Distressed companies undergoing insolvency proceedings could get higher valuations under a new mechanism proposed by the Insolvency and Bankruptcy Board of India (IBBI). According to a circular issued by the regulator, it will be mandatory for valuers to take into account “synergistic value” and intangible assets while estimating an entity’s worth.
The norms also mark a shift in the valuation approach under the Insolvency and Bankruptcy Code (IBC) from a largely asset-based reporting structure to a more holistic assessment of a company’s market value.
Move aims to improve valuation transparency
At the centre of the change is the introduction of a “coordinating valuer,” whose job would be to integrate asset-specific valuations prepared by other valuers to derive a fair value of a corporate debtor. “The coordinating valuer shall capture holistic value, including synergy, tangible and intangible assets, facilitate the committee of creditors (CoC) to make informed decisions based on a comprehensive valuation of the corporate debtor, and enhance transparency and confidence in the valuation process,” the IBBI said in the circular.
The norms prescribe rules for the coordinating valuer on how to treat intangible assets as they could significantly influence a company’s value. In this regard, the coordinating valuer will consider intangible assets such as brand value, trademarks and copyrights, patents and proprietary technology, licences and regulatory approvals, customer relationships and contracts, distribution networks, and goodwill. Additionally, the valuer will take into account additional value arising from integrated operations, market position, operational efficiencies and the distressed company’s future earnings potential.
As part of the guidelines, the board has prescribed detailed and standardised formats for valuation reports across different asset classes such as land and buildings, plant and machinery, and securities or financial assets.
Boost for IBC resolution process
Sourasubha Ghosh, partner at CMS INDUSLAW said this is a long-overdue move because valuations have been pegged down by a stringent asset-centric approach, which has nullified the fundamental objective of IBC – to revive the entity with the best possible resolution. “By allowing the valuers to factor in synergy value and intangibles, the board has filled a major gap. This is a pragmatic step that should reduce some of the unnecessary litigation that delays the resolution at the CIRP (corporate insolvency resolution process) stage,” he said.
Valuation has been one of the most contentious areas under the IBC. Bidders, lenders and promoters frequently challenge valuation assumptions which leads to disputes before tribunals and appellate forums. This has prompted the board to now introduce a standardised valuation format aimed at reducing litigation.
Amit Amlani, executive director at Nexdigm said that even though this is positive step, one can always argue that competitive bidding in the insolvency processes enables price discovery. “The market mechanism itself often captures realistic enterprise value without needing explicit adjustments.”
In April this year, IBBI had adopted the globally-recognised International Valuation Standards (IVS) for all valuations conducted under the IBC which essentially tell valuers how to value. On the other hand, the latest circular tells them how to report and integrate those valuations to arrive at a fair value.