Need for Institutional Framework for Valuation Profession

The maximisation of the value of assets of corporate debtors has always been the central theme of the Insolvency and Bankruptcy Code, 2016 (“IBC”). To achieve this, under Regulation 27 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) valuation professionals are vested with the predominant duty to provide estimates of fair value and liquidation value of the assets of corporate debtors. Thereby, under Regulation 35 of the CIRP Regulations, it was also made mandatory for the resolution professional to appoint two registered valuers within seven days of his appointment.

At present, an ad-hoc framework under the Companies (Registered Valuers and Valuation) Rules, 2017, regulates valuation procedures for various assets. The Central Government under Section 247 of the Companies Act, 2013 has delegated powers to the Insolvency and Bankruptcy Board of India (“IBBI”) to function as the authority to register and administer the valuers.

In 2018, the IBBI had, vide circular dated 17th October 2018 notified that “every valuation required under the Code or any of the regulations made thereunder is required to be conducted by a ‘registered valuer’, that is, a valuer registered with the IBBI under the Companies (Registered Valuers and Valuation) Rules, 2017.”

THE IMPLICATIONS OF THE VALUATION PROFESSION ON IBC

The current regime lacks uniform standards as well as effective regulatory framework to govern the valuation profession which enhances the predicaments of corporate debtors and of creditors.

Before it was made compulsory to get registered with the IBBI to provide service under the insolvency regime, most of the valuation professionals were registered under the Wealth Tax Act, 1957. The current framework in which valuers had to get themselves re-registered so as to practice under IBC, even after years of experience, seems vexatious. Moreover, the present set of rules which made training programmed for 50 hours with the Registered Valuers Organization (“RVO”) and examination for both groups; inexperienced and experienced valuers, made it cumbersome for the latter group to follow. These entry norms seem to create barriers in that way.

Capability, integrity and objectivity are required to perform the duty of estimation. However, akin to professions like medicine, insolvency, advocacy etc., there is no institutional framework for Valuational Professionals. As was highlighted by Pawan K Kumar, executive director, IBBI that  “It is the time for consolidation of the profession, all of the stakeholders have to join their hands together and work towards of the progression of the profession, that is it has to be recognised by everybody including all classes of users” (here)

Keeping in consideration the importance of the profession and parallel ingrained inconsistency in valuation standards, the Committee of Experts [“CoE”] was commissioned by the Ministry of Corporate Affairs under the chairmanship of M.S. Sahoo (Chairperson, IBBI),  to lay down the institutional and the regulatory framework for valuation professionals. Its objective was to delve into standards of valuation and suggest a framework for developing and regulating the valuation profession. The CoE in its Report recommended the establishment of the National Institute of Valuers [“NIV”]. Recommendations also took into consideration aspects like education programs, training, licensing of valuers and setting up disciplinarian mechanisms for them.

KEY RECOMMENDATIONS OF THE COMMITTEE

A. Development of the Profession

For the development of the valuation profession, a competent set of valuers is necessary who provide high-quality services to the stakeholders and be made accountable in case of unethical practices.  To ensure competency, the CoE recommended three specialised courses: (a) national valuation programme; (b) graduate valuation programme; (c) limited valuation programme, all having different timelines along with mandatory internships. It was further suggested that universities/institutes/Valuation Professional Organisations [“VPOs”] recognised by NIV would deliver these courses and a student would be required to pass an examination for admission in these courses.

An individual pursuing either of the first two courses has to earn three types of credit (i) generic subject credits which are common to every asset class, (ii) specific subject credits for a particular asset class, and (iii) practice credits for a particular asset class. Moreover, a practicing professional is asked to take up continuing professional education to build upon his knowledge and make himself aware of the current market situations.

B. Regulation of the Valuation Profession

Regulation of a valuation profession is required so as to strike a balance between the needs of the valuers and the interests of the consumers of such services. The CoE suggested strict entry norms to ensure that potentially sound professionals practice in the market. The CoE recommended that registration will only be granted if the person (i) is a member of a VPO, (ii) possesses necessary educational qualification and professional experience; and (iii) is a ‘fit and proper person’. A valuer shall not be allowed to provide services unless he has a certificate of practice. Even after registration, valuers will be required to comply with various code of conducts and eligibility criteria to seek renewal of their registration.

The CoE advised making a distinction between different professionals on the basis of passing of examination, working experience, professional achievements, worth of assets being valued, disciplinary actions taken against him etc. On such criteria, it was submitted to divide the valuers into four categories, they being, valuation entities, associate valuers, fellow valuers and honorary valuers. Committee left it upon the discretion of the NIV to develop mechanisms for monitoring and oversight of valuers.

C. Regulation of Market for Valuation Services

Under the proposed framework, it is made mandatory to obtain registration to practise as a valuation professional. The CoE recommended a unified framework across the nation governed by standard rules as and when laid down by the Institute. Such standardisation of valuation practices will help in the long run to develop a market for valuation services.

As per the CoE, a valuer should provide valuation services where there is any conflict of interest and should not outsource his duties unless allowed by the Institute. However, subject to appropriate disclosures a valuer can be allowed to seek opinions from another valuer belonging to an asset class for which he is not registered.

With regard to the issue of fees charged by professionals, the CoE was of the view that like other professions, a fee charged by valuation professionals should not be connected with the value of an asset rather it should be determined by market forces. If an unreasonable amount of fees is charged, depending upon the facts and circumstances, authorities have the power to intervene and take matters into consideration.

D. Regulatory Architecture

The framework proposed by the CoE comprises a unified, statutory and a two-tier regulatory architecture. At the paramount level, there should be the NIV which will act as the principal regulatory body. It will have a governing council consisting of a chairperson, whole-time members, part-time members and ex-officio members having the power to control and direct the Institute. The NIV will be governed by state regulations as well as self-regulation. At the subordinate level, there will be several VPOs as frontline regulators having the duty to develop the profession. VPOs will be self-regulating bodies having their own constitution and bye-laws.

Apart from this, the CoE suggested establishing a committee of valuers which will advise the governing council on various issues relating to the profession and market for valuation services.

As stated earlier, the CoE recommended standardizing the framework for valuation services. In line with that recommendation, the CoE proposed to form a Valuation Standard Committee, comprising relevant stakeholders which will provide guidance to the Institute in the formation of valuation standards. On the basis of such guidance, the Institute will form standard rules for the profession.

E. Transition and Implementation

The CoE is of the view that valuers and valuer organisations already registered with IBBI should automatically transition and be allowed to practise under the new framework. For other valuers providing valuation services; the CoE proposed a timeline of two-three years based on their qualifications to meet the eligibility norms.

To implement all the above-mentioned recommendations, the CoE has put forth the Draft Valuers Bill, 2020 along with the report to bring into action the institutional framework for valuation professionals. At the outset, the bill states establishment of the National Institute of Valuers and provides for its duties, obligations and operations. It also seeks to set up a governing council and valuation standards committee, as stated earlier.

CONCLUSION

A standard set of rules and institutional framework for valuation and valuation professionals will definitely be beneficial for the insolvency regime and for the valuation profession in the long run. Implementation of these recommendations will bring the valuation profession in India at par with many other countries. However, a certain set of valuers claim that the bill breeds many anomalies and is violative of fundamental rights of the valuers.

In India, the practice of valuation is mostly undertaken by Chartered Accountants or Company Secretaries on a part-time basis lacking any standardisation. Therefore, to bring in transparency, accountability, credibility and standardisation for the protection of users of such service and for the growth of the profession, the CoE did a plausible job by providing guidance towards institutionalisation. The proposed framework will help in bringing in quality professionals for the valuation of assets. Implementation of recommendations and the changes in valuation Industry will take some time; however, the committee surely provides favourable solutions for the Indian valuation profession industry.