REGISTERED VALUERS UNDER THE COMPANIES ACT, 2013:

RELIEF TO THE INDIAN COMPANIES?

KRATI RAJORIA
Abstract
Taking cognizance of rapid globalization, evolution of business environment
with the objective of enabling the Indian corporate sector to adopt the best
international practices in a globally competitive manner, fostering a positive
environment for investment and growth, the company law in India was
overhauled and a new Act was introduced in 2013. A number of new concepts
were introduced under the Companies Act, 2013 1 ; one such concept is the
inclusion of new professionals called registered valuers under section 247 of the
Act for the purpose of valuation of company or any of its assets. The attempt here
seeks to analyse the concept, its benefits, effects and impact on the company and
its stakeholdersin the present scenario. It revolves around answering the
question: Has the inclusion of this concept provided a helping hand to the
companies? The view expressed here concludes that though the introduction of
the concept is a good initiative to ensure good corporate governance practices, at
the same time it has its own drawbacks that have been thoroughly discussed in
the following paragraphs.
Introduction:
The Ministry of Corporate Affairs has placed the Draft Companies (Registered
Valuers and Valuation) Rules, 2017 2 and has invited comments/suggestions
along with justification, through email at comments_rv@mca.gov 3 , latest by
27.6.2017. The rules will come into force with effect from 15 July 2017. Registered
Valuer is a person registered as a Valuer under Chapter XVII of the Companies
Act, 2013. Prior to the introduction of this new concept most valuations were till
now done by chartered accountants engaged by companies or parties who
desired valuation. Since valuation is a highly subjective matter, the person
carrying out valuation should be a qualified person of repute. To ensure this,
section 247 of the 2013 Act proposes that persons who desire to be appointed as
valuers should be registered in accordance with the rules to be prescribed under
Chapter XVII of the Act and only persons so registered can be appointed as
valuer.4
Eligibility
The following persons can apply to get registered as registered valuers:

1 (2013) 5 Comp LJ 1 (St.).

2 (2017) 3 Comp LJ 86 (St.).
3 http://www.mca.gov.in/Ministry/pdf/NoticeforValuers.pdf
4 Ramaiya A., Guide to the Companies Act, LexisNexis, Edn 18, Vol. 3, 2014, pg. 4338.
[J-55]
56 COMPANY LAW JOURNAL (2017) 3 Comp LJ

* A chartered accountant, company secretary or cost accountant who is in

whole-time practice, or retired member of Indian Corporate Law Service
or any Indian Citizen holding equivalent Indian or foreign qualification
as the Ministry of Corporate Affairs may, by an order, recognise.
* A Merchant Banker registered with SEBI and having in his employment
persons having qualifications as mentioned above to carry out valuation
services by such qualified persons.
* A member of the Institute of Engineers and who is in whole-time
practice.
* A member of the Institute of Architects and who is in whole-time practice
5 years of continuous post membership experience is mandatory in all
the above cases.
* In the case of merchant banker the valuation report shall be signed by the
qualified person.
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:
* engages himself in the practice of valuation; or
* 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.
* A person or entity possessing necessary competence and qualification as
may be notified by the Central Government from time to time.
Role of registered valuer [section 247(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.
Requirement of registered valuers
As given under section 247, any property, stocks, shares, debentures, securities
or goodwill or any other assets or net worth of a company or its liabilities which
requires valuation under the provision of the Companies Act, 2013, shall be
(JOURNAL) REGISTERED VALUERS UNDER THE COMPANIES ACT, 2013 57

valued by a registered valuer. Valuation is the process of determining the current

worth of an asset or a company 5 . Valuation can also be understood as the
determination of price that is to be paid or received to complete sale of the
business. There are many approaches to determine the value of a companys
assets, viz., asset approach, income approach and market approach.
Valuing is both an art and science. There are many principles of valuing but
also each principle has an exception where it will not work. Therefore many times
it happens that a valuation mismatch is created. Valuation mismatch can be
defined as the difference between market and fundamental value of a company.
Valuation mismatch can be of two types; either it can be overvalued or
undervalued. There are several cases where the main cause of dispute was the
misevaluation of assets. In the Cadbury case6 the Bombay High Court approved
the resolution passed by Cadbury India Limited (Cadbury) for such reduction of
capital (by cancelling the shares held by and making a payment to the public
shareholders). While the decisions in the case of Sandvik Asia Ltd and others7 laid
the foundation principles for reduction of capital, and other subsequent cases
strengthened it into a now well-settled concept, recent cases including this one
have brought to the fore the frivolous attempts made by sections of minority
shareholders to cast doubt on aspects of the valuation, and hold the other non-
promoter shareholders to ransom from exiting the company.
Under the present Companies Act the following sections state the requirement
of valuation by registered valuer:
* Under section 62(1)(c) for valuing further issue of shares,
* Under section 192(2) for determining the value of assets involved in
arrangement of non-cash transactions involving directors;
* Under section 230(2)(c)(v) for preparing a valuation report in respect of
shares, and the property and all assets, tangible and intangible, movable
and immovable of a company under a Scheme of Corporate Debt
Restructuring;
* Under sections 230(3) and 232(2)(d) for valuation including share swap
ratio under a scheme of compromise/arrangement, a report of the expert
with regard to valuation, if any shall be accompanied;
* Section 232(3)(h) states that 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;

5 Valuation, Investopedia, available at http://www.investopedia.com/terms/v/valuation.asp.

6 Cadbury India Limited (Company Petition 1072 of 2009).
7 Sandvik Asia Limited v Bharat Kumar Padamsi (2010) 2 Comp LJ 255 (Bom): (2009) 3 Bom CR 57.
58 COMPANY LAW JOURNAL (2017) 3 Comp LJ

* Under section 236(2) for determining the value of shares held by minority
shareholders;
* Under section 260(2)(c) for preparing a valuation report in respect of the
shares and assets in order to arrive at the reserve price for the sale of any
industrial undertaking of the company or for the fixation of the lease rent
or share exchange ratio;
* Section 281(1)(a) provides for valuing assets for submission of report by
Company Liquidator;
* Section 305(2)(d) provides for report on the assets of the company for
declaration of solvency in case of voluntary winding up;
* Section 319(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;
* Section 325(1)(b) states that in winding up of insolvent company for
valuation of annuities and future and contingent liabilities.
Reason for the introduction of the concept
There are international bodies regulating the area of valuation such as
International Valuation Standards Council (IVSC), Valuation Standards of
American Institute of CPAsAmerican Society of Appraisers (ASA), National
Association of Certified Valuation Analysts (NACVA), Institute of Business
Appraisers (IBA) and The Canadian Institute of Chartered Business Valuers
(CICBV). The need of standardization and regulation in valuation industry is due
to large-scale international and foreign investments made in the industry. Once it
is done asset analysis will be done on common scale and it will simplify
investment process.
For a long time, valuation has been a subject matter of debate and chaos in
India. Substantial number of litigation in mergers and acquisitions (M&A) and
buy-backs are about valuation, It became difficult to determine that it is an art or
science due to the element of subjectivity in valuation. There are no specific
standards for valuation of business in India. Because of no specific standards and
professionals appointed for valuation there have always been interference and
interpretation by judiciary.8
There is consensus to some extent among professional valuers with respect to
generally accepted approaches, methods, and procedures when it comes to
valuation of assets of corporations but there are numerous controversies as well
that remain even among the best practitioners. A need was, therefore, felt for
education, training, regulation and standardization of the current practices. The
introduction of the concept of registered valuer in the Companies Act, 2013, will
definitely lead to establishment of Indian Valuation Standards that will enhance

8 Supra Note 5
(JOURNAL) REGISTERED VALUERS UNDER THE COMPANIES ACT, 2013 59

transparency, accountability and good governance, serving as a helping hand to

the company and relief to the stakeholders.
Impact of change
The introduction of registered valuer as professionals under the Act is likely to
have a major impact on the industry, professionals, shareholders and
government. As already stated above for valuation of assets of company specific
provisions are given under the Act requirement of professionals for this purpose
was the need of an hour. There will be substantial increase in professional
opportunities for CAs, CSs and CWAs because of the requirement for valuation.
Fine for contravening the requirements given under section 247 and
imprisonment for intention to defraud a company or its members will ensure the
accountability of valuers and the authenticity of valuation reports and will also
ensure that valuation procedures are more objective.This will boost the
stakeholders confidence and increase transparency and fairness in the valuation
system leading to improvement in Government revenue generation as fair
valuation will plug the loopholes in the system.
The Companies Act, 2013, intends that a registered valuer value all assets. On
one hand, it is expected that the introduction of such professionals will improve
the current position; on the other hand, at the same time, it is unreasonable to
expect professionals like CA/CS/CWA to value a property or machinery, etc.,
without the any kind of expertise in that specific area. Say, for example, for the
valuation of a property it would be difficult for a CA, CS, etc., to value the
property without the help of any property and in case of machinery without an
experts assistance.
The valuer is required to exercise due diligence. Most of the time, the valuers
report is accompanied by a caveat stating that the in valuation the valuer has not
done any due diligence and as the general practice has relied on facts and
statistics placed before. As due diligence is a broad terms and covers a wide
range of exercises to be undertaken and does not as such come under the scope of
the valuer. Though the valuer should check the data for consistency and
reasonableness and apply professional due care and suitable adjustments.
In 2005, the J.J. Irani Report highlighted the importance of good governance
and to ensure that the requirement of regulating the profession of valuers.9 On
similar lines, a concept was prepared for creating Council of Valuation
Professionals of India in form of a legislative Bill and circulated for public
comments in 2007. It was proposed that for the regulation of valuers there should
be a dedicated parliamentary Act. 10 As per the new Act, certified valuation

9 Government of India, Report on Company Law, Ministry of Corporate Affairs: (2006) 1 Comp LJ 26
(Journal).
10 http://www.thehindubusinessline.com/todays-paper/tp-corporate/india-needs-a-council-of-
corporate-valuation-professionals/article1668177.ece
60 COMPANY LAW JOURNAL (2017) 3 Comp LJ

professional is a person who has been given a certificate of practice by a body

recognized by the Council. ICAI, ICSI and ICWAI are the recognized institutes in
this Act. Considering the above statement it can be concluded that corporate
bodies such as large chartered accountant firms and merchant bankers can not be
allowed to practice as valuation professionals.
Conclusion and Recommendation
As professionals in valuation practice are from different backgrounds and
specialization, this results in dilution of core meaning and objective of valuation
process. Heterogeneity exists in industry; therefore, there is a requirement of
widening the scope of professionals who would be qualified to get themselves
registered as registered valuers. This concept of registered valuers will provide
scope of structuring the whole valuation services industry and allow in depth
research in the specified filed provided it is restricted to the domain specific
expertise so that the valuation in black and white is true to the dynamics of the
ground reality. With growing significance of valuation, it is imperative to have a
well-developed valuation discipline built upon technical standards and
supported by an institutional and regulatory framework.
__________________

Valuation methods typically fall under one of three basic appraisal approaches: the
asset approach, the market approach, or the income approach.
The asset approach uses appraisal methods that consist of a review of the
individual assets of the company. The most commonly used asset approach method is
called the adjusted book value method. In this method, assets and liabilities are
adjusted to the standard of value, for example fair market value. The major weakness of
this method is that the intangible asset value of a going-concern business is not
measurable. Occasionally, an appraiser may use an asset approach method in
combination with a hybrid-method, the excess earnings method, used to value the
intangible assets of a company.
The market approach uses businesses in the same or similar industry to develop
valuation multiples that can be used to determine a value for the business in question.
Several methods may be usedsome use information from the sale of private
companies, others use the sale of public companies or the price of stock as of the date of
valuation for comparable public companies in the same or similar industry.
The income approach consists of two primary methods: the capitalization of cash
flow method and the discounted cash flow method. These two methods are mutually
exclusive. The basic difference between the two is based on the stability or lack thereof
of expected future income. The most difficult part of the income approach is the
determination of the appropriate discount or capitalization rate to be used. A discount
or capitalization rate measures the risk associated with achieving the projected income
or cash flow.11

11 See Valuation concepts at NBVG: http://www.nationalbizval.com/valuation-basics.html