current flexibility of multiple approaches serve businesses better?

References

1. https://blog.shoonya.com/valuation-of-shares/
2. https://ibclaw.in/section-247-of-the-companies-act-2013-valuation-by-registered-valuers/
3. https://ibbi.gov.in/Agenda_09D_150318.pdf
4. https://icairvo.in/documents/Technical%20Guide%20on%20Valuation.pdf
5. https://scripbox.com/pf/valuation-of-shares/
6. https://www.legal500.com/developments/thought-leadership/sebi-start-ups-valuation-for-ipos-part-iii-of-iii/