The Insolvency & Bankruptcy Code -2016
For last four years the Reserve Bank of India has been coming down heavily on NPA situation accumulated in the banking system over a long period through quarterly Asset Quality Review (AQR) process, bringing to light the seriousness of the problem. This was supplemented by some very progressive and constructive initiatives such as the Joint Lenders Forum (JLF), Strategic Debt Restructuring (SDR) — with and without change in control — and S4A( Scheme for Sustainable Structuring of Stressed Assets). These frameworks, though unable to address all situations, were only a step forward toward a resolution culture. Default resolution has always been and shall remain unique to each situation. The IBC Code, from that perspective , is ‘just in time” initiative as it focuses on a turnaround plan of sick unit with a deadline, which, if not attained , results in liquidation. IBC puts creditors under pressure to come to a single platform and act in unison to resolve the situation or face the consequences . The multiple regulations in the past have only helped the defaulting borrowers to take shelter under some legal clause or other. IBC avoids such arbitrages available to borrower due to multiple regulations.
The IBC can be termed as one of the most important and suitable legislations for the times and circumstances. Yet the devil lies in the detail as various interpretations of this code are being rolled out by Hon’ble Courts through judgments in case matters. The law is charting a course for IBC as it gains maturity with experience of unique situations which are subsequently being generalized. However, a good beginning with the right intent and a good infrastructure is half the battle won.The results have started to show.
How does IBC alters the Valuation Landscape in India
One of the distinguishing features of the IBC is that it relies heavily on processes and administrative setup to ensure flow of information and resolution of process in time bound manner. The Code has provided for the establishment of a new institutional framework including
(a) Insolvency & Bankruptcy Board of India(IBBI) ,
(b) Information Utilities,
(c ) Insolvency Professional Agency(IPA) and Insolvency Professionals(IP),
(d) Registered Valuer Organisations (RVO).
The IBBI administers the entire institutional framework including registration and regulation of each of these entities.
The Central Government has delegated its powers and functions under Section 247 of the Companies Act, 2013 to the Insolvency and Bankruptcy Board of India (IBBI) and specified the IBBI as the Authority under the Companies (Registered Valuers and Valuation) Rules, 2017 under which the Valuer is required to be registered.
The Ministry of Corporate Affairs (MCA) has notified the provisions governing valuation by Registered Valuers [section 247 of the Companies Act, 2013 (the Act)] and the Companies (Registered Valuers and Valuation) Rules, 2017 (the Rules), both have come into effect from 18 October, 2017.
In addition, to administer and perform functions under the said rules, the MCA by way of notification on 23 October, 2017, has specified the Insolvency and Bankruptcy Board of India (IBBI) as the responsible authority.
Some Acts and Statutes that are of prime relevance to practice as valuation professional
- Registered Valuer under Section 34 AB of Wealth Tax Act-1957
- SARFAESI Act 2002 ‘s definition of Registered Valuer
- Section 247 of Companies Act 2013
- SEBI’s definition of Registered Valuer 2014
- The Companies (Registered Valuers and Valuation) Rules, 2017
The above Acts and statutes have been implemented by Government during different time periods. The definition of Registered Valuer and its role were defined to address the specific needs of respective Acts considering the purpose for which they were formulated. A need for comprehensive policy on valuation profession always existed and is yet to be fully addressed. However the next best thing by way of Companies (Registered Valuers and Valuation) Rules, 2017 has been brought and made applicable.
Accordingly, Section 247 of the Companies Act requires that where a valuation is to be made of any property, machinery & equipment ,stocks, shares, debentures, securities or goodwill or any assets or net worth of a company or its liabilities under the provisions of the Act, the same shall be valued by a person having the requisite qualifications, experience, Member of a Registered Valuers Organisation, and Registered as a Valuer in the manner prescribed in the Rules.
The notified Rules lays down the criteria for (a) individuals, (b) partnership entities and (c) companies to be eligible to be registered as Valuers under the Act.
Apart from this, the Rules contain other aspects pertaining to Registered Valuers and Valuation as follows: –
(1) Process for Registration as Valuers
(2) Recognition of Registered Valuer Organisations
(3) Valuation Standards
(4) Transitional Arrangement
Key provisions from the Rules regarding Eligibility, Qualifications and Registration of Valuers
- Any person, partnership entities (includes limited liability partnerships) are eligible to be registered Valuers, provided they meet the eligibility conditions prescribed in the rules. ( Annexure A)
- In case of partnership entities or companies, in order to be eligible as Registered Valuers (apart from other conditions), it is necessary that the entity is formed for rendering professional or financial services including valuation and at least three or all the partners or directors (whichever is lower), are Registered Valuers.
- Qualifications and experience requirements have been prescribed for individuals, to be eligible for registration as Valuers. Further, an indicative matrix on requisite qualifications/ experience in specified discipline for asset classes has been provided in the rules.
- To test professional knowledge, skills, values and ethics in valuation, IBBI to either on its own, or through a designated agency, conduct examinations for one or more asset classes, for individuals (who possess the qualifications and experience as specified) and have completed their educational courses/ Training Hours as member of a Registered Valuers Organisation.
- Notifications issued in this respect require that with effect from 1st April, 2018, for conducting valuations required under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016, a person is to be registered with the IBBI as a registered Valuer. For registering with IBBI, a person must have necessary qualification and experience, has to be enrolled as a Valuer member with a Registered Valuer Organisation (RVO), has to complete a recognised educational course conducted by the RVO, and pass valuation examination conducted by IBBI. A person, who is rendering valuation services under the Companies Act, 2013, may continue to do so without a certificate of registration up to 31st March, 2018.
- However, if a company has appointed a person for valuation, and the valuation or any part has not been completed before 31 March, 2018, the Valuer shall then be given an additional time period of three months to complete the valuation.
Recognition of Registered Valuers Organisations
- A company registered under Section 8 of the Companies Act, 2013 (or section 25 of the erstwhile Companies Act, 1956), with the sole object of dealing with matters relating to regulation of Valuers of an asset class or classes AND Professional Institutes established by an Act of Parliament enacted for the regulation of a profession are eligible to be registered as Registered Valuers Organisations, provided they meet the following key requirements: –
(a) It conducts educational courses in valuation, in accordance with the syllabus determined by the IBBI. (b) Grants memberships or certificate of practice to individuals who possess qualifications and experience as required under the Rules. – Conducts training for individual members before a certificate of practice is issued.
(c ) Monitors and reviews the functioning, including quality, of services, or Valuers who are its members.
RVO Structure, Governance, Code of Conduct, Monitoring , Recognition etc have been elaborated in the the rules.
The IBC for Valuers, on the Ground Situation
While lenders, borrowers, the legal system are adapting to IBC, the community of currently practicing valuers is trying to fathom the implication of IBC on its profession. While most of the current lot of practicing Valuers are registered under Wealth Tax Act and have been practicing as Registered Valuer for many years, the entire idea of re -registering themselves again as Valuer under provisions of Companies Act has not got down well. Added to this , the Process for Registration with IBBI seems cumbersome to many practicing Valuers who have been doing their work diligently for years together. The training programme for 50 Hours with RVO and conduct of exams is deemed by fraternity as suitable for new aspiring Valuers and it is widely felt that IBBI should do away with this conduct of training and exams for mature and experienced Valuers. However,to this day, the rule remains otherwise.
As a part of clarifications given by IBBI in public domain, the Process of Registration of Valuers, is applicable only for Companies Act purpose and Insolvency proceedings only.Valuers practicing under any other Acts, statutes and for any other purpose may continue to practice. This is also explained more clearly in the Rules.
Oppurtunities and Challenges for Valuers already Registered under W.T.Act.
Like any other disruptive change, the Companies (Registered Valuers and Valuation) Rules, 2017 (the Rules) have its own set of opportunities and challenges for Valuers practicing under W.T.Act.
- The Companies Act identifies the need for a comprehensive policy on Valuation Profession and provides for legislative framework.
- It lays ample emphasis on continuous education and training programs for up gradation of profession.
- It provides for regulation of valuation profession through an institutional mechanism.
- It opens new professional opportunities for individual valuers for valuations under Companies Act like mandatory valuations for various Accounting Standards, Valuations for Insolvency Proceedings etc.
- With high entry barriers to profession of Valuers, the payout as professional fee package is likey to improve.
- Most of practicing valuers under W.T Act have based their income on Valuation practice. The idea of disruption in professional practice due to Companies Act Rules might jeopardize the livelihood of many practicing valuers, specially in small towns.
- A new entry barrier has been created by Companies Act’s process of Registration of Valuer The idea of not being able to undertake computer based test by elder valuers OR faiure to match up to high standards of IBBI exam might lead to loss of work to currently practicing Valuers.
- The concern that Valuation practice of W.T. Act Registered Valuer will shrink down to Taxation matters.
- The possibility of convergence of Process of Registration of Valuer for various Acts in future cannot be ruled out.
- T. Act Registered Valuers are predominantly Engineers and Architects who have very little or no formal education of Finance and Law. The current Company Act provisions for Valuation lay emphasis on substantial understanding of Finance and Legal subjects to pursue the valuation practice, which it deems as critical for Valuation.
Registration Process of Valuers with IBBI
Before registering with the IBBI that the valuer must fulfil four pre-requisite conditions :
- Must have necessary qualification and experience
- Enrolled as a valuer member with a Registered Valuer Organisation (RVO)
- Complete a recognised educational course conducted by the RVO
- Pass valuation examination conducted by IBBI
In pursuance to the Companies (Registered Valuers and Valuation) Rules, 2017, IBBI, being the Authority, recognised on 27th December, 2017 two RVOs, namely:
(a) The IOV Registered Valuers Foundation in the Asset Classes of:
- Land and Building
(ii) Plant and Machinery, and
(iii) Securities or Financial Assets.
(b) The Institution of Estate Managers and Appraisers in the Asset Class of Land and Building, and
Later IBBI also recognized the third RVO
(c ) The ICSI Registered Valuers Organisation in the Asset Classes of:
- Land and Building
(ii) Plant and Machinery, and
(iii) Securities or Financial Assets.
IBBI, has specified the details of educational course on 30th December, 2017. It has published such details for all three Asset Classes
These courses shall be delivered by the RVOs in not less than 50 hours.
IBBI has also being the Authority, published the syllabus, format and frequency of the valuation examination for all the Asset Classs on 30th December, 2017. It has published such details for the Asset Classes of (a) Land and Building, and (b) Plant and Machinery (c ) ‘Securities or Financial Assets’ followed by Model Code of Conduct for Valuers. A person wishing to be a valuer needs to pass this valuation examination.
The sample questionnaire shall be uploaded on the websites of IBBI , IOV- RVF and other RVOs in due course of time.
The Valuation Standards
The notified Rules attempt to bring in standardization in the valuation practices in India and ensure that valuation reports disclose a true and fair view and result in greater objectivity in valuation procedures. The increased transparency and fairness in the valuation system would also boost stakeholder confidence by bringing uniformity.
The emphasis has been laid on adoption of Valuation Standards for practitioners to bring out uniformity in valuation reports and adherence to ethical and professional conduct by Valuers.
- Until the Central Government notifies the Indian Valuation Standards, the Registered Valuer shall make valuation as per – (1) internationally accepted valuation methods; (2) valuation standards adopted by a Registered Valuers Organisation.
- The Central Government may constitute a committee to be known as “Committee to advise on valuation matters” to make recommendations on formulation and laying down of Indian valuation standards and policies for compliance by companies and registered valuers.
- Presently the standards recommended by International Valuation Standards Council for 2017 may be be adopted for valuation practice .
Change comes with bagful of opportunities and challenges. More and more value drivers of companies like fixed assets, human capital, technology, management etc are now getting intricately integrated. It is in best interest of a practicing valuer, who envisages a long term in valuation practice, to expand its knowledge base including subjects of law and finance. The process of Registration of Valuers involving training and examination is merely a test of primary skills. Given the scale of challenges for Valuers in ever evolving economic scenario , the real test lies in the life situations where Valuers shall be exposed.