Methodology Rejection explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
In practice, the harder question is rarely why the valuer used a DCF. It is why the valuer did not use anything else.
The questions that actually get asked
Valuation challenges often focus less on the methodology adopted and more on the methodology that was not used. Three recur in peer reviews, regulatory inspections and disputes:
- "Why was the Income Approach not applied?"
- "Why was NAV not considered?"
- "Why was the Market Approach used only as a cross-check?"
The ability to answer such questions from within the report significantly enhances its defensibility. Answering them afterwards, in correspondence, does not — the report is what the CoC and the tribunal read.
The rule
The decision not to adopt an approach or method should be based on identifiable limitations rather than preference. This is consistent with IVS 105, which requires valuers to consider the applicability of available approaches before determining the most appropriate methodology.
Illustrative bases for rejection or limited reliance
| Approach / method | Illustrative basis for rejection or limited reliance |
|---|---|
| Income Approach (DCF) | Reliable projections unavailable; business continuity highly uncertain; significant forecast dependency |
| Capitalisation of Earnings | Earnings not stable or maintainable; significant expected changes in operations or profitability |
| Market Approach – comparable companies | No sufficiently comparable listed entities; extensive adjustments required |
| Market Approach – comparable transactions | Limited or outdated transaction evidence; transactions not sufficiently comparable |
| NAV method | Does not adequately reflect going-concern earning potential; asset values not the primary driver of enterprise value |
| DRC method | More appropriate for specialised assets than for operating businesses as a whole |
The point is easy to miss because it sits between the approach-level rejections. Within a selected approach, certain methods may be rejected in favour of others:
a DCF may be preferred over a Capitalisation of Earnings method where the business is expected to experience significant changes in growth, profitability or capital structure — the normal condition of a company emerging from a CIRP;
conversely, Capitalisation of Earnings may be more appropriate where operations have stabilised and maintainable earnings can be reliably estimated.
A report that explains why the Income Approach was chosen but never mentions the method not used within it has answered only half the methodology rejection question.
How much explanation is enough
The report need not provide an exhaustive critique of every alternative methodology. The requirement is narrower and more workable: where alternative approaches or methods were reasonably available, the report should explain the principal reasons for their:
- rejection;
- limited use; or
- treatment as corroborative checks.
The third category is often the honest answer in a CIRP, where a Market Approach may be available but too thin to carry the primary conclusion. Saying so — and saying what it was used for instead — is stronger than silence.
The objective
Methodology rejection is not about establishing that alternative approaches were incorrect. It is about demonstrating that the selected methodology was more appropriate in the circumstances of the assignment.
A report that transparently explains both what was adopted and what was not is generally more persuasive and more resilient to challenge than one that presents methodology selection as a foregone conclusion.
Common mistakes
- Naming the approach adopted and saying nothing about the others.
- Rejecting an approach on grounds of preference or unfamiliarity.
- Using a Market Approach as a cross-check without saying that is what it was.
- Critiquing every conceivable alternative and burying the principal reasons.