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Rules limited to valuers, do not have the all-important
component of valuation methodology; till the time methodology is framed,
international standards to be followed
After much
dilly-dallying, the Ministry of Corporate Affairs (MCA) has come up
with rules on valuation of unlisted companies that will do
away with arbitrariness at the time of mergers and acquisitions (M&As), and
transfer of shares. The draft for the same was put up for consultations four
years back.
However, these
rules are limited to valuers and do not have the all-important component of
methodology of valuation. Till the time the methodology is framed by
a committee that is yet to be set up, international standards will be followed.
Experts state that till the final methodology is drawn up, it is difficult to
say which country’s rules will have a presence in India. Each country has its
own set of rules for the same.
Chander Sawhney,
partner and head of valuations at Corporate Professionals, says there are three
broad global methods of valuation — assets, income, and the market
approach of the company.
India has never had
rules for all firms, though there are separate norms for listed companies laid
down by the markets regulator. Currently, the Securities and Exchange Board of
India (Sebi) has its own set of valuation guidelines for listed companies on
takeovers, preferential allotment of shares and so on. As such, this is a
beginning towards framing rules for valuation by registered valuers.
According to
the Companies (Registered Valuers and Valuation) Rules, 2017, the
Insolvency and Bankruptcy Board of India (IBBI) is the authority responsible
for these regulations.
These rules are
basically about who could become valuers and the process of registration and
deregistration of these valuers with the IBBI.
According to the
rules, chartered accountants can conduct a financial audit, while subject
experts will have to be hired for other specific audits such as for machinery
and real estate. Essentially, there will be separate financial valuers and
technical valuers. These rules will also be applicable to companies going
in for liquidation under the Insolvency Code. Once the methodology is also
finalised, it will help other regulators such as SEBI to follow
uniform guidelines.
Sawhney says these
rules will be applicable under the Companies Act, 2013, until
sectoral regulations also adopt these rules.
Companies are
now allowed to function as registered valuers, provided three or all of their
directors are registered valuers. Because of this, merchant bankers also
qualify to become valuers. This is a modification of drafts issued by the MCA
in 2013, which had proposed to allow only individuals and partnership firms
such as limited liability partnerships (LLPs). Around 95 per cent of merchant
bankers in India are companies and only five per cent are LLPs.
Unregistered
valuers can continue to work till March 31, 2018.
Experts say these
rules will bring in professional discipline among valuers in India and will
lead to standardisation in this field.
This move will also
make M&As easier, as valuation will be done on the basis of
certain guidelines. Before these rules, there was a great deal of subjectivity
that was usually challenged, experts had opined. They had also opined
that litigation on account of valuation will reduce with the
regulations. The rules state that all transactions with third parties
undertaken during the period the valuer has been appointed has to be reported
to the IBBI.
A disciplinary
committee will be constituted which will hear complaints against the valuer. An
appellate panel will also be set up which will look into appeals against the
disciplinary committee’s order. An appeal can be filed within 30 days of the
initial order. An individual who has been declared bankrupt cannot enrol as a
valuer.
NORMS FOR VALUERS
- Chartered accountants (CAs), company secretaries (CS),
subject experts can become valuers
- Unlike draft rules, these norms allow companies to
become valuers
- Merchant bankers can become valuers
- CAs/CS will be allowed to conduct only financial audits
- Others (subject experts) will do technical audits
- Professionals with a graduate degree will need 3-year
audit experience
- Draft rules had proposed 5-year audit experience
- Insolvency and Bankruptcy Board of India to be
regulatory authority
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