The Hindu Business Line : ‘India needs a council of corporate valuation professionals’

The present system of corporate valuation lacks a disciplined, systematic and scientific approach, which is much needed for consistency, says Mr Chandra Wadhwa, President of the Institute of Cost and Works Accountants of India. “The absence of valuation discipline is damaging corporate governance and its health.”

Mr Wadhwa, a New Delhi-based cost accountant, is also Chairman of Working Group to suggest institutional framework for corporate valuation constituted by the Ministry of Corporate Affairs. Recently, he shared with Business Line his personal views on the subject of valuation.

Excerpts from the e-mail interview.

Why is there need for valuation professionals?

The Government seems to have taken note of the need for some regulatory mechanism to protect the interest of stakeholders. There are disputes and court cases on the system of valuation of shares, so the Government has begun the process of putting some regulatory body in place.

Currently, chartered accountants, cost accountants and merchant bankers do corporate valuation in India. Engineers and architects also often form part of the team to assess performance and evaluate plant, machinery and other productive equipment to arrive at a fair market value. Company secretaries and lawyers who guide the corporate world follow procedures for financial restructuring, amalgamation, and mergers as prescribed in the Companies Act, 1956.

There are institutes working in valuation, such as the Institution of Valuers registered under the Societies Act, Delhi. It enrols members of different professional institutes and issues ‘certificates of practice’ for them to work as valuation professionals.

Can you give us a timeline of how the Government responded?

In 2003, the Department of Company Affairs formed a committee under Mr Shardul S. Shroff, which suggested the need: To frame valuation guidelines for different types and classes of companies; to assess the standards of valuation; to prescribe procedures for appointing valuers; to prescribe the qualification and experience for valuers; to fix a consultation procedure for finalising valuation options; to prescribe ethical code of professional conduct for valuers; to set up a regulatory mechanism for professionals; to prescribe the procedures to be adopted for valuation; to finalise modality of confidential filings; and to set up a peer review committee to resolve allegations or complaints or disputes.

Further, the Shardul Shroff Committee also recommended that Investor Education and Protection Fund may be used for conducting examination for valuers, payment of fees for peer review and meeting the cost of regulating the profession.

In 2004, the Irani Committee said business valuation had a significant impact on a company’s stakeholders, including small and minor shareholders. And that correct business valuation and transparency were a means to good corporate governance.

What role did you play in the new direction?

In 2006, the Ministry of Company Affairs constituted a working group under me to suggest an institutional framework for corporate valuers. The Group submitted its report, which highlighted the need to set up a council to regulate the profession.

The report highlighted that a regulating mechanism was necessary to offer quality services to the corporate sector. Corporate valuation professionals must be held accountable through an appropriate mechanism to curb casual and arbitrary approach to valuation work that could erode professional credibility, lead to loss in business transactions and result in needless litigations.

After studying how the profession took off in the US, the UK, Canada, the European Union and Australia, it was found that except in Australia, the profession was regulated through independent institutes. These countries considered valuation a specialised profession and organised courses to equip the professionals to meet the needs of the corporate world.

These countries favoured standardising the methodology and procedures to ensure quality services and to minimise legal disputes. An International Valuation Standard Committee (IVSC) was set up by these countries in 1981 and it has 43 members.

In the US, there are three bodies for education, accreditation and to some extent, regulation of Business Valuers. These are the American Society of Appraiser (ASA), the National Association of Certified Valuation Analysts, and the Institute of Business Appraiser (IBA). These bodies publish business valuation standards.

To develop valuation profession in India, a systematic approach is needed to match the professionals in other developed countries. The corporate sector could then understand and scientifically quantify the growth of asset creation in the economy, using tools and techniques perfected elsewhere in the world. The valuation techniques can be standardised through scientific education and training, and codes of conduct, keeping the world standards in view.

The issue has become important as the Indian economy has opened up under liberalisation and multinational companies have entered India through acquisitions, mergers, and business alliances. The absence of a standardised approach could affect the quality of services adversely.

Why do you assign so much of importance to valuation?

Corporate valuation has two important roles to play. First, to assess correctly the wealth creation, and secondly to instil confidence in corporate investors on the value arrived at.

Valuation now is done by different groups of professionals from different institutes or associations with varying background and skills. This is a serious hurdle. The answer is to adopt a unified approach, but for consolidation, a systemic control in the right direction is needed.

Problems of independence of valuers and confidentiality, as well as disputes on methodology or the value arrived at could lead to a stressful situation for corporate users. This could be solved with a proper regulatory body, well-planned devices and a scientific approach.

The plan is to bring valuation professionals under one umbrella, under which adherence to valuation standards can be monitored and valuation professionals can be guided to adopt standardised practices for uniformity and consistency. The intended independent regulatory body could be called the Council for Valuation Professionals.

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