NEED FOR UNIFORM VALUATION STANDARDS

STANDARDISING VALUATION & NEED FOR UNIFORM VALUATION STANDARDS FOR IBC ASSETS –IBBI CHIEF

There are two globally followed valuation standards from two independent agencies—International Valuation Standards Council (IVSC), a not-for-profit entity, and the Royal Institution of Chartered Surveyors (RICS), a professional body. Notably, no definite standard has been prescribed under IBC to conduct the valuations.

In a move that will improve evaluation of assets under resolution, the government is working on bringing about a uniform set of valuation standards. The move, which is still at a nascent phase, is being spearheaded by the Insolvency and Bankruptcy Board of India (IBBI).

A number of advanced economies such as the UK, the US, Canada and Singapore already have their own valuation standards.

NEW DELHI (TECHNO REPORTER) 18/08/2023: Uniform standards are needed to value assets of companies facing bankruptcy proceedings to ensure credibility and usefulness of the valuation reports given by professionals for debt resolution under the Insolvency and Bankruptcy Code (IBC), Insolvency and Bankruptcy Board of India (IBBI) chairperson Ravi Mital said in the bankruptcy regulator’s latest quarterly review.

He said “Insolvency and Bankruptcy Board of India (IBBI/Board) in its regulations provided for valuation by the Registered Valuer (RV). The Companies Act, 2013 has introduced the concept of ‘RV’ under section 247 of Chapter XVII to set certain valuation standards and regulate the practice ensuring transparency, accountability and better governance during a valuation exercise. The Central Government, thereafter, designated the IBBI as the Authority under section 458 of the Companies Act, 2013 and notified the Companies (Registered Valuers and Valuation) Rules, 2017 (Valuation Rules) to provide a comprehensive framework for development and regulation of the profession of valuers. The Valuation Rules prescribes that valuation standards are to be notified by the Government. However, pending such notification, an RV is required to undertake valuation as per internationally accepted valuation standards or valuation standards adopted by any Registered Valuers Organization (RVO).”

Currently, RVS follow a wide range of standards, approaches, and methodologies while assessing the value of assets. As a consequence, in the corporate insolvency resolution process (CIRP) of a particular CD, two RVs appointed by the Resolution Professional (RP) might adopt different standards and approaches for valuing the same assets. This inconsistency in valuations, along with multiple interpretations might cause confusion, undermine the credibility of the valuation process, and disrupt the decision-making process, he said.

IBBI has been trying to expedite the outcome of bankruptcy resolution by reducing delays in admitting cases in tribunals and streamlining the procedures so that bidding for fresh investments into distressed assets is done efficiently.

At present, internationally accepted valuation standards adopted by the Registered Valuers Organization (RVOs) are used by the registered valuers for the purpose of arriving at the cost or value of assets such as plant and machinery and land and building.

Valuation reports prepared in adherence to established standards would add an additional layer of validation and provide a reliable basis for negotiation in resolution plans, Mr. Mital explained in the quarterly update.

Insolvency and Bankruptcy Board of India (IBBI) chairman Ravi Mittal has pointed for a “well-structured and comprehensive standards framework” for the valuation of stressed firms under the bankruptcy law, which will have international acceptance.

“Standardized valuations would enable stakeholders to make well- informed decisions, instil confidence in the resolution process, and maximize value for all parties concerned in the resolution of distressed enterprises,” Mr. Mittal said in an IBBI publication.

He highlighted the need for uniform valuation standards with global acceptance to ensure that the valuation process remains transparent and credible, and subjectivity is limited.

“Standardized methodologies and defined techniques, clear guidelines on selecting appropriate valuation approaches, such as asset-based, market-based and income-based, depending on the nature of the assets and businesses are required,” he said.

Mittal also stressed that uniform valuation standards would help in identifying potential biases or errors in the valuation process, thus minimizing the risk of misrepresentation. “Valuation reports prepared in adherence to established standards would add an additional layer of validation and provide a reliable basis for negotiation in resolution plans,” he added.

At present, internationally accepted valuation standards adopted by the Registered Valuers Organization are used by the registered valuers for the purpose of arriving at the cost or value of assets such as plant and machinery and land and building. However, it is felt that there is a need for having valuation guidelines in the Indian context to ensure more objectivity and uniformity.

The IBC currently doesn’t prescribe an uniform valuation standard but valuation can be done only by registered valuers who follow internationally accepted valuation standards after physically verifying the assets. Given that different valuers may chose varied methods and assumptions for valuation, the assets available for restructuring and turning around an insolvent business may be valued differently, causing delays.

Experts point out that valuation is a very important part of the corporate insolvency resolution process and plays a key role in ensuring a fair price for company under resolution. Fair value and liquidation value requirements are prescribed under the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. “The proposal on how to go about the valuation standards is still under discussion and it will require some time before a concrete plan of action is worked out,” said a independent source.

“To achieve successful insolvency resolutions, it is imperative to enhance the effectiveness, reliability and usefulness of the valuation procedure under the IBC. This can be accomplished by implementing a well-structured and comprehensive standards framework for valuations,” Mittal said, highlighting that standardized valuations will enable well informed decisions and install confidence in the debt resolution process while maximizing value for all.

It is expected that the IBBI is likely to work with the Registered Valuers Organizations, who would have more technical knowledge as well as professionally qualified members to chalk out the guidelines. RVOs are self-regulating professional entities that work as front line regulators for valuation professionals.

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