New Valuation Regime under Companies Act, 2013
Till now, only an ad-hoc framework for valuation professionals was in place, which is basically governed by the Companies Act, and the government has designated the Insolvency and Bankruptcy Board of India (IBBI) as the authority to implement the new regime of registered valuers.
The move came at a time when stressed companies worth thousands of crores were up for sale under the Insolvency and Bankruptcy Code (IBC) and there was no standardized formula for valuing these assets nor is there a proper regulatory framework governing the valuation profession. Proper valuation of a company is also a crucial part of any merger and acquisition.
Accordingly, the Ministry of Corporate Affairs introduced the Companies (Registered Valuers and Valuation) Rules, 2017 (“Rules“). The Rules inter alia provided for the eligibility criteria which needs to be fulfilled for obtaining a certification for being a registered valuer and the manner in which the certification maybe obtained.
The Rules also provide that the Insolvency and Bankruptcy Board of India (“IBBI“) established under the Insolvency and Bankruptcy Code, 2016 be the “registering authority” which will hold examinations and grant certifications of the designation of a “registered valuer”.
The valuation by a registered valuer applies to valuation of assets, liabilities, shares, etc. required under the Companies Act, 2013 and the rules made thereunder. It does not apply to valuations required under other laws, unless the other laws mandate valuation by a registered valuer. However, certain SEBI Regulations also mandate valuation by RV.
Thus, from February 01, 2019, only a registered valuer is allowed to undertake valuation required under the Companies Act.
It is interesting to note that under Section 247(2) of the Companies Act, the registered valuer is required to:
- Make an impartial, true and fair valuation of assets which maybe required to be valued;
- Exercise due diligence while performing the functions of a valuer;
- Make the valuation in accordance with such rules as maybe prescribed;and
- 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.
Who can be a Registered Valuer?
A person, who aspire to be a registered valuer, is required to possess certain qualifications and experience, obtain membership of a recognized organization of valuers and get itself registered as a valuer with IBBI. The RV Rules sets out in detail the eligibility criteria, educational qualifications (degree), experience, and procedure for registration of a valuer. However, such valuer will not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during a period of three years prior to his appointment as valuer or three years after the valuation of assets was conducted by him.
Different qualifications of registered valuers for different class of assets
- For valuation of land & building, a registered valuer must be a graduate or post graduate in Civil engineering, architecture or town planning with minimum experience of 3 to 5 years
- For valuation of plant & machinery, a registered valuer must be a graduate or post graduate in Electrical or Mechanic Engineering with minimum experience of 3 to 5 years
- For valuation of securities or financial assets, a person must be a member of ICAI, ICSI or Institute of Cost Accountants of India or an MBA with specialization in Finance, with minimum experience of 3 years in the discipline after completing graduation
The registered valuer is responsible for any negligence or misconduct leading to disciplinary action by IBBI and regulatory penalties and fines.
Impact on valuation practice in India
For long, in the absence of a specialized cadre of valuers, valuation services have been usually provided by chartered accountants and merchant bankers, etc. They typically issue valuation certificates for the purpose of compliance under the Companies Act and other laws like SEBI Regulations and even I-T Act. However, the lack of a standardized formula has resulted in too much of subjectivity in the valuation of companies. Now with this rules and IBBI being appointed as responsible authority to administer and perform functions under the said rules, the valuation domain is being well regulated.
Presently more than 900 valuers are registered under IBBI and they are only authority to carry out valuations under different legal framework. Nevertheless the other laws are soon expected to be amended to include the Registered Valuers to carry out Valuations.
The MCA has constituted a committee to recommend the valuation standards and policies for compliance by companies and registered valuers. Given the need of the hour, the ICAI has already established a Valuation Standard Board and formulated ICAI Valuation Standards in June 2018. These ICAI Valuation Standards will remain effective till valuation standards are notified by the MCA.
Though the valuation of a listed company whose shares are actively traded on a nationwide stock exchange in India can be derived from its prevailing market price over a period of time, the valuation of an unlisted company and its shares is the real challenge.
Below is the Ready Reckoner for the valuation transactions covered in case of Private, unlisted Public companies and listed companies under Companies Act 2013, SEBI and Income Tax Act 1961:
| Nature of Transaction | Private Company | Unlisted Public Company | Listed Public Company |
| Fresh Issue/ preferential allotment(Rule 13 of SCD Rules, 2014) | Yes- by RV(sec 42 and 62 of CA 2013) | Yes- by RV(sec 42 and 62 of CA 2013) | Not required, if frequently traded shares.If shares not traded frequently, then issue price can be valued by MB or CA
(Reg 76A of ICDR) |
| Rights Issue | Not Required (sec 62 of CA 2013) | Not required (sec 62 of CA 2013) | Not required (ICDR) |
| Employee Stock Option Scheme | Not Required (sec 62 of CA 2013) | Not Required (sec 62 of CA 2013) | Not Required (SEBI Reg) |
| Bonus Issue | Not Required | Not Required | Not Required |
| Employees Stock Purchase Scheme(Rule 16 of SCD Rules) | Yes- by RV (sec 67 of CA 2013) | Yes- by RV (sec 67 of CA 2013) | Not Required (sec 67 of CA 2013) |
| Valuation of Assets Involved in Arrangement of Non cash transactions involving Directors | In case of sales or purchases of any asset between the company and directors of the company (or its subsidiary company, holding company or associate company) or a person connected with the director for consideration other than Cash, in this scenario value of transaction will be calculated by the RV. Section 192(2) of CA, 2013. | In case of sales or purchases of any asset between the company and directors of the company (or its subsidiary company, holding company or associate company) or a person connected with the director for consideration other than Cash, in this scenario value of transaction will be calculated by the RV. Section 192(2) of CA, 2013. | In case of sales or purchases of any asset between the company and directors of the company (or its subsidiary company, holding company or associate company) or a person connected with the director for consideration other than Cash, in this scenario value of transaction will be calculated by the RV. Section 192(2) of CA, 2013. |
| Sweat Equity (rule 8 of SCD Rules) | Yes- by RV (sec 54 of CA 2013) | Yes- by RV (sec 54 of CA 2013) | Yes- by MB (valuation of IP or value addition) or CA (certification that valuation is in accordance with AS)(Reg 8 of SEBI SE Regulations) |
| Buyback of shares | Not required but valuation report can be obtained from MB, CA or RV for justifying the buyback price(rule 17 of SCD Rules, Sec 69 of CA 2013) | Not required but valuation report can be obtained from MB, CA or RV for justifying the buyback price(rule 17 of SCD Rules, Sec 69 of CA 2013) | Not required but valuation report can be obtained from MB, CA or RV for justifying the buyback price(rule 17 of SCD Rules, SEBI Buyback Reg) |
| Purchase of Minority Shareholding | Shares of Minority shareholding can be acquired at price calculated by RV. (Sec 236 of CA 2013) | Shares of Minority shareholding can be acquired at price calculated by RV. (Sec 236 of CA 2013) | MB as per SEBI Circulars |
| Mergers & Amalgamations | Yes- by RV (sec 230 of CA 2013 Rule 6(3) of Merger Rules) | Yes- by RV (sec 230 of CA 2013 Rule 6(3) of Merger Rules) | Yes- by CA(SEBI Circulars) |
| Reverse Merger- Exit price for shareholders | Not Applicable | Not Applicable | Yes- by RV (Sec 230(3)(h) of CA 2013) |
| Scheme of Corporate Debt Restructuring | Yes- by RV | Yes- by RV | Yes- by CA (cases not exempt from ICDR) or RV (for cases exempt from ICDR) (Reg 158(7) of ICDR) |
| Conversion of Debt into equity shares | Not required | Not required | Yes- by CA (cases not exempt from ICDR) or RV (for cases exempt from ICDR) (Reg 158(7) of ICDR) |
| Report on effect of compromise | Yes- by RV, MB CA or any other advisor (Sec 232(2)(c) of CA 2013) | Yes- by RV, MB CA or any other advisor (Sec 232(2)(c) of CA 2013) | Yes- by RV, MB CA or any other advisor (Sec 232(2)(c) of CA 2013) |
| Fairness Opinion on Scheme of Mergers or Amalgamation | Not Required | Not required | Yes- by MB (SEBI circulars) |
| Accounting Standards | If valuation report is required to be obtained, then such valuation shall be done by RV (s 133 and s 247 of CA 2013) | ||
| Delisting regulations | Not Applicable | Not Applicable | Valuation can be done by RV, CA or MB (s 247 of CA 2013, Reg 23 of SAST) |
| FDI Regulations- Issue of shares/ securities to NR | Yes- by MB, AC or Cost Acc (Reg 11 of FEMA 20(R)) | Yes- by MB, AC or Cost Acc (Reg 11 of FEMA 20(R)) | Yes- as per SEBI reg (Reg 11 of FEMA 20(R)) |
| SEBI (REIT) Regulations- valuation of assets | Yes- by RV (Reg 2(zz)of SEBI (REIT) Reg) | ||
| SEBI (INVIT) Regulations- valuation of assets | Yes- by RV (Reg 2(zzf)of SEBI (INVIT) Reg) | ||
| Valuation under IBC | Yes- by RV (IBBI Circular dated Oct 17, 2018) | ||
Under Income Tax Act 1961Fresh Issue and transfer at:
(S 56(2) of IT Act, Rule 11UA) |
Not Required Any Valuer (MB/ CA/ RV) MB only Any Valuer | Not required Any (MB/ CA/ RV) MB only Any Valuer | It shall only take place in open market at FMV, thus no valuation prescribed for the same. |
| Transfer of shares at less than FMV (u/s 50CA) | Any Valuer | Any Valuer | Not applicable |
| Preferential Allotment (S 56(2)(Rule 11UA) | If shares issued at premium, then valuation by any valuer (MB, CA or RV) | If shares issued at premium, then valuation by any valuer (MB, CA or RV) | If shares issued at premium, then valuation by any valuer (MB, CA or RV) |
| Rights Issue (S 56(2) (Rule 11UA) | In case shares issued at premium, valuation may be required by any Valuer (MB, CA or RV). | In case shares issued at premium, valuation may be required by any Valuer (MB, CA or RV). | In case shares issued at premium, valuation may be required by any Valuer (MB, CA or RV) |
However, one can opine that in cases where valuation report by Registered Valuer is mandatorily required under Companies Act, 2013, then it shall also be accepted under Income Tax Act, 1961 (except in cases where MB report is mandatory under DCF) as well as FEMA.