Post-SEBI MB Prohibition: The New Landscape for Rule 11UA DCF Certifications
In December 2024, the Securities and Exchange Board of India (SEBI) issued a circular that prohibits merchant bankers from performing valuation work for the purposes of Rule 11UA of the Income Tax Rules, 1962. This directive has reshaped the competitive landscape for DCF certifications and created new opportunities for IBBI-registered valuers and chartered accountants.
Understanding the Prohibition
Rule 11UA governs the valuation of unquoted equity shares for income tax purposes, most commonly applied when private companies issue shares at a premium under Section 56(2)(viib) of the Income Tax Act. Previously, valuations under this rule could be performed by either a merchant banker registered with SEBI or a registered valuer under the Companies Act.
SEBI's circular clarified that merchant banking activities should be limited to capital market intermediation and that performing standalone valuation certifications falls outside the intended scope of merchant banking licenses. The prohibition applies specifically to new engagements; existing certifications completed before the circular's effective date remain valid.
Market Impact: Volume Redistribution
The merchant banker route was popular among startups and private equity-backed companies because of the perceived credibility that a SEBI-registered entity lent to the valuation. Industry estimates suggest that merchant bankers were handling approximately 30-35% of all Rule 11UA DCF certifications, particularly for high-value transactions involving foreign investment.
This volume has now shifted primarily to two categories of professionals: IBBI-registered valuers holding the Securities or Financial Assets (SFA) credential, and chartered accountants in practice. The shift has created capacity constraints in some markets, particularly in Mumbai and Bangalore where startup activity is concentrated.
Quality and Methodology Considerations
The transition has highlighted important differences in approach. Merchant bankers, accustomed to producing valuation reports for fundraising and M&A contexts, often employed more sophisticated multi-method approaches with extensive market analysis. Some IBBI-registered valuers and CA practitioners, particularly those newer to structured valuation work, may need to enhance their methodology to match the expectations set by merchant banker reports.
Key areas requiring attention include the rigor of DCF model construction, particularly in selecting appropriate discount rates and terminal growth assumptions. The quality of comparable company analysis is another differentiator, as merchant bankers typically had access to proprietary databases and deal flow data that informed their comparable selection.
Pricing Dynamics
The prohibition has also affected pricing in the market. Merchant banker fees for Rule 11UA certifications typically ranged from INR 1-3 lakhs for straightforward cases, with premium pricing for complex multi-entity structures. The redistribution of volume has led to some price discovery in the market, with fees for IBBI-registered valuers and CAs settling at generally lower levels, though quality-focused practitioners have been able to maintain premium pricing.
Technology as an Equalizer
Automated valuation platforms can help bridge the capability gap. By providing structured access to comparable company databases, standardized DCF model construction, and template-driven report generation, technology enables individual practitioners to produce work product comparable in quality to that of larger merchant banking teams. The key is ensuring that the technology preserves the practitioner's judgment while automating the mechanical aspects of data gathering, computation, and report formatting.
Looking Ahead
The SEBI prohibition is unlikely to be reversed. Instead, we expect further clarity on the respective domains of registered valuers, merchant bankers, and other intermediaries. Practitioners who invest in building robust valuation capabilities and adopt technology to enhance their efficiency will be best positioned to capture the redistributed market volume.