Net Asset Method of Valuation of Shares: A Step-by-Step Guide

Valuation of shares is a critical requirement for investors, business owners, and professionals engaged in mergers, acquisitions, restructuring, succession planning, or regulatory compliance. Among various approaches, the Net Asset Method of Valuation of Shares, also known as the Asset-Based or Book Value Method, remains one of the most widely used techniques, particularly for asset-heavy companies.

1. What Is the Net Asset Method of Valuation of Shares?

The Net Asset Method (NAM) determines the value of shares by calculating a company’s net assets (total assets minus liabilities) and dividing the residual value among equity shareholders. Unlike earnings-based methods, NAM emphasizes the balance sheet strength of a company rather than its profitability.

It is particularly relevant for:

• Asset-rich companies (real estate, manufacturing, investment firms)
  
• Businesses under liquidation or restructuring
  
• Valuation of investment companies
  
• Situations where valuation is mandated by regulatory authorities
  

2. When Is the Net Asset Method Used?

The Net Asset Method of Valuation of Shares is commonly applied in the following cases:

• Mergers & Acquisitions (M&A): Determining fair share swap ratios
  
• Buy-back or fresh issue of shares
  
• Exit planning or succession planning
  
• Liquidation or winding up of companies
  
• Regulatory compliance: When required under the Companies Act, Income Tax Act, or FEMA
  

3. Step-by-Step Guide to Applying the Net Asset Method

Step 1: Identify the Company’s Assets

• Tangible assets: land, buildings, plant & machinery, inventory, receivables, cash
  
• Intangible assets: goodwill, patents, trademarks (if independently valued)
  
• Investments: shares, bonds, or debentures held by the company
  Note: Assets should be taken at fair market value, not merely book value.

Step 2: Deduct Liabilities

• Secured and unsecured borrowings
  
• Trade creditors and outstanding expenses
  
• Tax provisions
  
• Material contingent liabilities
  

Net Assets = Total Assets – Total Liabilities

Step 3: Adjust for Preference Shares
If preference share capital exists, deduct its value before determining the equity value.

Step 4: Compute Net Worth
Net Worth = Net Assets – Preference Share Capital

Step 5: Calculate Value per Equity Share

Value per Share=Net Worth​ / Number of Equity Shares Outstanding

4. Illustrative Example

Suppose XYZ Pvt. Ltd. has the following details:

• Tangible Assets (FMV): ₹10 crore
  
  
• Investments: ₹2 crore
  
  
• Current Assets: ₹3 crore
  
  
• Liabilities: ₹6 crore
  
  
• Number of Equity Shares: 10 lakh
  

Net Assets = (10 + 2 + 3) – 6 = ₹9 crore
Value per Share = ₹9 crore ÷ 10 lakh = ₹900 per share

5. Advantages of the Net Asset Method

• Simple & Transparent: Based on audited financials and asset values
  
• Reliable: Reflects realizable value of tangible assets
  
• Best for Asset-heavy Companies: Real estate, manufacturing, and investment firms
  
• Useful in Liquidation: Captures the liquidation value effectively
  

6. Limitations of the Net Asset Method

• Ignores Future Profits: Does not reflect earning capacity or growth potential
  
• Fair Value Estimation Required: Professional judgment needed for asset revaluation
  
• Less Suitable for Asset-light Companies: Service-based or technology businesses may be undervalued
  
• Static in Nature: Represents financials at a single point in time
  

7. Comparison with Other Valuation Methods

8. Legal & Regulatory Perspective in India

• Income Tax Act, 1961 (Rule 11UA): Prescribes NAM for certain cases of unlisted equity share valuation.
  
• Companies Act, 2013: Requires valuation by a Registered Valuer for transactions like mergers, demergers, issue of shares, and buy-back.
  
• FEMA & RBI Regulations: Mandate valuation using asset-based approaches for cross-border transactions and FDI compliance.
  

9. Key Takeaways

• The Net Asset Method of Valuation of Shares is one of the most straightforward and widely accepted approaches.
  
• Best suited for companies with significant tangible assets or in liquidation scenarios.
  
• It provides balance sheet clarity but does not capture earning potential.
  
• A Registered Valuer ensures accuracy, compliance, and credibility of the valuation.
  

Conclusion

The Net Asset Method of Valuation of Shares continues to be a recognized and regulatory-accepted method in India. While it provides transparency and reliability for asset-heavy businesses, it should ideally be complemented with income-based methods (like Earnings or DCF) to achieve a holistic and fair valuation.

At N Pahilwani & Associates, our team of Chartered Accountants and Registered Valuers deliver accurate, compliant, and practical valuation reports tailored to your business requirements.