Reforming India’s approach to valuing private equity deals, especially in listed shares, could reduce litigation, provide greater certainty for investors, and make the market more attractive to long-term capital, according to industry experts.
Legacy procedural frictions are still weighing on India’s ability to channel capital efficiently, and one of the most persistent fault lines is the tax treatment of off-market equity deals. These private transactions, which are negotiated directly rather than through an exchange, remain a key route for venture capital, private equity, mergers and acquisitions and other portfolio shifts, yet they can become mired in disputes over valuation. The core problem is not the principle behind the anti-abuse rule itself, but the uncertainty it creates for genuine transactions. According to commentary in Business Standard, that uncertainty is undermining market efficiency and discouraging foreign portfolio and direct investment.
The tax provision at the centre of the controversy, Section 56(2)(x) of the Income Tax Act, is designed to curb sham transactions and the laundering of unaccounted money. Investopedia’s explanation of the rule notes that when a buyer is deemed to have paid less than fair market value, the gap can be treated as taxable income in the hands of the purchaser. That approach is meant to deter abuse, but it can also catch bona fide deals in its net, especially when tax officials and counterparties disagree on what constitutes fair market value in a live transaction.
The valuation issue is particularly acute in listed shares. In practice, the tax authorities often rely on a single trading day’s price to establish fair market value, yet deal execution can take months because regulatory approvals, competition clearances and open offers have to be completed before shares actually change hands. During that interval, market prices can move sharply. Investopedia describes fair market value as the price a willing buyer and seller would agree on in an open market, but in strategic acquisitions the agreed price may include a block discount, making a point-in-time exchange quote a poor proxy for a negotiated control transaction. The result is repeated litigation over whether a buyer has, in effect, received shares at an “inadequate” price.
A more workable approach, as the Business Standard column argues, would be to anchor valuation to the agreement date and then calculate fair market value using a volume-weighted average price over a longer period, such as 90 trading days. Investopedia describes VWAP as a benchmark that reflects price alongside trading volume, which makes it less vulnerable to short-term noise than a single closing price. The case for reform is that this would reduce the influence of rumours, leaks and other distortions, while giving genuine buyers and sellers more certainty. A safe-harbour threshold, under which modest differences between the deal price and the valuation would be ignored, could further narrow disputes and reserve scrutiny for transactions that genuinely raise anti-abuse concerns. That, the column suggests, would lower India’s tax risk premium and make the market more attractive to long-term capital.
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