With the enforcement of Insolvency and Bankruptcy Code (‘IBC’), all the stakeholders, i.e., Lenders, Borrowers, Bidders, Insolvency Professionals and even the government are undergoing ‘teething troubles’ for its effective implementation. These stakeholders seems to be at crossroads on every vital issue.
A pertinent question is arising about the valuation methodology to be adopted for a fair valuation of the stressed company’s assets. The lenders and bidders contradictory opinions about the valuation of the company stressed assets.
According to the IBC regulations, liquidation value of the company is to be specified in the information memorandum shared with the prospective bidders.
On one hand, the bidders for the stressed assets are of the opinion that these assets should be evaluated at the liquidation value. The lenders, however, feel that to accommodate bidding from a higher point, an enterprise value of the company should be taken into consideration for evaluating the stressed assets.
The enterprise value of a company is market value of common stock, market value of preferred equity, minority interest and market value of debt minus cash and investments. Liquidation value, on the other hand, is the estimated realizable value of the assets of the debtor if it were to be liquidated on the date of the commencement of the insolvency process.
From a practical perspective, enterprise valuation involves a lot of subjectivity and such valuation can be done adopting several different methods. The Liquidation valuation, on the other hand, is less complex in nature and less subjectivity is involved in the process.
There is an apprehension among select quarters that the prospective bidders will not be too receptive to bid for the assets of a stressed company at the enterprise value of a company given the current state of the company as well as further deterioration in the financial position of the company. Further, ascertaining the right value of shares of stressed company is not possible due to the everchanging price of such shares in the capital market. This change could even be due to completely unrelated events or circumstances.
While no single valuation can be fool proof, inclusion of enterprise value along with the liquidation value in information memorandum may help insolvency resolution applicants in evaluating what value they will get out of the stressed assets. It may also help lenders in identifying what amount of bid value they can reasonably expect from the bidders.
In view of the above, the Government is likely to introduce new norms for evaluation of the stressed assets of a company. Apparently, such a proposal is under consideration and norms are likely to be in place by this fiscal end.
For effective operationalization of the IBC, which tries to be fair to all the parties concerned, a specific approach as to valuation of stressed assets will go a long way.
The author is a seasoned international corporate lawyer and can be contacted on firstname.lastname@example.org.
Research and inputs by Paruchuri Baswanth Mohan