Report Of Expert Group On Guidelines On Valuation Of Corporate Assets And Shares
CHAPTER I
INTRODUCTION AND SCOPE
The Department of Company Affairs constituted our Expert Group for recommending valuation guidelines in the context of corporate assets (such as businesses comprised within a company) and shares. This process concerns the community of shareholders and society at large, and we had to address the issue of valuation in a market with low confidence and poor sentiment, in which our economy is locked into at present.
Several events which transpired before the constitution of this Expert Group gave an indication of the public concern on valuation and the impact on shareholder value. The cases of Sterlite Industries Ltd. and Godrej Ltd. where reductions of shareholding were undertaken threw up concerns on the applicability of Section 77A and Section 100 of the Companies Act,
Investors' Forums have been active in asking for enquiries into share values proposed by companies while restructuring. They speak for the mute and vast numbers, the 'sheep' in the field of companies. The celebrated Larsen & Toubro case for the public offer to shareholders is still an on going dispute.
The scope and canvas of this report is not to propose reconciliation of the provisions of Section 77A or Section 100 of the Companies Act as they operate in two different fields. It is not to suggest solutions in the context of public offers and related pricing matters.
The Expert Group has divided the scope of this exercise into examining the coverage of companies for valuation purposes. The matters that require mandatory valuations and those which are recommendatory in nature were identified.
Valuers need to be licensed and regulated. At the moment there are several streams of professionals who render valuation assessments. Chartered Accountants, Costs Accountants and Merchant Bankers are engaged in this activity. There is no unified or single regulator governing such practitioners. There is no unified code of conduct applicable. The Expert Group therefore examined the need for regulating valuers, with the intention of ultimately providing a better service offering to Corporates and the shareholding community. A Model Code of Conduct and Rules & Regulations for discipline and standards, or etiquette of the profession will enhance the performance levels for the ultimate benefit of shareholders and their companies.
The scope and text of the valuations reports are undetermined and undefined at present. Several practitioners have different ways of presenting valuation assessments. In order to create a uniform standard, the ingredients of a valuation report were discussed by the Expert Group constituted and our guidelines in relation to valuation reports have been set out in this report.
The inherent conflict of interest between valuers appointed for an advisory mandate, with the duty to advocate the appointed's cause and the duty of an independent valuer was also examined. This had a bearing on the manner in which the advisors were to be appointed.
Confidentiality of business information was of prime concern and the Expert Group evolved modalities for confidential filing of some of the information relied upon in the preparation of a report.
The scope of judicial review or departmental review was also an important aspect of our deliberations. Since the complaints on valuation made to the DCA and SEBI were invariably directed at valuation assessments, the judicial principles surrounding adjudication of valuation and fixation of share exchange ratios were re-examined. We also had the benefit of two public hearings and several experts presented themselves before the Expert Group. Experts reiterated to us the need for confidentiality, the imperatives of business expediency in restructuring, the "spoiler" effect where competitors try to scuttle the schemes of arrangement presented to the Courts. There was a dialogue with such experts on encouraging independence of valuers, preparing rules of conduct and determining and punishing misconduct, gross negligence and fraud in valuation assessments. From the discussion our report has emerged and crystallized.
We have in the closing chapter made suggestions for implementing recommendations contained in this Report. These suggestions relate to changes in the law e.g. introducing a chapter under the provisions of the Companies Act for valuations, preparing rules and regulations for licensing of valuers, their code of conduct, adjudicatory rules for fines and penalties (on the lines already in existence and applicable to SEBI intermediaries).
For the present we have recommended that the Department of Company Affairs be the Sole Regulator for valuers and valuation related issues since the scope of valuation concerns both listed and unlisted companies. Multiplicity of Regulators and division of the powers of their functions does not promote a unified body of precedents or policy. With this introduction we commend our report for your consideration.
CHAPTER II
COVERAGE
2.1 Coverage of Companies for Valuation
2.1.1 In light of the need to protect the rights of the stakeholders in a company, in particular the minority shareholders, institutional investors, retail fixed depositors and debenture holders, the Expert Group is of the view that there is a pressing requirement for prescribing guidelines for situations requiring valuations as also for specifying standards for such valuation work. As an extended principle of corporate governance, norms for valuation processes will enhance the credibility of Indian Corporates and Indian capital markets. The benefit to the corporate sector by improved access to capital and reduced costs thereof will also have a social and economic impact in restoring faith of the investors.
2.1.2 The scope of applicability of such guidelines was discussed by the Expert Group. Issues concerning different categories of stakeholders, their ability to look after their own interests (at the time of structural changes and other significant corporate actions), and the time and costs involved in commissioning such valuations were considered. The Expert Group came to the view that listed companies, unlisted companies accepting public deposits or issuing privately placed debentures to investors and companies which have been delisted but still continue to have residual minority public shareholders (from the original listing or subsequent capital issues); are among the class of companies for which it is desirable that valuation principles and norms be prescribed. Some other companies may also warrant coverage due to the nature and extent of public interest. However, the Expert Group is of the opinion that considering the time and cost entailed in compliance in getting such valuations, it will be unreasonable to mandate valuations for all companies and for a wide range of circumstances.
2.1.3 Accordingly, the Expert Group recommends that the scope of the application of the valuation guidelines should extend beyond listed companies subject to the rule of reasonable time and cost for valuations. We do not propose to burden all companies irrespective of size, for the present, with the requirement to observe the valuation principles.
2.1.4 Based on the aforesaid, the Expert Group recommends that the valuation guidelines and requirements should therefore apply to the following types and classes of companies.
(i) All listed companies;
(ii) All unlisted public companies accepting public deposits and having a networth (i.e. paid-up capital and free reserves) in excess of Rs. 25 crores or a turnover in excess of Rs. 150 crores;
(iii) All unlisted public companies not falling in (ii) above and all private companies having a networth in excess of Rs, 100 crores or a turnover in excess of Rs. 500 crores; and
(iv) All companies under the Control of the companies described in (i), (ii) or (iii) above and including but not limited to the Group companies of the same and which have a networth (comprising paid-up capital and free reserves) in excess of Rs. 5 crores or a turnover in excess of Rs. 30 crores;
Explanation. For the purposes of this Report, "Group" shall have the meaning as assigned to it in Section 5 of the Competition Act, 2002 ("Competition Act"); "Control shall have the meaning assigned to it in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997 ("SEBI Takeover Code") and "Turnover" shall include to mean the value of sale of goods or services.
2.2 Circumstances requiring Valuation from Registered Valuer(s)
2.2.1 The Expert Group is of the view that there are two circumstances under which the prescribed valuation guidelines may apply to the companies for which the coverage is set out in para 2.1.4 above.
These are:
(i) Circumstances under which a valuation from the Registered Valuer(s) is mandatory and
(ii) Circumstances under which a valuation from the Registered Valuer(s) is recommended but not mandatory.
2.2.2 The Expert Group has adopted two basic principles for identifying the circumstances under which the mandatory valuation as stated in 2.2.1(i) is required. These circumstances are:
(i) Whenever a shareholder's resolution, ordinary or special, is required to authorize the transaction under the Companies Act, 1956 ("Companies Act") or where the shareholders are required to take a decision on values which may have a bearing on or help in making the decision; and
(ii) All Related Party transactions described herein.
Explanation: For the purposes of this report, "Related Party" and "Relatives" shall have the meaning assigned to it under the Varma Committee Report on Transfer Pricing (August 2002).
2.2.3 Without limiting the generality of the above, some of the specific circumstances under which the Expert Group opines that the company/Board of Directors should seek a mandatory valuation from a Registered Valuer(s) are:
(i) All Schemes of Compromise and Arrangement under Sections 391 to 394 of the Companies...
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