Valuing assets right for liquidation

Valuation of a company’s assets is done by a registered valuer, and is one of the core features of the corporate insolvency resolution process under the insolvency code. Among other things, a registered valuer determines the ‘liquidation value’ of a company, which is the amount guaranteed to dissenting financial creditors, and is also relevant in a liquidation scenario.

In the absence of notification of Section 247 of the Companies Act, 2013, valuers under the old regime were being appointed. Though the Companies Act, 1956 did not have the concept of ‘registered valuers’, separate guidelines existed for valuation of different entities and transactions. For example, the Wealth Tax Act, 1957, contains provisions for valuations in wealth tax and separate SEBI regulations for takeover code, issue of sweat equity, buyback of securities etc. and lay down valuation requirements in different scenarios.

The old regime had many shortcomings. First, the monitoring mechanism in respect of valuers for private companies was absent, and the existing valuation rules for listed public companies, prescribed by SEBI are fragmented leading to multiplicity of requirements for valuers.

Second, the qualifications for valuers under each set of rules are different, leading to inconsistency and lack of clarity. For instance, valuations under the SEBI (Issue of Sweat Equity) Regulations, 2002 are undertaken by a merchant banker and then certified by an independent chartered accountant while Wealth Tax Act, 1957 gives detailed qualifications prescribing different degrees and years of experience to be a valuer.

Third, the methods used for valuation differed in each case, since uniform valuation standards were not prescribed. To address these many problems, the Ministry of Corporate Affairs recently notified the Companies (Registered Valuers and Valuation) Rules, 2017 (Rules). These Rules encapsulate the qualifications, and a detailed monitoring mechanism for an entity to be a valuer for matters relating to a company and thus, have a significant impact on the valuation requirements under the insolvency code as well.

As per the Rules, a company, a partnership or an individual is eligible to be registered as a valuer for valuation of property, stocks, shares, debentures, securities, goodwill or any other assets of a company. The registration process requires eligible entities to enrol as members with a ‘valuation professional organisation’.

These organisations are a creature of the Rules and are envisioned to be the first layer of oversight for valuers they lay down the code of conduct in line with the model code of conduct prescribed under the Rules. Eligible persons are also required to register with a registration authority, proposed to be the Insolvency and Bankruptcy Board of India.

Thus, a two-layer monitoring mechanism, similar to that for insolvency professionals under the insolvency code, is envisaged. This may help regulate the valuation sector by enabling self-governing entities to regulate valuers, instead of entrusting the entire responsibility to the regulator.

An examination system has been evolved for such valuers as well, which proposes to test the “professional knowledge, skills, values and ethics in respect of valuation”. To be eligible, the valuer should have a degree in a specified discipline, which should be consistent with the asset class she wants to valuate.

A novel aspect in relation to the examination to be taken by the valuers is it being based on the asset class that the valuer intends to practice in, such as land and building, plant and machinery or securities and financial assets.

This is an improvement upon the draft rules put out for public comments, which did not make it clear whether the proposed examination would be based on an asset class. It goes without saying that the qualifications required for valuing each class of assets is separate, and thus, the policy of asset class based examination, and registration is welcome.

This will ensure that valuers are experts in the valuation of the asset class they are permitted to practice in. However, on the flip-side, it may take time for valuers to avail registration for different asset classes.

Further, if different valuers are to be appointed for separate classes of assets, it may substantially increase the cost of valuations, which may pose a problem in insolvency proceedings. These problems may be resolved through an appropriate examination procedure to be developed by the registration authority.

The Rules prescribe the valuation standard to be used by valuers as ‘internationally accepted valuation standards’. An advisory committee has been formed to come up with such standards in the interim, and when prescribed, they will go a long way in making the valuation process more systematic and consistent, since presently, there is no specific internationally accepted valuation standard in place.

For instance, the International Valuation Standards Council prescribes valuation guidelines which are a general guide to choosing methods of valuation.

Additionally, different countries have laid down valuation standards to be followed by them, for example, the American Society of Appraisers and American Institute of Certified Public Accountants in US, Royal Institute of Chartered Surveyors in the UK, etc., give valuation methods to be used in diverse situations to get the most optimal valuation.

The lack of a common set of standards applicable to all valuers will result in inconsistency since valuers can choose between any of these international standards and methods. Thus, the prescription of uniform standards by the Centre should be expedited.

Further, a partnership or a company is not eligible under the Rules for registration as a valuer, unless three or all partners or directors, whichever number is lower, are also registered valuers. This requirement may pose practical difficulties for such entities to penetrate the new regime.

An overall assessment reveals that the enactment of the Rules has created a positive environment for developing a structured valuation regime aimed at optimising efficiency of valuers and creating a self-governing mechanism. It is a step forward in enhancing corporate governance norms for valuers, especially due to the detailed model code of conduct which is required to be complied with.

The code of conduct mandates confidentiality, independence and reasonable competence on part of the valuer. The regime created by the Rules will make the valuation sector more organised by introducing a two-step monitoring mechanism, by having a detailed eligibility criterion based on specialisation, and by eventually introducing valuation standards.

The efficacy of the Rules can only be completely examined once the valuation standards have been prescribed by the central government.

Garg is a Senior Resident Fellow and Satija is a Research Fellow at the Vidhi Centre for Legal Policy, New Delhi

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