With a view to prescribe a standardised format to prepare a valuation report for an insolvent company, the Insolvency and Bankruptcy Board of India (IBBI) has proposed fresh guidelines for conducting valuation under the Insolvency and Bankruptcy Code (IBC), 2016. In a discussion paper, the board said that these guidelines are intended to promote consistency, transparency, and standardisation in valuations carried out under the IBC. “The objective is to ensure that valuation reports are comprehensive, supported by adequate documentation, and prepared through a structured and well-reasoned assessment of the assets of the corporate debtor,” the paper said.
At present, registered valuers (RVs) do not follow a standardised format while preparing a valuation reports. These reports often lack details on methodologies, assumptions and data sources employed by the valuers which results in inconsistencies, and lack of comparability.
What do experts say?
Experts said the absence of a set format has led to disputes and litigation, causing delays in the resolution process and undermined the confidence in the whole valuation exercise.
Broadly, the new guidelines cover four aspects, including the documentation to be maintained by the registered valuer, the minimum content of the valuation report, key parameters to be considered while valuing receivables, and the asset-specific formats for the valuation report.
“The objective of these guidelines is to prescribe the minimum contents of the valuation report for conducting valuation under the IBC, and specify the responsibility of a valuer in preparing the relevant documentation for arriving at a value,” the paper said.
What does the documentation exercise entail?
As part of the documentation exercise, the valuer will have to keep a comprehensive written record of the valuation such as relevant communications with the client, working papers, and supporting materials that substantiate the conclusions reached. Moreover, documentation will include alternative methodologies considered by the valuer, additional data and inputs evaluated, risks and potential biases identified and addressed, the exercise of professional judgement, and the valuation quality control procedures applied.
Devendra Mehta, partner at PwC, said even though the intent to standardise the valuation process is well-meaning, apart from certain mandatory information, the remainder should be left to the judgement of the valuer. “An overly prescriptive and compulsory approach may not fully capture value in some cases,” he said.
The valuation report is one of the key documents for the committee of creditors (CoC) to evaluate the bids for a distressed company. The value provided by the valuer is a major factor that facilitate the CoC in taking decisions on the future course of an entity. In cases where the valuation report doesn’t reflect the fair worth of a company, it’s likely that CoC might order its liquidation or try to revive it even when there’s no scope to resuscitate.
