Reliable valuations are critical to the efficient working of the capital markets, businesses, government and all its stakeholders. With growing shareholder activism, importance of independent valuations is arising all over the world, including India. Business/asset valuation is critical for strategic business decisions including fund-raising, M&A, sale/liquidation of businesses, strategic business decisions like family or shareholders disputes, voluntary value assessment, or may be vital just to comply with certain regulatory or accounting requirements in India under RBI, income tax, Companies Act, Sebi laws, etc. Better corporate governance is also leading to requirement of independent business valuations.

“MCA has notified the provisions governing valuation by registered valuers [section 247 of the Companies Act, 2013 (the Act)] and the Companies (Registered Valuers and Valuation) Rules, 2017 (the Rules), both to come into effect from 18 October, 2017. In addition, to administer and perform functions under the said rules, the MCA by way of notification on 23 October, 2017, has specified the Insolvency and Bankruptcy Board of India (IBBI) as the responsible authority.”

Valuation, in itself, is evolving in India and is an inexact science. Professional judgement of valuer is thus critical in any valuation exercise. However, till now, due to lack of Indian valuation standards and absence of any regulatory authority to control, guide and develop the practice of valuation in India, different valuers have been taking different assumptions leading to drastic differences in value conclusion. In many cases, the valuation also lacks uniformity and adherence to generally accepted global valuation practices. With above background, the Companies Act, 2013 (Act) had brought the concept of registered valuers to regulate the practice of valuation in India and to bring valuation in line with international standards. However, the valuer’s qualification, experience, manner and process was left to be decided by the Rules.

Thus, keeping in view the above requirements The Ministry of Corporate Affairs has recently issued the Companies (Registered Valuers and Valuation) Rules, 2017 (Rules) on October 18, 2017. Simultaneously, section 247 of the Act has now come into force w.e.f. October 18, 2017. These rules contain various aspects pertaining to registered valuers . Section 247 states that any valuation of an asset of a company (including property, stocks, shares, debentures, securities, goodwill), or net worth of a company, is required to be made by a person who is registered as a valuer, and has requisite qualifications and experience in such capacity. Such a valuer may be appointed by the audit committee or board of directors of the company.

Owing to the lack of Indian valuation standards and guidelines, most of the professionals associated with business valuation adopt international valuation norms. A few valuers in collaboration with the promoters have contravened the ethical standards of valuation with the intention of making money. Hence, Ministry of Corporate Affairs (MCA) has come out with a more prudent Registered Valuers and Valuation Rules, 2017.

According to The Registered Valuers & Valuation rules, 2017, valuers upon registration with a government notified authority can perform valuation (those including individuals, partnership entities and companies) under the Companies Act. The MCA has entrusted Insolvency and Bankruptcy Board of India (IBBI) for valuer registration.

The highlight of the rule is that the valuers are required to adopt internationally accepted standards along with supporting documents during valuation. It necessitates the valuation report to include purpose of valuation, appointing authority, disclosure of conflict/interest of valuer, inspections underdone and background information of the asset to be valued among others.

The credibility of this act has further been improved with the addition of clauses for prevention of unethical manipulations. This includes provisions for cancellation or suspension of certificate of registration or recognition (Rule 15), complaints against a registered valuer or valuer organisation so that it can be appropriately referred and handled according to the bye laws (Rule 16), setting up a committee to advise on validation matters for formulating valuation standards (Rule 18 & 19), punishment of contravention (Rule 20), punishment for false statement in any report, certificate or document etc. (Rule 21).

The valuation is to be done in accordance with the Companies (Registered Valuers and Valuation) Rules, 2017. The following are some of the important provisions:

• Eligibility criteria. The eligibility criteria include having the qualifications prescribed, being a member of, and being recommended by a registered valuer’s organization, is of sound mind, not being a minor/adjudged bankrupt, being a resident of India, not having been punished with imprisonment for a prescribed minimum duration, being a fit & proper person, etc. Similar criteria have been prescribed for recognition of registered valuers organizations.

Registration. All persons who receive such registration must comply with certain prescribed conditions at all times, including continued compliance with CA 2013 and the rules, compliance with the code of conduct prescribed in the rules, etc.

Conduct of valuation. The central government, based on the advice of a committee to be set up for valuation standards, will notify (and may, from time to time, modify) the valuation standards. Until such notification, the registered valuers are to ensure that all valuations are as per internationally accepted valuation standards, and valuation standards adopted by any registered valuers organization. Registered valuers should furnish a report, which includes the background information of the asset being valued, purpose of valuation, identity of the valuer and other experts involved in the valuation, procedures adopted, major factors taken into account for valuation, and caveats, limitations and disclaimers which limit the responsibility of the valuer.

Transitional arrangement. All existing valuers providing valuation services on the date of commencement of the rules may continue to render their services under the rules up to 31 March 2018 until obtaining registration. If any relevant law/regulatory body requires that the valuation conducted by any person be in accordance with the rules, then the rules shall apply to such person from the date specified under such law/by regulatory body.

Any contravention of the CA 2013 or the rules by a registered valuer would lead to a minimum fine of INR 25,000 (US$387), which may extend to INR 100,000. A valuer who has contravened provisions with the intention of defrauding the company or its members, may be imprisoned for a year, and may be fined between INR 100,000 and INR 500,000.

The notified Rules attempt to bring in standardisation in the valuation standards in India and ensure that valuation reports disclose a true and fair view and result in greater objectivity in

valuation procedures. The increased transparency and fairness in the valuation system would also boost stakeholder confidence by bringing uniformity.

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Acquisory News Chronicle - November 2017