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Valuation Conundrum: Changing Face of Regulatory Matrix

MARCH 17, 2023

By J B Mohapatra

BUSINESS or asset valuation owing to dearth of standard codified processes, availability of manifold choices among methodologies for valuation, exertion of institutional pressures or personal bias, macroeconomic uncertainties and contrasting intent of the users of valuation services has struggled to be counted as an exact science, though sporadic attempts through legislative and administrative routes have been made for developing, promoting and regulating the profession of valuers, the universe of valuation service providers and recipients, and institutionalize a governance architecture befitting the significance of valuation services sector.

Section 247 of the Companies Act 2013, for the purposes of valuation of any property, stocks, shares, debentures, securities, goodwill or any other asset or for determining net worth of a company or its liabilities provides for their valuation through a registered valuer, who 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 function 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." Registering authority for valuers under the Companies Act 2013 is the Insolvency and Banking Board of India (IBBI) established under the Insolvency and Bankruptcy Code, 2016 (IBC Code, 2016).

Under section 2(r) read with section 12A of Wealth Tax Act, 1957 (WT Act, 1957), departmental valuation officers are appointed for valuation of assets hitherto liable to tax under the WT Act namely building and land appurtenant thereto within or at the proximate periphery of a municipality, motor car, jewellery, bullion, utensils or articles made fully or partly of gold, silver, platinum or any precious metal, yachts, boats, aircrafts and urban land. Departmental valuers also answer to references under section 50C, 55A, 142A under the Income tax Act seeking valuation of capital assets. A further class of valuers registered by the Income Tax Department under section 34AB of the WT Act, 1957 caters to the requirements of valuation as and when solicited by the taxpayers. Section 77 of Black Money (Undisclosed Foreign Income and Assets)Imposition of Tax Act, 2015 provides for a valuer in any proceeding before a tax authority or the Tribunal in connection with any matter relating to valuation of any asset. Valuation services required under the existing legislations include those under the Banking Regulation Act, 1949, Limited Liability Partnership Act, 2008, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Foreign Exchange Management Act, 1999, SEBI Act 1992, and many others.

Matching the varied nature of assets liable for valuation ranging from assets that are tangible (land, building, plant and machinery, agricultural land, orchards, plantations, livestock, forest, mines and quarries, gems and jewellery) or are intangible (intellectual property, know-how, goodwill, trade secrets, brand, patent and copyrights) or are financial assets (securities, stocks, shares, debentures, receivables, derivatives, businesses, companies and enterprises) and embedded rights in those assets, the intent of the user of the valuation services ( valuation could be for portfolio management, or for merger and acquisition, or restructuring of a business or in terms of an order of an appropriate legal authority or in terms of a family arrangement) and intent of the legislation, if valuation is purported to be carried out as a requirement under the law, are material as much as the choice of the specialist valuers, rules and standards set out for valuation and the choice among the methodologies provided under the rules for valuation. Sometimes as in the case of Rule 11UA of the Income Tax Rules, fair market value of unquoted equity shares for the purposes of section 56 barring under Explanation (a)(i) of section 56(2)(viib) is mandated under a formulaic method , whereas for the latter a choice between a formulaic method and discounted free cash flow method is afforded to the taxpayer. This is but one example of multiplicity of methods of valuation even under one provision of a law, and multiple standards and formulations for determining an appropriate valuation across the existing legislations which have requirement of an appropriate valuation.

In the above context, the effort to bring an institutionalized governance architecture to the valuation profession and for protecting the users of valuation services through the draft Valuers Bill, 2020 would have repercussion across enactments, since the bill is purported to expand beyond the boundaries of the existing Companies (Registered Valuers and Valuation)Rules, 2017, the IBC Code, 2016 and the Companies Act, 2013 and lay down a framework for a slew of enactments which necessitate professional valuation services, Apart from defining assets [section 2(5)], asset classes [section 47] classes of valuers [section 48], registration of valuers [section 50], establishing a national institute of valuers [section 3], valuer institute [section 2(50)], and a valuation professional organisation [section 2(51], 3 seminal points emerge in the proposed interface of this bill with other enactments, which are sought to be brought under a common governance architecture.

First, the bill covers valuation services relating to any asset or liability required under the provisions of Banking Regulation Act, 1949, Securities Contracts Regulation Act, 1956, Wealth Tax Act, 1957, Income Tax Act, 1961, Securities Exchange Board of India Act, 1992, Insurance Regulatory and Development Authority Act 1999, Foreign Exchange Management Act, 1999, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, Prevention of Money Laundering Act, 2002, Limited Liability Partnership Act, 2008, Companies Act, 2013, Pension Funds Regulatory and Development Authority Act, 2013, Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and the Insolvency and Bankruptcy Code, 2016.

Second, a valuation standards committee constituted under section 21 of the bill shall review and recommend valuation standards and valuation guidelines, which the Institute shall lay down after consultation with the central government. In essence, the existing enactment- specific standards and guidelines for valuation agencies would necessarily have to get ratified and then subsumed or get modified and approved under the new dispensation.

Finally, the eligibility conditions for registration under section 50 of the bill would override the qualification requirements laid down in specific enactments. For example Rule 8A of the Wealth Tax Rules laying down the qualification of valuers for the purposes of registration under section 34AB of the WT Act prescribes specific education and professional credentials as also a level of professional experience as essential threshold conditions for registration. IBBI for the purposes of registering a person as a valuer under the Companies (Registered Valuers and Valuation)Rules, 2017 mandates that an individual to be eligible for registration has to be (a) fit and proper person (b) has the necessary qualification and experience (c) be a valuer member of registered valuer organisation (d) completed a recognised educational course as member of a RVO (e) passed the valuation examination conducted by IBBI and (f) recommended by the RVO. Now under section 49 of the new bill, eligibility conditions for registration as a valuer would be (a) completion of national valuation program of the relevant asset class after having a degree or equivalent qualification in any of the specified disciplines or (b) completion of graduate valuation program of relevant asset class after having a degree or equivalent qualification in any of the specified disciplines or (c) successful passing of valuation examination of respective asset class having experience of rendering valuation services for at least 5 years and having completed limited valuation program of relevant asset class or (d) successfully passing valuation examination of respective asset class having completed qualified hours of training from a valuation professional organisation. When the question of synchronizing the valuer's eligibility conditions as per new bill with the existing eligibility conditions under individual enactment arises, as in the case of departmental valuers under section 12A of the WT Act or the other class of registered valuers under section 34AB of the WT Act, questions would of course arise whether one or both the categories of valuers should be submitting to the requirements of the new bill.

The transition provision available in the new bill would, of course, allow the status quo for a length of time, but to a large extent, the two questions, one substantive/technical relating to adoption of new valuation standards across the group of enactments which the bill purports to cover, and two, broadly procedural relating to new registration methodology for registration of valuation professionals would need to be addressed from the perspective of legislative intent behind individual enactments getting covered in the new bill, and the degree of administrative ease or complexity that would ensue while transitioning to the new regime. Establishing an institutionalised structure under the new bill for valuation professionals encompassing number of enactments for the purpose of promoting, developing and regulating the profession of valuers and for protecting the interest of users of valuation services though a timely legislative intervention, interfacing the provisions of the new bill to the existing enactments calls for a fair degree administrative dexterity.