Until the introduction of the Companies Act, 2013 ("Companies Act"), the valuation of shares, assets, net worth of companies etc. was conducted by chartered accountants or as prescribed by other laws such as the Foreign Exchange Management Act, 1999 and the regulations made thereunder or the Income Tax Act, 1961. There was no provision in the earlier company law that provided for valuation or specified the persons who could conduct valuation of companies, shares etc.
The concept of a "registered valuer" under Indian law was introduced for the first time vide Section 247 of Chapter VXII of the Indian Companies Act for matters requiring valuation under the said act.
Section 247 of the Companies Act provides that "where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other asset or net worth of a company or its liabilities under the provisions of this Act, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner and on such terms and conditions as maybe prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company".
Accordingly, the Ministry of Corporate Affairs introduced the Companies (Registered Valuers and Valuation) Rules, 2017 ("Rules"). The Rules inter alia provided for the eligibility criteria which needs to be fulfilled for obtaining a certification for being a registered valuer and the manner in which the certification maybe obtained.
The Rules also provide that the Insolvency and Bankruptcy Board of India ("IBBI") established under the Insolvency and Bankruptcy Code, 2016 be the "registering authority" which will hold examinations and grant certifications of the designation of a "registered valuer".
It is interesting to note that under Section 247(2) of the Companies Act the registered valuer is required to:
- Make an impartial, true and fair valuation of assets which maybe required to be valued;
- Exercise due diligence while performing the functions of a valuer;
- Make the valuation in accordance with such rules as maybe prescribed; and
- 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.
As far as 247(2)(c) is concerned, the Rule 16 provides that
- A registered valuer shall make valuations as per the Valuation Standards notified from time to time by the Central Government.
- Until such time as the Valuation Standards are notified by the Central Government, a valuer shall make valuations as per- (a) an internationally accepted valuation methodology; (b) valuation standards adopted by any valuation professional organisation; or (c) valuation standards specified by Reserve Bank of India, Securities and Exchange Board of India or any other statutory regulatory body.
Consequently, in accordance with the Rules all valuations that have to be undertaken under the Companies Act must now be undertaken using a method as per-
- an internationally accepted valuation methodology;
- valuation standards adopted by any valuation professional organisation; or
- valuation standards specified by Reserve Bank of India, Securities and Exchange Board of India or any other statutory regulatory body.
The Rule 16(1) also provides for the ability of the Central Government to notify the method by which assets and companies must be valued under the Companies Act.
It is important to note that all valuations under the Companies Act after January 31st 2019 must be conducted by a registered valuer.1
Comments: Section 247 and the Rules particularly Rule 16 have codified into law certain aspects of transaction law. Only the test of time will tell whether such codification is necessary and useful.
1. Companies (Registered Valuers and Valuation) Third Amendment Rules, 2018
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