Introduction and Background
On 18 October 2017, the Ministry of Corporate Affairs (MCA) notified:
- Section 247 of the Companies Act 2013 (Act), which deals with valuation by registered valuers; and
- the Companies (Registered Valuers and Valuation) Rules 2017 (Rules).
This is an important development, as Section 247 provides that wherever under the Act, a valuation is required to be conducted in respect of any asset (including property, shares, debentures, securities or goodwill), or net worth of a company or its liabilities, it shall be done by a registered valuer, in the manner prescribed under the Rules.
There are various provisions in the Act, which require valuation by a registered valuer including issuance of shares on preferential basis, compromise and arrangements between company and its creditors or members, minority shareholding buy-out, liquidation, etc. Until Section 247 was notified, valuations could have been conducted by any independent valuer (except in few cases, for instance, issuance of shares on preferential basis, where it was specifically provided that until Section 247 is notified, valuation should be conducted by a SEBI registered merchant banker, or a chartered accountant with at least 10 years' experience).
While Section 247 has been notified, the Rules have not yet been published in the Official Gazette.
Key provisions under the Rules:
- Authority: Under the Rules, a designated 'authority' has been made in charge of the registration process, recognition of registered valuer organisations (RVOs) (discussed below), conducting of qualifying examinations, prescribing the appropriate syllabus, entertaining and adjudicating complaints against the valuers or RVOs, etc. As per the MCA notification dated 23 October 2017, the Insolvency and Bankruptcy Board of India has been designated as the 'authority' under the Rules (Authority). This notification has not yet been published in the Official Gazette.
- Asset Classes: The Rules also introduce the concept of an 'asset class', defined as a distinct group of assets, displaying similar characteristics, that can be classified and require separate set of valuers for valuation. As of now, the Rules provide for three asset classes, (i) plant and machinery, (ii) land and building; and (iii) securities and financial assets; however, the Authority has the power to specify other asset classes as well.
It is pertinent to note that: (a) the registration of any valuer shall be for any particular asset class (or multiple asset classes); (b) a valuer registered under any particular asset class shall only be entitled to conduct valuation for that asset class; and (c) the educational qualifications are different for the various asset classes.
- Eligibility Criteria: To be eligible for registration, a
person must fulfil the following key criteria:
- Educational Qualifications and Experience: He should
have the minimum educational qualifications and experience required
to be registered as a valuer for any asset class, as follows:
- For 'land and building': (a) Graduation in civil engineering, architecture or town planning plus 5 years' experience in the same discipline after graduation; or (b) post-graduation in the afore-mentioned discipline plus 3 years' experience after post-graduation;
- For 'plant and machinery': Same as 'land and building' above, except the discipline will be mechanical or electrical engineering instead;
- For 'securities or financial assets': Graduation in any stream plus membership of the Institute of Chartered Accountants, or the Institute of Cost Accountants of India, or the Institute of Company Secretaries of India, or an MBA/PGDBM specialisation in finance plus 3 years' experience after graduation.
- Registered Valuer Organisation: The person should be a
member of a RVO.
- A RVO is an entity recognised by the Authority as such. The
following entities are eligible to apply to the Authority to be
recognised as a RVO:
- a company registered as a non-profit company under the Act or Companies Act, 1956;
- any professional institute established under an act of Parliament to regulate a profession; or
- a society or a trust, subject to its registration as a company under Section 8 of the Act within a year from the commencement of the Rules.
- The role of RVO includes:
- conducting educational courses in valuation and granting membership to qualified persons;
- laying down a code of conduct and monitoring the functioning of its members; and
- enforcing a grievance redressal mechanism.
- A RVO is an entity recognised by the Authority as such. The
following entities are eligible to apply to the Authority to be
recognised as a RVO:
- Examination: The person, if he is an individual, should have passed the 'valuation examination' within the preceding three years of making the application for registration. The Authority, either on its own or through a designated agency, may conduct a valuation examination for the various asset classes. The Authority also has the power to recognise an examination conducted by a university as a part of its graduation or post-graduation degree as equivalent to the valuation examination.
- Companies and Partnership firms: A company or
partnership firm can also be registered as a registered valuer,
provided that it meets the following key conditions:
- it has been set up for rendering professional or financial services and in case of a company is not a subsidiary or associate of another company or body corporate; and
- all the partners or directors, fulfil the eligibility criteria as set out in this paragraph 3 above (except registration with an RVO).
- Educational Qualifications and Experience: He should
have the minimum educational qualifications and experience required
to be registered as a valuer for any asset class, as follows:
- Valuation Mechanism: The Rules provide that a Committee shall be set up to formulate and to recommend valuation standards and policies. Until such time that the Committee is set up and the valuation standards are prescribed, any internationally accepted valuation standards, or valuation standards adopted by the relevant RVO, can be followed by the registered valuers.
- Transition Period: The Rules provide for the status quo to be maintained till 31 March 2018. Hence, persons rendering valuation services can continue doing so without registration under the Rules till the end of the current financial year. Any pre-engaged persons conducting valuations, required under the Act, as of 31 March 2018 will have to complete the same within three months thereafter.
Comment
Specialisation: By classifying various asset classes, and laying down different educational qualifications and experience requirements for each asset class, the Rules will result in specialisation of valuation. While accountancy firms / merchant bankers may continue to value securities and financial assets, the role of international property consultants in valuing immovable assets will increase. Also, although not very clear, it appears that a valuer when valuing the shares of a company (holding substantial immovable property, for instance), may be required to engage another valuer registered under 'land and building' asset class to value the immovable property. In such case, vis-à-vis the company, only the first valuer would be liable (and he may choose to have back-to-back indemnity from the second valuer).
Accountability: As the valuers are required to comply with a code of conduct, which includes, (a) conducting the valuation in accordance with the Rules, (b) making an impartial, true and fair valuation; (b) exercising due diligence while performing the functions as valuer; (d) avoiding conflict of interest, etc., a valuer, if he breaches any provisions of the code of conduct, the Rules or Section 247 of the Act, could be subject to monetary penalties in addition to other penal actions from the Authority and/or the relevant RVO. In addition, if the breach is with the intention to defraud the company or its members, he is also liable for imprisonment (up to one year). The above should result in greater transparency and accountability for the valuers.
Standardisation: Once the 'committee' is constituted and the various valuation standards and policies are prescribed, it should bring in much needed standardisation in the conduct of valuations under the Act. That said, it might be difficult to prescribe the specific valuation methodology to be adopted for any particular sector, as each company may have its own intricacies (it could be in growth phase, it could be capital intensive, it could have a large contract, etc.). To that extent, a valuer should have some flexibility to determine the methodology (or a mix of them) best suited for such company. However, it may be helpful to prescribe certain guidance / premises which should be taken into account, for instance, if the valuation should be on a going concern basis, the discount (if any), which should be applied for a minority stake or the company being unlisted, etc.
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