No sight of rules on business valuation, even after three-year wait

Fair-market value formula for indirect share transfers not fair: Experts

It has been more than three years since the Ministry of Corporate Affairs had issued draft rules on valuation under the Companies Act 2013, but the rules are yet to be finalised and see the light of the day.


However, MCA clarified that Sebi-registered merchant bankers and chartered accountants with 10 years of experience will do the valuation of shares and debentures until the rules are finalised and brought to force.


Draft rules, issued in September 2013, defined who could be registered as an evaluator, the evaluation process and the procedure for de-registration.


An e-mail query to officials in the ministry on when the rules will be finalised elicited no response.


Chander Sawhney, Partner & Head (Valuations & Deals) at Corporate Professionals Capital, said there are no standards for business valuation specifically for unlisted and private companies in India. As such, he said in many cases the valuation lacks the uniformity and generally accepted global valuation practices.


He said there are valuation bodies regulating the discipline of valuation globally including the Valuation Standards of American Institute of CPAs (AICPA), American Society of Appraisers (ASA), Institute of Business Appraisers (IBA), National Association of Certified Valuation Analysts (NACVA) and the Canadian Institute of Chartered Business Valuers.


A substantial part of the litigation in Mergers & Acquisitions (M&A) takes place on the issue of valuation as it involves an element of subjectivity that often gets challenged, he said.


Even judicial guidance on the subject is limited in India, he said.


However, Saket Shukla, partner at Phoenix Legal, said while the intention of the draft rules is to ensure fair valuation to protect the interest of the non-promoters, the draft rules do seem to micro-regulate, which probably is avoidable especially when India continues to rank 130th on ease of doing business rankings of the World Bank.


He said the ministry of corporate affairs should perhaps take a leaf out of RBI’s books which no longer prescribes the methodology to value shares in case of sales between residents and non-residents and leaves it to the experts.


He also said the provision setting out the requirement for evaluators to register needs reconsideration as the evaluators proposed to be covered are already subject to supervision by professional bodies such as the Indian Institute of Chartered Accounts.


The Standing Committee on Finance, in its report on the Companies Bill  2011, had also suggested that only those evaluators who are not already subject to rules of professional conduct should be required to be registered.


Sawhney, however, said that the absence of any stringent course of action and the non-regulation under any statute are leading to loose ends.


Though recently a consensus is getting built amongst professional evaluators with regard to generally accepted approaches, methods, and procedures, nonetheless, numerous conceptual controversies still remain, even among the most prominent practitioners, he added.

He said the concept of a registered valuer is likely to have a huge impact on the industry, professionals, shareholders and government. Depending upon who is held eligible to be registered as a valuer along with an increase in the number of valuation requirements, new professional opportunities shall emerge.

Also, a proposed provision of personal liability on misleading or incorrect information would lead to a true, fair and complete view, he added.


Stakeholder’s confidence would largely get boosted with the transparency and fairness which the system of valuation indicates, Sawhney said.