Several streams of professionals currently render valuation services, and their conduct is regulated by the rules of the respective governing/regulatory bodies of which they are members or with which they are registered.india business
In order to streamline the process of valuation of shares and assets of a company and also the registration of valuers, the Companies Act, 2013, has for the first time introduced the concept of “registered valuers”, under section 247, and the requirement of specific valuation to be undertaken by such a valuer under other provisions of the act. In addition, draft rules on registered valuers were released by the Ministry of Corporate Affairs (MCA) in September 2013. Both section 247 of the act and the draft rules are yet to be notified and are expected to be notified soon.
Section 247 and the draft rules are the result of recommendations by different expert committees, such as the Shardul Shroff Committee and the Chandra Wadhwa Committee, to the MCA. These committees were constituted to suggest a framework for valuation in India.
The recommendations touched on a number of aspects, which included: the qualifications, registration, appointment and model code of conduct for valuers; forms of valuation reports and matters to be covered under them; modality for appointment of valuers; disclosure and confidential filing of final valuation; establishment of an independent regulatory body for valuers; quality improve-ment for valuers; and framing of guidelines for corporate valuation.
The act prescribes that a registered valuer should undertake valuation (mainly valuation of shares/assets) in a number of situations. These situations include: further issue of share capital; non-cash transactions involving directors; compromises or arrangements with creditors or members; merg-ers and amalgamations; purchase of minority shareholding; arriving at the reserve price for the sale of any industrial undertaking of a company or for fixing of lease rent or share exchange ratio; submission of company liquidator’s report to the tribunal for the purposes of winding up a company; and for declaration of solvency in case of a proposal to voluntarily wind up a company.
Section 247 relates specifically to valuation and registration of valuers. It requires valuers to follow specified principles for undertaking valuation, such as making an impartial, true and fair valuation of shares/assets, exercising due diligence, and not undertaking valuation of any shares/assets in which they have an interest. Further, the draft rules include provisions pertaining to eligibility criteria for registration as a valuer, removal and restoration of names of valuers from the register of valuers, methods of valuation and contents of valuation reports, among other things.
The act and the draft rules also provide for taking appropriate action against registered valuers in cases such as contravention of the provisions and contravention with the intention to defraud the company or its members. Valuers could also be held liable under the proposed provision on class action, for any wrong on their part. These provisions are expected to have a deterrent effect on the valuers and may facilitate improvement in the quality of the valuation reports to be prepared by them.
The new regime is expected to have a significant impact on the manner in which valuations are undertaken in India for the issuance of shares for cash or non-cash consideration. Further, the eligibility criteria for registration as a valuer will allow only persons with the relevant qualifications and experience to undertake valuation.
The introduction of the provisions on valuation and registered valuers under the act (read with the draft rules) is a move in the right direction. The prescription of the methods of valuation and the contents of valuation reports under the draft rules is expected to result in the preparation of better valuation reports, which would ultimately be beneficial to all the stakeholders, including those who are considering entering into M&A transactions. However, there is a need to synchronize the valuation process under the act (read with the draft rules) with the valuation process under other laws, such as the Foreign Exchange Management Act, 1999, and the rules/regulations made under it, and the regulations and circulars of the Securities and Exchange Board of India, which require valuation to be undertaken using methods different from the methods proposed under the draft rules (for similar scope of work).
While Section 247 and the draft rules are yet to be notified, clarity is required on certain issues, such as how a valuer would become interested in any of the shares/assets during or after the valuation and what constitutes “interest”, and whether members of professional bodies specializing in the valuation field are eligible for registration as valuers under the draft rules.
Once implemented, this new regime on valuation and registered valuers will help to improve the standards and generate transparency in matters of valuation.
Rudra Kumar Pandey is a partner and Vishal Nijhawan is an associate at Shardul Amarchand Mangaldas & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.
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