So far government has not prescribed any definite standard under IBC to conduct the valuations
A standardised valuation framework is the need of the hour as it can help achieve successful insolvency resolutions under the IBC, IBBI Chairman Ravi Mital has said.
For this, there is a need to enhance the effectiveness, reliability, and usefulness of the existing valuation procedure under the Insolvency and Bankruptcy Code (IBC), Mital wrote in the IBBI’s latest quarterly newsletter.
This can be accomplished by implementing a well-structured and comprehensive standards framework for valuations, according to Mital.
“Standardised valuations would enable stakeholders to make well-informed decisions, instill confidence in the resolution process, and maximise value for all parties concerned in the resolution of distressed enterprises”, Mital said.
Mital’s views on standardising Valuations are significant, as so far no definite standard has been prescribed under the IBC to conduct the valuations. The Centre’s valuation Rules prescribe that Valuation Standards are to be notified by the Government.
However, pending such notification, a Registered Valuer is required to undertake valuation as per internationally accepted valuation standards or valuation standards adopted by any Registered Valuers Organisation (RVO).
The two worldwide standards followed are issued by the International Valuation Standards Council and the Royal Institution of Chartered Surveyors Red Book.
Mital said that uniform valuation standards with international acceptance are necessary in order to establish consistent, uniform, and transparent valuation and ensure the compatibility and credibility of valuation assessments under the IBC.
Standardised methodologies and defined techniques, along with clear guidelines on selecting appropriate valuation approaches, such as asset-based, market-based, and income-based, depending on the nature of the assets and the businesses, are required, he added.
Currently, Registered Valuers (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 corporate debtor (CD), two Registered Valuers 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.
Mital observed that valuations typically rely on various assumptions such as growth rates, discount rates, terminal values, etc.
These subjective hypotheses can vary from one value to another, leading to inconsistencies in the valuation of outcomes. Moreover, different valuation techniques, like discounted cash flow, comparable company analysis, replacement cost, residual income, etc., can produce different conclusions. Mittal highlighted that the selection of the valuation methodology can be subjective and varies between Valuers, leading to different valuation results due to varying approaches in assumptions.
WHY VALUATION MATTERS
The IBC seeks to resolve a distressed CD in a time-bound manner to ensure the maximisation of value of assets.
In a significant shift from earlier regimes, the decision about what to do with the distressed firm has been entrusted to the creditors. For the body of creditors, i.e., the committee of creditors (CoC), to arrive at an optimal decision, an accurate valuation of the CD is essentially required.
The valuation also determines the entitlement of various stakeholders (like dissenting creditors and operational creditors) in a resolution plan.
Recognising this, IBBI had in its regulations provided for valuation by the Registered Valuer (RV).
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