CA HOZEFA NATALWALA researchbv@gmail.comINTRODUCING THE PROVISIONS FOR REGISTERED VALUERS IS AN APPRECIABLE STEP OF THE COMPANIES ACT, 2013 : PORTRAYING A NEW AVENUE FOR CHARTERED ACCOUNTANTS IN PRACTICE

The current economic and regulatory environment in India is on the verge of a major revamp. Constant efforts are being made to amend and adapt the laws to suit the needs of contemporary age, to update and make it globally compliant and more meaning full in the context of investor protection and business friendliness.

BACKGROUND

Companies Act, 2013 (2013 Act) has been assented by the President of India on 29 August 2013 and published in Official Gazette on 30 August 2013. 2013 Act empowers the Central Government to bring into force various sections from such date(s) as may be notified in the Official Gazette. The new law will replace the more than 50 year old Companies Act, 1956.

The new legislation concurs bringing easy and efficient way of carrying business in India. The 2013 Act stipulates enhanced self-regulations coupled with emphasis on corporate democracy and provides for business friendly corporate regulation, enhanced accountability of management, e-governance initiatives, corporate governance, introduction of Corporate Social Responsibility (CSR), improved disclosure norms, audit accountability, protection for minority shareholders, investor protection and activism and better framework for insolvency regulation and institutional structure.

It is the first time that the concept of Registered Valuers has been introduced. Though business valuations are required in various situations such as court approved M&A, IPO, FDI, etc., the concept of valuation as a code is new to India. The Companies Act, 1956, despite using the term valuation in some sections, does not specify the basis on which such valuations shall be done or who will do them. The 2013 Act has introduced the concept of a 'Registered Valuer' under a separate chapter which intends to cover several kinds of valuation requirements. As per Chapter XVII Section 247 of the Act, where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities under the provision of this Act, it must be valued by a Registered Valuer. The underlying principle behind introducing this concept is to set and regulate the practice which will bring transparency and better governance through defined valuation standards in various business processes demanding valuation. Chapter XVII Section 247 of the 2013 Act, read with Rule 17 of Draft Rules lay down the eligibility criteria to work as registered valuer, purpose oriented approaches and methods to be used by registered valuers and contents of the Valuation Report. It defines their roles and responsibilities. The draft rules are subject to change.

Provision of Companies Act, 2013CHAPTER XVIIREGISTERED VALUERS

247. (1) Where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities under the provision of this Act, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company.

(2) The valuer appointed under sub-section (1) shall,(a) make an impartial, true and fair valuation of any assets which may be required to be valued;(b) exercise due diligence while performing the functions as valuer;(c) make the valuation in accordance with such rules as may be prescribed; and(d) not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during or after the valuation of assets.

(3) If a valuer contravenes the provisions of this section or the rules made thereunder, the valuer shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees:

Provided that if the valuer has contravened such provisions with the intention to defraud the company or its members, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

(4) Where a valuer has been convicted under sub-section (3), he shall be liable to(i) refund the remuneration received by him to the company; and(ii) pay for damages to the company or to any other person for loss arising out of incorrect or misleading statements of particulars made in his report.

The silent features of the Provisions Audit Committee or in absence of Audit Committee, the Board of Directors of the company will appoint a valuer The Valuer can not undertake or carry out valuation job of any assets in which he has a direct or indirect interest. The Valuer shall exercise due diligence and shall make an impartial, true and fair valuation in accordance with prescribed rules. In case of contravention of any provision/s of the Act or the Rules by the Valuer, he will be punishable with imprisonment and fine and subject to be liable to refund the remuneration and also to pay for damages.

As per the provisions of Companies Act, 2013, all valuations under the Act will be carried out by a Registered Valuer. The below mentioned sections specifies valuation requirement under the Act.

SectionsDetails

Section 62(1)(c)For Valuing further Issue of Shares

Section 192(2)For Valuing Assets involved in Arrangement of Non Cash transactions involving Directors

Section 230(2)(c)(v)For Valuing Shares, Property and Assets of the company under a Scheme of Corporate Debt Restructuring

Section230(3)Under a Scheme of Compromise/Arrangement, along with the notice of creditors/ shareholders meeting, a copy of Valuation Report, if any shall be accompanied

Section 232(2)(d)The report of the expert with regard to valuation, if any would be circulated for meeting of creditors/members

Section 232(3)(h)Where under a Scheme of Compromise/Arrangement the transferor company is a listed company and the transferee company is an unlisted company, for exit opportunity to the shareholders of transferor company, valuation may be required to be made by the Tribunal

Section 236(2)For Valuing Equity Shares held by Minority Shareholders

Section 260(2)(c)For preparing Valuation report in respect of Shares and Assets to arrive at the Reserve Price for Company Administrator

Section 281(1)For Valuing Assets for submission of report by Liquidator

Section 305(2)(d)For report on the Assets of the company for preparation of declaration of solvency under voluntary winding up

Section319 (3)(b)For Valuing the interest of any dissenting member of the transferor company who did not vote in favour of the special resolution, as may be required by the Company Liquidator

Some of the stipulations under draft rules

The draft rules speaks about the definition of registered valuer, eligibility criteria to get registered as valuer, provisions related with governance of registered valuers including the information submission requirements, removal and restoration of name, appeal procedures etc., and the consideration while conducting the valuation assignment including procedures, methods and reporting contents.

REGISTRATION AS VALUER

The Draft Rules define "Registered Valuer" and state that a person to be eligible to act as a valuer, must register with the Central Government or institution or agency notified by the Central Government by filing an application for registration as a valuer.The following persons shall be eligible to apply for being registered as a valuer:

a)A chartered accountant, company secretary or cost accountant who is in whole-time practice, or any person holding equivalent Indian or foreign qualification (acquired by Indian citizen) as the Ministry of Corporate Affairs may recognize by an order; (having at least 5 years continuous experience after acquiring membership of the respective institution)b)A Merchant Banker registered with the Securities and Exchange Board of India, and who has in his employment person(s) having qualifications prescribed under (a) above to carry out valuation by such qualified persons; (having at least 5 years continuous experience after acquiring membership of the respective institution)c) Member of the Institute of Engineers and who is in whole-time practice; (having at least 5 years continuous experience after acquiring membership of the respective institution)

d)Member of the Institute of Architects and who is in whole-time practice; (having at least 5 years continuous experience after acquiring membership of the respective institution)e) A person or entity possessing necessary competence and qualification as may be notified by the Central Government from time to time. Persons referred to in (a) and (b) shall be in respect of requirement for a financial valuation and the persons referred to in (c) and (d) shall be in respect of requirement for a technical valuation and a person or a firm or Limited Liability Partnership or merchant banker possessing both the qualifications may act in dual capacity.

Explanation: For the purposes of this rule, a person shall be deemed to be in whole-time practice, when individually or in partnership or in limited liability partnership or in merchant banker with other persons in practice who are members of other professional bodies, he, in consideration of remuneration received or to be received :

(i) engages himself in the practice of valuation; or (ii) offers to perform or performs services involving valuation of any assets with the object of arriving at financial value of the asset being valued; or renders professional services or assistance in or about matters of principle or detail relating to valuation.

The Central Government or any authority, institution or agency, as may be notified by the Central Government, shall maintain a register to be called as the Register of Valuers in which there shall be registered the names, address and other details of the persons registered as valuers in pursuance of section 247.

In case valuer found guilty of professional misconduct or otherwise by the Institute in which he is a member or by National Financial Reporting Authority or where the SEBI removed the registration of the merchant banker, such valuer shall cease to be the valuer automatically and their name shall be removed from the register of valuer unless such order has been stayed by the Competent Authority. Any ongoing assignment of such valuer, who has ceased to be a valuer, shall be assigned to other valuer from the panel maintained by Central Government or any authority or institution to complete the assignment, if no stay is granted on such appeal, if any.

CONDUCTING VALUATION ASSIGNMENT

The Valuer shall conduct valuation in accordance with the provisions of rules.

The foremost things to start the valuation task are to finalize the purpose of valuation and the date of valuation. Based on these, the approach will be finalized and will further lead to select the methods of valuation to be used to arrive at concluding value estimation.

A registered valuer shall make a valuation of any asset as on valuation date, in accordance with the applicable standards, if any, as may be stipulated for this purpose. And for the purposes of this rule, valuation date means the date on which the estimate of value is applicable. It may be different from the date of the valuation report or the date on which the investigations were undertaken or completed.

Approaches To Value

Following are the approaches to conduct purpose oriented valuation as prescribed in draft Rules1. Asset approach;2. Income approach;3. Market approach.

Important Points To Consider

The following points need to be considered while undertaking valuation:

a) Nature of the business and the history of the enterprise from its inception;b) Economic outlook in general and outlook of the specific industry in particular;c) Book value of the stock and the financial condition of the business;d) Earning capacity of the company;e) Dividend paying capacity of the company;f) Goodwill or other intangible value;g) Sales of the stock and the size of the block of stock to be valued;h) Market prices of stock of corporations engaged in the same or a similar line of business;i) Contingent liabilities or substantial legal issues, within India or abroad, impacting the business;j) Nature of instrument proposed to be issued, and nature of transaction contemplated by the parties.

Valuation Methods

The Draft Rules cover most of the frequently used methods of valuation as well as permit valuers to apply other methods as appropriate and justified.

The Rules provides that the valuation of any asset as on valuation date shall be made in accordance with any one or more of the following methods:

1. Net asset value method2. Market Price method3. Yield method / Profit Earning Capacity Value (PECV)4. Discounted Cash Flow Method (DCF)5. Comparable Companies Multiples Methodology (CCM)6. Comparable Transaction Multiples Method (CTM)7. Price of Recent Investment method (PORI)8. Sum of the parts valuation (SOTP)9. Liquidation value10. Weighted Average Method11. Any other method accepted or notified by the Reserve Bank of India, Securities and Exchange Board or Income Tax Authorities.12. Any other method(s) that the valuer may deem fit to adopt in the given circumstances of the case, provided that adequate justification for use of such method(s) (and not any of the methods above) must be included in the report.

Valuation Report

As per draft rules the valuation report shall be as near to and shall contain such information as mentioned in form No. 17.3.

Format of Valuation Report - Title [Pursuant to section 247(2)(c) and rule 17.7]

Sr. NoContents

Sub-Contents

1)

Valuer Details

a) Name of the Valuerb) Address of the Valuerc) Registration number of the Valuerd) e-mail ID

2)

Description of Valuation Engagementa) Name of the clientb) Other intended usersc) Purpose for valuation

3)Description of Business/ Asset /Liability being valueda) Nature of business or asset / liabilityb) Legal backgroundc) Financial aspectsd) Tax matters

4)

Description of the Informationunderlying the Valuation

a) Analysis of past resultsb) Budgets, with underlying assumptionsc) Availability and quality of underlying datad) Review of budgets for plausibilitye) Statement of responsibility for information received

5)

Description of specific Valuation ofAssets used in the Business

a) Basis or bases of valueb) Valuation Datec) Description of the procedures carried outd) Principles used in the valuatione) The valuation method used and reasoningf) Nature, scope and quality of underlying datag)The extent of estimates and assumptions together with considerations underlying them

6)Confirmationthat the valuation has been undertaken in accordance with these Rules

7)Further it is certified that valuation has been undertaken after taking into account relevant conditions/regulations/rules/notifications, if any, issued by the Central/State Government(s) from time to time.

8)Valuation Statement :

Date : Signature of ValuerPlace :

Apart from this, some key/additional information needs to be included in the Valuation Report:

i. The valuation report must clearly state the significant assumptions upon which the value is based. When reporting, there may be instances where there are confidential figures, these must be summarized in a separate exhibit.ii. In the valuation report, the Registered Valuer must set out a clear value or range of values along with the reasoning.iii. In case the Registered Valuer has been involved in valuing any part of the subject matter of valuation in the past, the past valuation report(s) should be attached and referred to herein. In case a different basis has been adopted for valuation (than adopted in the past), the Valuer should justify the reason for such differences.