The Ministry of Corporate Affairs (MCA) is mulling on the prospect of drafting valuation standards for listed and unlisted companies. This would be done to establish uniform guidelines for defining the process to be adopted in relation to valuation of the listed and unlisted firms.

The factor that contributed to the prospect of drafting valuation standards is that the diversified practices are being adopted by different companies for valuation of the firms businesses as a consequence of absence of norms in relation to valuation of firm businesses.

A working committee comprises of representatives from financial regulators (e.g. Reserve Bank of India, Securities and Exchange Board of India, Ministry of Corporate Affairs, Insolvency and Bankruptcy Board of India, and the insurance regulator) has been constituted for working on the draft of valuation standards and six months’ time given to the committee to articulate the uniform valuation standards.

The constitution of the committee is the reflection of the government thought process to establish a hierarchy to ensure the functionality of the third-party professionals (chartered accounts, auditors and valuation firms) is closely monitored. It should go a long way to enhance transparency in their working process and make them more accountable and responsible for their acts and omissions.

Most of the valuation reports issued by these third-party professionals come with disclaimers such as ‘Internal use’ – ‘it is only a fair opinion’ making it very difficult to impose accountability and responsibility on such professionals for their acts/omissions. This practice may become extinct upon formulation and implementation of the uniform valuation standards.

As part of the central government efforts to reinforce the functionality of third party fiduciaries – the establishment of the National Financial Reporting Authority (NFRA) is sanctioned by the central government to monitor the functionality of the audit community along with making IBBI as the regulatory authority for valuation firms – any valuation of the company assets or liabilities to be conducted by the valuer registered with the IBBI.

As of now, the registered valuers are mandated to conduct the business valuation in accordance with the international accepted valuation methods owing to the absence of the Indian uniform valuation standards.

The articulation and enforcement of the uniform valuation standards should ensure valuation of business of firms across industries will be conducted in unique process as specified in the valuation standards and curbs diversified practices adopted by the different valuation firms – ultimately enhance the transparency in the valuation reports issued by registered valuers and impose more accountability and responsibility on these valuers for their acts and omissions.

Research and inputs by Paruchuri Baswanth Mohan