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On 21st November 2022, the Ministry of Corporate affairs issued a notification amending the Registered Valuers and Valuation Rules. In this background, a look into the niche area of valuation and its (amended) rules.  

Valuation
Simply put, valuation is the process of evaluating or estimating the monetary worth of either an asset or business or company or shares. Valuation is a relatively new concept in India. Usually, the valuation process is executed by professionals such as Chartered accountants, Cost accountants, Company Secretaries. 

Valuation is done with respect to land & building, plant & machinery and financials assets – share, debentures, goodwill etc.

Hitherto, section 34AB of the Wealth Tax Act under the Income Tax law was the only governing statutory provision with respect to valuation and valuers in India. Valuation / valuers were largely ungoverned.   

Further, lack of structured, standardized method of computation resulted in subjective evaluation of assets / entities. It was necessary to obtain correct value of assets which was always not the same as market value of assets.    

 All that changed with the introduction of section 247 of the Companies Act 2013 and the Rules which became effective from 18th October 2017. The section and the rules laid down the eligibility, qualifications and the manner, terms and conditions subject to which valuation shall be carried out. 

Section 247 of the Companies Act 2013 made it mandatory for persons with requisite qualification, experience and registered as a valuer to undertake valuation where it is required under the Act.   

Valuation from a registered valuer was made mandatory for a host of requirements under various Acts. To name a few –

• Issuing / Allotment of shares either through private placement, sweat equity under the Companies Act 2013
• Buyback of shares under the Companies Act 2013
• Mergers, amalgamations, reverse merger, restructuring under the Companies Act 2013
• Liquidation under the Companies Act 2013
• Valuation for transactions like estimating assets of corporate debtor under Insolvency and Bankruptcy Code 2016 (IBC)
• Transactions that attract foreign direct investment (FDI) or overseas direct investments (ODI) under the FEMA Act 1999
• Requirement under Income Tax Act 1961
• Valuation of Listed securities on recognized stock exchanges under SEBI (LODR)     

Methodology used in valuation

1. Net Asset Value method: (NAV method): the value of shares is ascertained based on the net value of assets of the company.
2. Discounted Cash Flow method: (DCF method): the value is determined on projected cash flows that a company can generate in future and is discounted to the present value.

Valuers / Registered Valuers – Then and now   

Often, valuers and surveyors are mistaken to be the same. Their functions are different. Valuation involves evaluating and estimating the economic value of any property – movable or immovable, while surveying involves estimating the physical condition or state in which a property is in. While valuers can be surveyors, the reverse is not always true.

The Companies Act 2013 introduced the concept of “registered valuer” vide section 247 of the Act. Simultaneously, the Companies (Registered Valuers and Valuation) Rules 2017 was introduced. The Section and the Rules lay down the framework governing the valuers including but not limited to their eligibility, qualifications, code of conduct etc.    

These Rules got amended in November 2022. A look at the Companies (Registered Valuers and Valuation) Amendment Rules 2022.

Companies (Registered Valuers and Valuation) Amendment Rules 2022

Highlights of amendments:

1. Eligibility of partnership firm or company to be registered as a registered valuer: Rule 3(2)(c) & 3(2)(f)
   For a partnership firm or company to be registered as a registered valuer, it is mandatory for each partner or director to be registered as registered valuers under the Rules. Such partners or directors must be registered with a registered valuer organisation.  Provided that such partner / director shall not be member of more than one registered valuer organization. Existing partnership firms or companies which do not satisfy this amended rule have been given a period of 6 months from commencement of the 2022 rules to comply with the same.
2. Intimation of change(s) in personal details of registered valuer: Rule 7A
   Any change(s) in personal details of the registered valuer including change in constitution or composition of partners in a firm or directors in a company which may affect the registration of registered valuer shall be intimated to the authority (Insolvency & Bankruptcy Board of India “IBBI”) by making the requisite fee payment as per schedule contained in the amended Rules.
3. Intimation of change in governing body of the registered valuer organisation(s): Rule 14A
   Any change in the composition of the governing board, appellate panel or committee of the registered valuer organisation shall be intimated to the authority making the requisite fee payment as per schedule contained in the amended Rules.
4. Temporary surrender of membership: Explanation to Clause 26(1)(b) of Annexure III
   An explanation has been inserted to clause 26(1)(b) of Annexure III which deals with temporary suspension of membership. As per the explanation, a member functioning as whole-time director of a company that is registered as a valuer shall not be considered as being in employment of the company and hence will not be a ground for temporary suspension of membership.
   

Amendment to the 2017 Rules were brought about in 2022 to provide express clarity on functioning of registered valuers especially on partnership firms and companies. 

Valuation is a multi-disciplinary function requiring registered valuers to have knowledge all areas impacting business – legal, financial, accounting, market etc. The role of valuation in estimating value of a business is felt most now than ever before with Indian business being on par with global businesses, stressed assets on the rise back home and international methodology of valuation being adopted. Only an effective regulatory framework for valuation and registered valuers will ensure valuation is an important exercise in due diligence and not mere certificate issued to complete compliance. The amended rules 2022 is a step-in furtherance of that objective.

For text of Companies (Registered Valuers & Valuation) Amendment Rules 2022:

https://www.mca.gov.in/bin/dms/getdocument?mds=jf9MSWpybbeJiak1ynOMQQ%253D%253D&type