RULES AND REGULATIONS FOR VALUATION PROFESSION IN INDIA

[Vinay Goel]

A market economy needs valuations of assets to facilitate a variety of transactions under different statutes and authorities in India and for different purposes and prescribe the manner of such valuation. A valuer thus has an important responsibility. The valuer must possess the required capability and integrity for the job.

Applicable Laws and Provisions:

1. Companies Act, 2013

Section 62(1)C, 192(2), 230(2)(c)(v), 230(3), 232(2)(d), 232(3)(h), 236(2), 281(1) are the specific sections of Companies Act, 2013 and Rule 2 of Companies (Acceptance of deposit) Rules, 2014, Rule 8 (6) of Companies (Share capital and Debentures) Rules, 2014 which require valuation report from a Registered Valuer.

Brief on the above mentioned provisions is as follows:

1. Valuation report in respect of shares of the company 

• Section 62(1)C - Further Issue of Shares

In case of further issue of shares by a company by way of right issue, ESOP or issue of shares on a preferential basis the valuation for the price of share at which the share is to be issued is to be valued by the Registered Valuer.

• Section 236(2)- Valuation of equity shares held by the Minority Share Holders

The Valuation of equity shares held by the Minority Shareholders is required to be done by the Registered Valuer in case an acquirer is making an offer to the minority shareholder or the minority shareholder is making an offer to the acquirer for sale of his shares.

• Rule 8 (6) of Companies (Share capital and Debentures) Rules, 2014 in respect to issue of Sweat Equity Shares

Section 2(88) of the Companies Act, 2013 defines sweat equity shares as:

"Sweat Equity Shares" means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

This rule applies to all the companies private or public limited except the listed companies issuing sweat equity shares to its directors or employees. Following are the provisions in context to the valuation of the sweat equity shares in these Rules:

1.  the sweat equity shares shall be issued at a price determined by a Registered Valuer as the fair price giving justification for such valuation.
2. the value of the intellectual property or know-how or any other value additions, for which the sweat equity shares have been issued to its directors or employees shall be determined by a valuation report of a Registered Valuer.
3. If the sweat equity shares are issued for a non-cash consideration, the value of such non-cash consideration shall be based on a valuation report by a Registered Valuer.
4. If the shares are issued pursuant to acquisition of an asset, the value of the asset, as determined by the valuation report, shall be carried in the balance sheet as per the Accounting Standards and such amount of the accounting value of the sweat equity shares that is in excess of the value of the asset acquired, as per the valuation report, shall be treated as a form of compensation to the employee or the director in the financial statements of the company.

2. Valuation report in respect of Assets of the company  

• Section 192(2) of the Companies Act, 2013 - Restriction on Non-cash Transactions Involving Directors.

This section provides that in case the company acquires or is to acquire assets for consideration other than cash from directors of the company or a person connected with the Director, holding, subsidiary or associate companies, the value of such assets involved in such arrangement shall be duly calculated by a Registered Valuer.

• Section 230 of the Companies Act, 2013 - Power to Compromise or Make Arrangements with Creditors and Members.   

Where a compromise or arrangement is proposed between a company and its creditors (Corporate Debt Structuring) or any class of them or between a company and its members (Mergers & Acquisitions) or any class of them, the scheme of corporate debt restructuring including the schemes of mergers & acquisition shall be accompanied by a valuation report prepared by the Registered Valuer in respect of the shares and the property and al l assets, tangible and intangible, movable and immovable and also the swap ratio.

1. Sub Section (2)(c)(v) – Valuation Report is to be accompanied along with the scheme.
2. Section 230(3) – Valuation Report is to be accompanied along with the notice to creditors.
3. Section 232(2)(d) - Valuation Report is to be circulated for meeting of creditors/Members.
4. Section 232(3)(h) - The Valuation report to be made by the tribunal for exit opportunity to the shareholders of transferor Company under the scheme of Compromise/Arrangement in case the Transferor company is Listed Company and the Transferee-company is an unlisted Company.

• Section 281(1) - Submission of Report by Company Liquidator.

In case of winding up, voluntarily or otherwise, Valuation report is to be attached by the Liquidator of the company.

2. Insolvency & Bankruptcy Code (IBC), 2016 and the regulations made there under:-

• Section 59(3)(b)(ii) of IBC, 2016

A report of the valuation of assets of the company by a Registered Valuer shall be submitted by the company with the application for voluntary liquidation of the company.

• Regulation 3(1)(b)(ii) of Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017

A report of the valuation of the assets of the corporate person prepared by a Registered Valuer is to be accompanied along with the declaration by the Directors of the company at the time of liquidation proceedings of such company.

• Regulation 26 of the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017.

Regulation 26 of the said regulations provides for the appointment of Registered Valuer by the interim resolution professional (IRP) within seven days of his appointment to determine the liquidation value of the corporate debtor.

• Regulation 34 of the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017.

Regulation 34 of the said regulations provides that the following persons shall not be appointed as the   registered valuer:

1. 1. a relative of the interim resolution professional;
   2. a related party of the corporate debtor;
   3. an auditor of the corporate debtor in the five years preceding the fast track commencement date; or
   4. a partner or director of the insolvency professional entity.

3. SEBI Regulations

1. SEBI (Real Estate Investment Trusts) Regulations, 2014

Under these regulations, Valuer has been defined as:

“Valuer” means any person who is a “registered valuer” under section 247 of the Companies Act, 2013 or as specified by the Board from time to time.”

And the valuation reports as required under these regulations for the valuation of the REIT assets is to be done by the Registered Valuer(s)

2. SEBI (Infrastructure Investment Trusts) Regulations, 2014

Under the said regulations Valuer has been defined as:

“Valuer” means any person who is a “Registered Valuer” under section 247 of the Companies Act, 2013 or as specified by the Board from time to time.”

And the valuation of the InvIT assets is to be done by the Registered Valuer(s).

4. Valuation Standards

Since the Central Government is in the process of finalizing the Valuation Standards and they have formed a committee for this purpose, until such Valuation Standards are notified, the rules state that the Valuers shall adopt the Valuation standards:

1. as per the internationally accepted valuation standards
2. valuation standards adopted by the RVO.

5. Indian Accounting Standards – IND AS

Fair Value under IND AS 113 -Since IND AS is applicable to the Companies and where the Companies have adopted IND AS, valuations required under IND AS shall be carried out by the Registered Valuers only.

There is immense opportunity for growth in this industry. Professionals are being exposed to a wider variety of opportunities now by enhancing their professional and career growth chances. The Indian business valuation industry is bound to grow significantly, especially domestically.