JUN 13, 2017

Impact Analysis of Companies (Registered Valuers and Valuation) Rules, 2017

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Under Section 247 of the Companies Act, 2013, a Registered Valuer would carry out valuation in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities, as per the rules that may be prescribed.

The Ministry of Corporate Affairs (MCA) has issued the draft Companies (Registered Valuers and Valuation) Rules, 2017 on 26th May, 2017 which shall come into force on 15th July, 2017.

These rules contain various aspects pertaining to Registered Valuers and Valuation including:

  • Who can become Valuers and the process involved
  • Mentions about Valuation Professional Organisations (VPO)
  • The Standards required to be adhered to while performing and reporting, and
  • Regulation of the profession etc.

Once the Registered Valuers rules are notified, any person who will possess the prescribed qualifications and pass the valuation examination conducted by the Designated Agency, shall be allowed to act as the Registered Valuers.

Provisions under the Companies Act, 2013 which requires Valuation Report from a Registered Valuer

S. no. Section Particulars
1 62(1)C Valuation report for Further Issue of Shares
2 192(2) Valuation of Assets Involved in Arrangement of Non cash transactions involving Directors
3 230(2)(c)(v) Valuation of shares, property and assets of the Company  under a scheme of Corporate Debt Restructuring
4 230(3) Valuation report along with Notice of creditors/shareholders meeting –Under scheme of compromise/Arrangement.
5 232(2(d) The report of the expert with regard to valuation, if any, would be circulated for meeting of creditors/Members
6 232(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.
7 236(2) Valuation of equity shares held by the Minority Share Holders.
8 260(2) (C) Preparing valuation report in respect of shares and assets to arrive at the reserve price for company Administrator
9 281(1) Valuing assets for submission of report by liquidator

The Registered Valuer under the Companies Act is also recognised under Insolvency and Bankruptcy Code, 2016 and SEBI (REIT and InvIT Regulations), 2016

Major Definitions-

  1. “Registered Valuer” is a ‘Valuer’ registered with the Registration Authority under Rule 7(6) for carrying out valuation of assets belonging to a ‘class of assets’
  2. Certificate of recognition shall be granted to a “Valuation Professional Organisation” (VPO) under Rule 13 or 14
  3. VPO is an Organisation set up under an Act of Parliament or Section 25 company or Society or Trust for conducting valuation exams for its members, granting certificate of practice, conducting training, laying down code of conduct, providing continuing education, monitoring and review of the functioning and addressing grievances including conducting disciplinary proceedings against valuers who are its members.
  4. “Registration Authority” means the Insolvency and Bankruptcy Board of India (IBBI)
  5. “Valuation Standards” means the standards of valuation referred to in Rule 16

Conduct of Valuation Examinations

  • It is clarified in Rule 4 that the Registration Authority shall conduct a Valuation examination of “Individuals” to test their knowledge and practical skills in respect of Valuations.
  • The syllabus for Valuation Examination shall be determined based on recommendation of a committee of experts.


No “Individual” shall be eligible to be a Registered Valuer if

  1. He has not passed the Valuation Examination in the three years preceding the date of making an application under Rule 7:
  2. However, if an individual has completed 50 years of age and has been substantially involved in at least 10 valuation assignments of assets (for which he is seeking registration) amounting to five crore rupees or more, during the five years preceding the commencement of these rules, he shall not be required to pass the valuation examination.

  3. He does not have the qualification and experience specified in Rule 6
  4. He is not a Valuer member (holding certificate of practice) of a Valuation Professional Organisation (VPO)

Qualification and Experience

  1. Post Graduate degree in specified discipline from an Indian University and at least 3 years of experience in discipline;
  2. Graduate degree in specified discipline from an Indian University and at least 5 years of experience in discipline;
  3. Membership of professional institute set up under an Act of Parliament and at least 5 years’ experience after such membership;

Registration conditions

The valuer shall –

  1. Comply with provisions of the Act and these Rules
  2. Comply with the Valuation Standards
  3. Not conduct valuation of assets other than for which he has been registered
  4. Maintain records of all assignments undertaken by him for 3 years
  5. Comply with code of conduct of the VPO
  6. Allow only the partner who is a Registered valuer to sign
  7. Be jointly and severally liable

Transitional Arrangements

It is provided for that for a period not exceeding 6 months from the commencement of these rules, a person who is allowed under any provision of the Act or Rules or under any other law to act as Registered Valuer may continue to act as such, without getting registered.

Valuation Standards

A Registered Valuer shall make valuations as per the Valuation Standards

Until Valuation Standards are notified, a valuer shall make valuations as per-

  1. Internationally accepted valuation methodologies
  2. Valuation standard adopted by and VPO or
  3. Valuation standards specified by Reserve Bank of India, SEBI or any other statutory regulatory body

Advisory Committee

The Central government may constitute an Advisory Committee to advise it and the Registration Authority on issues relevant to formulation and prescription of Valuation Standards

Contents of Valuation Report

  • The valuer shall in his report state the following
  • Background information of the asset being valued
  • Purpose of Valuation and Appointing authority
  • Identity of Valuer and any other experts involved in valuation
  • Disclosure of Valuer interest/conflict, if any
  • Date of appointment, valuation date and date of report
  • Procedures adopted in carrying out the valuation
  • Valuation methodology
  • Major factors that influenced the valuation
  • Conclusion and
  • Caveats, Limitations and Disclaimers

Disciplinary Proceedings

The Registration Authority may initiate disciplinary proceedings of a Valuer or VPO based on material available on record.

Schedule I : Model Code of Conduct for Registered Valuers

Integrity and Fairness

Professional Competence and Due Care

  • It is clarified herein that the Valuer should not disclaim liability for his expertise or deny his duty of care
  • However, he can disclaim that assumptions are statements of fact provided by company and not generated by the Valuer.

Independence and Disclosure of Interest

  • A valuer should not take up assignment if he or any of his relatives or associates is not independent in relation to the company and assets being valued
  • A valuer should wherever necessary disclose to the clients, possible sources of conflicts of duties and interests, while providing unbiased services
  • A valuer should not deal in securities of any subject company after any time when he first becomes aware of the possibility of his association with the valuation
  • The valuer shall not charge success fee
  • The valuer should also declare the past association with the company, if there has been a prior engagement in an unconnected transaction

Information Management

  • A valuer shall appear, co-operate and be available for inspections and investigations carried out by the Registration Authority and the VPO
  • A valuer should maintain proper working papers for a period of three years

Occupation, employability and restrictions

  • A valuer should refrain from accepting too many assignments, if he is unlikely to be able to devote adequate time to each of the assignments
  • A valuer should not engage in any employment
  • A valuer should not conduct any business inconsistent with the reputation of the profession

Schedule II : Application for registration and registration certificates

Form A : Application for registration as a valuer by an Individual

Form B : Application for registration as a valuer by a Partnership entity

Form C : Certificate of Registration

Form D : Application for Certificate of Recognition of VPO

Form E : Certificate of Recognition of VPO

Schedule III : Model Bye Laws and Governance Structure for VPO

Conclusion and Observations

Corporate valuations form the basis of corporate finance activity including M&A, fund raising, sale of businesses and also to meet regulatory and accounting requirements. Credible valuations are critical to the efficient working of the capital markets, businesses, government and all its stakeholders. With growing shareholder activism, importance of independent valuations is arising all over the world including India.

The scope for registered valuers is quite large. Any person who clears the valuation exam and other conditions will have a good scope for practice in valuation. With formal implementation of Registered Valuer, the valuation will become a discipline in niche field of Valuations in India. It is however a very onerous task and comes with lot of responsibilities.

Valuation in itself is an evolving in India and is an inexact science. Professional judgement of valuer is thus critical in any valuation exercise. Though the Valuation Standards would also be framed by the Central Government and come up shortly however it’s high time that Professionals interested in practicing in this field to come forward and gain academic knowledge of valuation principles and concepts, valuation approaches and methodologies in general and also as prescribed under various statutes like Income Tax, RBI and SEBI for different purposes, valuation case laws, ICAI business valuation standard, ICAI Technical guide on Share Valuation, PSU Disinvestment commission recommendations, erstwhile CCI guidelines, guidance from Revenue Ruling 1959-60 and international valuation standards.

Under the proposed regulatory framework, the Registered Valuers can do valuation under the following Acts/Regulations-

  1. Companies Act, 2013
  2. Insolvency Code, 2016 and
  3. SEBI (REIT and InvIT) Regulations, 2016

It is pertinent to note that there are other large significant areas of valuation like Business Valuations, Intangible Valuations, RBI Valuations (FDI and ODI), Income Tax Valuations (ESOP, Gift Tax, Transfer Pricing and Capital Gains), SEBI Valuations (Exit to minority shareholders, Takeover Code, Preferential allotment etc.) and also Valuations for Accounting and Financial reporting (Ind-AS, ESOP, Purchase Price Allocations) which are not governed under the Companies Act, 2013 and thus Registered Valuers provisions would not be applicable on these valuations.

Till now, all the above valuations are done either by SEBI Registered Merchant Bankers or established CA Firms. In fact, in cases where high risk is involved like where swap of shares is involved in FDI or where the ODI remittance is more than 5mn$ or for determination of ESOP Tax liability, valuation of IPR or technical know-how in case of sweat equity of a listed company, determination of exit price in case of Exclusively listed regional stock exchange companies (BSE), only a SEBI Registered Merchant Banker is authorised by the regulators for determination of valuation.

However, quite strangely, it seems that the draft Companies (Registered Valuers and Valuation) Rules, 2017 excludes most of the Merchant Bankers from being empanelled as Registered Valuers under Companies Act. This is because only Individuals and Partnerships firms are now proposed to be registered under these rules.

This is when the initial draft of Registered Valuers rules (issued about 3 years back) permitted Merchant Banker to become both Financial as well as Technical Valuers. Further the recent MCA notifications both in case of fresh issue of Shares and in case of Scheme of Compromise and Arrangement prescribed Registered valuer as a SEBI Registered Merchant Banker or a CA with 10 years of experience.

SEBI Registered Merchant Bankers know best how to value businesses and companies (both listed and closely held) and are involved in Valuation of Equity Shares since long now. They are having stringent Net Worth norms and thus take form of Corporate structure. They are accountable to SEBI and do practice as per its guidelines/notifications.

So, if these rules are passed as such, there will be two breed of valuers for companies act, 2013 and other valuations. It’s also a known fact that not many professionals practice in the field of Valuations in India. At this junction, when the Valuation practice is still evolving in India and to build a credible discipline of valuation, all persons (including companies) having experience and expertise in valuations should be allowed to practice. Instead of bifurcating valuation professionals and prescribing multiple valuation approaches, we should rather have one common valuation standards which all Regulatory authorities should adopt in India.

Hopefully, MCA would address this aspect in the final (Registered Valuers and Valuation) Rules, 2017.