The Hindu Business Line : The bull in the numbers

MR ARUN Shourie, the former disinvestments minister, is in the dock for having allegedly sold the state-owned Centaur hotel, Mumbai, at less than its true worth. A similar allegation but a trifle more muted was made when Balco was sold to Sterlite Industries Ltd a couple of years ago. Mr Shourie's defence then was he had set store by accountants' valuation report. The same defence predictably would be offered this time round as well. But the issue is not whether the dealings were above board or not. The issue is whether accounting theories can be held sacrosanct or infallible.

Accountants have traditionally relied upon three methods of valuation of shares — market value thereof, capitalisation of future profit potential of the business and the realisable value of the assets. Often the three methods are used in conjunction with weights being assigned to each.

Market quotation of shares does not always reflect the intrinsic strengths and weaknesses of a company because apart from the fundamentals of the company there are other factors that exert powerful influence on it.

Putting a figure on the future profits of a company has never been an easy exercise. Because the broad parameters used in making guesstimates of future sales can and do go wrong, turning a blueprint into a wastepaper. That forecasts can go awry is a truism. If forecasts of sales can go awry, a fortiori forecasts of profits too can.

The first two methods of business valuation thus are intrinsically flawed inasmuch as they are premised on a fickle market and an uncertain future. The third method, which unfortunately figures the last in the pecking order, as witnessed by the least weight often accorded to it in practice, believes in the here and now of current quotations for what is offered on the plate. Bids offered for assets transparently bring out the intrinsic value of the business. In comparison, projection of future profits can be marred by uncertainties and coloured by the prejudices of the accountants. And share market quotations, despite their openness, are susceptible to influence by extraneous factors.

Accountants discount the third method on the ground that it is not premised on the going concern concept but is instead premised on the more fatalistic liquidation assumption. This is patently wrong. When a business changes hands, the buyer gets to own the assets hitherto owned by the seller. Should not he be expected to pay the prevailing market rate for the assets on the block?

The going concern concept may be relevant for drawing up accounts when there is no change in the ownership of the business but when the ownership changes hands, the liquidation principle should hold sway and the going concern principle should yield. When 51 per cent of Balco's shares were sold to Sterlite for roughly Rs 500 crore, the communists cried foul on the ground that the worth of the facilities handed over was in the region of Rs 2,000 crore, thus warranting a minimum sale price of Rs 1,000 crore for 51 per cent shares.

Criticism in l'affaire Centaur is on the same grounds. The rap should be taken by the accountants for once.

They should have preferred the here and now of the quotations for assets on block rather than set store by innately uncertain methods such as capitalisation of future profits.

(The author is a Delhi-based chartered accountant.)