Valuations of Fully Paid-Up and Partly Paid-Up Equity Shares

Valuation of equity shares is the process of determining the fair or intrinsic value of shares based on the financial position, profitability, and future prospects of a company. Equity shares represent ownership in the company and may be fully paid-up or partly paid-up depending on the amount of share capital paid by shareholders. The valuation of these two types of shares differs mainly due to the existence of future payment liability in partly paid-up shares.

1. Fully Paid-Up Equity Shares

Fully paid-up equity shares are those shares on which the entire face value has been paid by the shareholders. There is no outstanding amount payable on these shares. Holders of fully paid-up shares enjoy full ownership rights, including voting rights, dividend entitlement, and transferability. Since there is no further financial obligation, the valuation of fully paid-up equity shares is simpler and more reliable.

Need for Valuation of Fully Paid-Up Equity Shares

The valuation of fully paid-up equity shares becomes necessary in several situations such as:

• Amalgamation and merger of companies

• Acquisition or takeover

• Issue of bonus shares

• Conversion of debentures into equity shares

• Transfer of shares in private companies

• Settlement of disputes among shareholders

In such cases, market price may not reflect true value, especially when shares are unquoted.

Methods of Valuation of Fully Paid-Up Equity Shares

Fully paid-up equity shares are valued using standard valuation methods:

• Net Asset Value Method

Under this method, the value of equity shares is based on the net assets available to equity shareholders.

Formula:

Value per fully paid-up equity share = Net assets available to equity shareholders / Number of equity shares

This method is suitable during liquidation or when asset strength is important.

• Yield or Earnings Method

This method values shares based on the earning capacity of the company.

Formula:

Value per fully paid-up equity share = (Earnings per share × 100) / Normal rate of return

It is suitable for going concerns and profitable companies.

• Fair Value Method

This method takes the average of values obtained under the Net Asset Method and Yield Method.

Formula:

Fair value per share = (Net asset value per share + Yield value per share) / 2

It is widely used because it considers both assets and profitability.

2. Valuation of Partly Paid-Up Equity Shares

Partly paid-up equity shares are those shares on which only a part of the face value has been paid, and the remaining amount is yet to be called by the company. Shareholders holding partly paid-up shares have a future liability to pay the unpaid amount when calls are made. Due to this additional risk and obligation, partly paid-up shares are valued lower than fully paid-up shares.

Reasons for Lower Valuation of Partly Paid-Up Shares

The valuation of partly paid-up equity shares is lower due to the following reasons:

• Existence of future payment obligation

• Higher risk to shareholders

• Limited transferability in some cases

• Dividend entitlement only on paid-up capital

• Possibility of forfeiture if calls are not paid

These factors reduce the attractiveness and value of partly paid-up shares.

Method of Valuation of Partly Paid-Up Equity Shares

The valuation of partly paid-up equity shares is generally derived from the value of fully paid-up equity shares.

• Proportionate Value Method

Under this method, the value of a partly paid-up share is calculated in proportion to the amount paid.

Formula:

Value of partly paid-up share = Value of fully paid-up share × (Paid-up value / Face value)

• Deduction Method

Alternatively, the unpaid amount is deducted from the value of a fully paid-up share.

Formula:

Value of partly paid-up share = Value of fully paid-up share – Unpaid amount per share

This method ensures that the shareholder’s future liability is fully adjusted.

Illustration of Valuation

Suppose the value of a fully paid-up equity share of ₹100 is ₹150. If ₹60 is paid and ₹40 is unpaid:

Using proportionate method:
Value = 150 × (60/100) = ₹90

Using deduction method:
Value = 150 – 40 = ₹110

In practice, the deduction method is commonly preferred as it fully accounts for the unpaid liability.