While there are well-recognised Standards for accounting, audit and related services, the profession of valuation, similar to its regulation and recognition, is waking up to Standard-setting process. ICAI has been in the forefront of providing guidance to the accounting profession and true to its colour, is the first and the only Indian organization to have issued Standards on valuation as early as in 2018. Apart from the Valuation Standards issued by ICAI, there are other international bodies which have also issued standards on Valuation, the notable ones being International Valuation Standards published by International Valuation Standards Committee. This article discusses the confusions surrounding applicability of Standards related to valuations.
Introduction
Standards are an important repertoire in the quiver of a professional. Standards provide guidance and clarity to users. For instance, for accounting, there are Accounting Standards 1 to 5, 7, and 9 to 29, and Indian Accounting Standards. Similarly in the field of auditing, there are Engagement Standards, Standards on Quality Control, and Statements on Auditing.
Though, the profession of Valuation is an age-old profession, compared to the other professions, its regulation is relatively in the development stage. Currently, in India, the profession of Valuation is regulated by Insolvency and Bankruptcy Board of India which gives credence to a new breed of valuation professionals known as Registered Valuers (“RV”). A qualified professional can become an RV by enrolling under one of the 15 Registered Valuer Organisations (“RVO”) currently available in India as on 30 June 2023.
In parallel to development of regulating the profession of valuation in India, various statutes are being amended to recognise valuations performed by RVs. Companies Act, 2013 and Insolvency and Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 are two such statutes which have made valuation, wherever required under the respective statutes to be performed by RVs and none other.
Like any profession which has the flair of art and the approach of science, the practices followed for performing valuation is quite diverse. A layman user might not be conversant with the nuances of Valuations. Consequently, a user of Valuation service who is not an expert, might end up drawing conclusion which might not be what the Valuation service intended to convey. The erudite lawmakers of India having understood this reality to protect the interests of such users have ensured to see to it that statutes, wherever require valuation, also prescribe the method/methodology to be used while performing the valuation. Examples of such prescriptions are:
- Rule 21 of Foreign Exchange Management (Non-debt Instruments) Rules, 2019 stipulates valuations to be performed as per internationally accepted pricing methodology for valuation.
- Rule 11UA(2)(b) of Income Tax Act, 1962 prescribes the Discounted Free Cash Flow (DCF) method.
- Rule 35(1) of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 requires valuations to be done in accordance with internationally accepted valuation standards.
- Indian Accounting Standards require, with certain exceptions, adherence to Indian Accounting Standard 113, “Fair Value Measurement” wherever another Indian Accounting Standard requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements).
Similarly, for valuations under the Companies Act, 2013, Rule 8(1) of The Companies (Registered Valuers and Valuation) Rules, 2017 (“Rules”), RVs have to comply with the Valuation Standards as notified by the Central Government. The said Rule further permits adherence to other Valuation Standards until the Standards are notified by the Central Government. Since, no Valuation Standards have yet been notified by the Central Government, today, valuations under the Companies Act, 2013 must comply with the other mandated valuation Standards.
The Missing Conjunction
The said Rule 8(1) of the Rules used to read as follows:
“The registered valuer shall, while conducting a valuation, comply with the valuation standards as notified or modified under rule 18:
Provided that until the valuation standards are notified or modified by the Central Government, a valuer shall make valuations as per-
(a) internationally accepted valuation standards.
(b) valuation standards adopted by any registered valuers’ organization.”
The two sets of Standards provided in (a) and (b) above are neither connected, nor separated by any conjunction. This has led to some confusion as to whether RVs are required to comply with both the sets of Standards or any one of the Standard sets.
The Amendment
Taking note of the confusion, Ministry of Corporate Affairs vide notification dated 21st November 2022 has amended the aforementioned Rule by inserting, “or” in Proviso to Rule 8(1) of the Rules.
With the aforementioned amendment, it is now clear that valuations under the Companies Act, 2013 can follow either internationally accepted valuation standards, or valuation standards adopted by any RVO.
Has the Amendment Cleared the Confusion?
Before answering this question, let us try to understand the requirement to comply with Valuation Standards for conducting valuations under the Companies Act, 2013 at various points in time:
Evolution Timeline of Valuation Standards under Companies Act, 2013
| Time Period | Applicable Requirement & Governance Context |
|---|---|
| Prior to 15th July, 2017 | Since Companies (Registered Valuers and Valuation) Rules, 2017 became effective on 15th July 2017, prior to 15th July 2017, valuations under Companies Act, 2013 was not regulated. Consequently, there was no necessity to comply with any particular Valuation Standard-set. |
| From 15th July 2017 up to 30th June 2018 | Valuations under Companies Act, 2013 needed to comply with any internationally accepted valuation standards. |
| From 1st July 2018 up to 20th November 2022 | ICAI-RVO adopted India’s first Valuation Standards namely, ICAI Valuation Standards 2018 on 01st July 2018. Hence, from this date onwards, RVs could consider performing valuations required under the Companies Act, 2013 in accordance with ICAI Valuation Standards 2018. However, considering the missing conjunction in the said Rule, RVs were unsure whether RVs are required to comply with both, internationally accepted valuation standards as well as with ICAI Valuation Standards 2018, or any one of the Standard sets. |
| From 21st November 2022 onwards | With the amendment in the said Rule, there is clarity that, RVs could consider performing valuations required under the Companies Act, 2013 in accordance with either ICAI Valuation Standards 2018, or with internationally accepted valuation standards. |
Comprehensive Matrix: Types of Valuers, Engagements & Standards
| Type of Valuer | Type of Engagement | Prescribed Valuation Standards | Unanswered Doubts |
|---|---|---|---|
| RV registered with an RVO other than ICAI-RVO | Valuation engagements under Companies Act, 2013 | Either internationally accepted valuation standards, or ICAI Valuation Standard, 2018 | None |
| Valuation engagements under IBBI | Internationally accepted Valuation Standards | Whether choice of ICAI Valuation Standard, 2018 is also available? | |
| Valuation engagement under FEMA | Any internationally accepted pricing methodology for valuation | Whether choice of ICAI Valuation Standard, 2018 is available? | |
| Valuations for the purpose of Indian Accounting Standards | Indian Accounting Standard (Ind AS) 113, except for: • Share-based payment transactions within scope of Ind AS 102 • Leasing transactions within scope of Ind AS 17 • Measurements having similarities to fair value but not fair value, such as net realisable value in Ind AS 2 (Inventories) or value in use in Ind AS 36 (Impairment of Assets) | There is disagreement as to whether valuations required for Ind AS are considered “valuations required to be made under the Companies Act, 2013”. If so considered, would RV have the option to choose between internationally accepted valuation standards or ICAI Valuation Standard, 2018, or should RV strictly limit to requirements of Ind AS? | |
| Other Valuation Engagements | As per the terms of engagement | None | |
| RV registered with ICAI-RVO, whether Chartered Accountant or not | Any Valuation Engagement | ICAI Valuation Standard, 2018 | Can Internationally accepted Valuation Standards be used? How to handle IBBI and FEMA valuation engagements? |
| Chartered Accountants not being RVs | Valuation engagements under Companies Act, 2013 | Not permitted | None |
| Valuation engagements other than under Companies Act, 2013 | Recommendatory to use ICAI Valuation Standard, 2018 | Would non-usage of ICAI Valuation Standard, 2018 be deemed to be guilty of professional misconduct as per Clause 1 of Part II of Second Schedule to Chartered Accountants Act, 1949? |
Legal Nuances & Unresolved Professional Dilemmas
1. Can RVs Registered with Other RVOs Use ICAI Valuation Standards 2018?
The question which continues to bug RVs is: “Whether RVs registered under other RVOs are required to comply with ICAI Valuation Standards 2018?”
In the author’s humble opinion, ICAI Valuation Standards 2018 is available for usage to all RVs irrespective of the RVO under which he/she is enrolled, since sub-clause (b) contains the words, “…any RVO.” Hence, not just an RV registered under ICAI-RVO, but also an RV enrolled under an RVO other than ICAI-RVO has the option to choose ICAI Valuation Standards, 2018. Once a particular Standard-set is chosen, it becomes mandatory to follow all the Standards prescribed under such chosen Standard-set. This particular mandate is limited to such particular engagement alone and not a blanket requirement. For other engagements, such RV may choose to use ICAI Valuation Standards 2018, or internationally accepted Valuation Standards.
2. What is the Status of RVs Enrolled with ICAI-RVO?
Attention is drawn to the Code of Conduct of ICAI-RVO, which inter alia prescribes that, “A valuer shall carry out professional services in accordance with the relevant technical and professional standards that may be specified from time to time.” Since members of ICAI-RVO are bound by the Code of Ethics of ICAI-RVO, and since ICAI Valuation Standards 2018 have been specified by ICAI-RVO, notwithstanding the choice provided by Rule 8, do members of ICAI-RVO have the choice to use any set of Valuation Standards other than ICAI Valuation Standard, 2018?
The clarity would be rendered when the Central Government notifies the Valuation Standards on the recommendations of the Valuation Standards Committee as per Rule 18 of the Rules.
3. Position for Non-RV Chartered Accountants Conducting Non-Companies Act Valuations
Chartered Accountants’ attention is drawn to Clause 1 of Part II of Second Schedule to Chartered Accountants Act, 1949 which provides that:
“A member of the institute, whether in practice or not, shall be deemed to be guilty of professional misconduct, if he contravenes any of the provisions of this Act or the regulations made thereunder, or any guidelines issued by the council.”
The said ICAI Valuation Standards, 2018 have been issued under the aegis of the Council of the Institute of Chartered Accountants of India vide its 375th meeting. Hence, if ICAI Valuation Standards, 2018 are not followed, then a Chartered Accountant might be held guilty of professional misconduct under the aforementioned clause. However, such a strict interpretation might not be suitable, since the Institute of Chartered Accountants of India itself has clarified that:
“These ICAI Valuation Standards will be applicable for all valuation engagements on mandatory basis under the Companies Act 2013. In respect of Valuation engagements under other Statutes like Income Tax, SEBI, FEMA etc, it will be on recommendatory basis for the members of the Institute.”
Is the Confusion a Matter of Concern?
Any authority prescribing Standards undertakes research, involves wide range of stakeholders, issues drafts seeking public opinion and then issues Standards. It is these standard Standard-setting procedures which render credibility and acceptability to Standards framed by famed organisations. This being the case, most of the Valuations Standards should be uniform. Hence, one might feel that adherence to any relevant Standard-set issued by reputed valuation-regulating organisation would automatically ensure credibility and acceptability to the valuation engagements. While such an approach is mostly right, the concern would be on areas where difference exist amongst different Standard-sets owing to the purpose which each Standard-set sets to achieve.
Suggested Approach Until the Dawn of Clarity
Attention is drawn to para 60 of International Valuation Standards Framework published by The International Valuation Standards Council which recognises the possibilities of valuations being performed not in adherence to the valuation Standards.
The said Framework permits valuations not in compliance with the Standards, provided, the non-compliance to Standard is on account of legislative, regulatory or other authoritative requirements and the nature and reason of such non-compliance is disclosed. The said Framework further provides that non-compliance with Standards for reasons other than legislative, regulatory or other authoritative requirements is not permitted.
Conclusion
Standards provide valuable guidance to valuers, and having clarity on which guidance to use greatly enhances the professional lives of valuers.
Author may be reached at: uttampadival@gmail.com and eboard@icai.in