The Disciplinary Committee of the Insolvency and Bankruptcy Board of India (IBBI) has recently reprimanded a Registered Valuer (RV) for the illogical assumptions drawn with regard to discounting factors in valuation report.
The Issues regarding Methodology adopted for Valuation were raised against the Registered Valuer in the Show Cause Notice
It was mentioned in the Show Cause Notice that the RV had stated in point 7 of Appendix- I of his valuation report that,
“while estimating market Value of Plant & Machinery, due considerations have been given to following attributes:
• Age of the machines/Equipment
• Make & Model
• Year of Manufacturing
• Balance economic life
• Working conditions of the machines
• maintenance schedule & records
• availability of spares/accessories
• balancing between machines
• AMC/Insurance (if any)
• benefits under Export/Import including charges over assets if any relating to this present economic status of the industries located in the neighborhood and its sustainability”
The SCN further stated that the valuation report also mentions that No cost indexing has been provided to Equipment’s acquisition cost under the assumptions that the same was set off against technological obsolescence of the plant & equipment. Further as per valuation standards/convention, it is not recommended to apply cost indexing for a period over 10 years.
The SCN also noted that the RV has estimated the fair value of the assets to be 29.88 lakh and liquidation value at 22.30 lakh as on 02nd March 2020. However, the SCN alleged that there appeared to be no convergence between methodology indicated by in the report and the final valuation figures estimated therein.
The report claimed to have taken into account, various factors while estimating the value of machines. However, the summary sheet contained fair value and liquidation value of two sets of machines/equipment without any justification on how he had abruptly reached those figures. There has been hardly any effort by the RV to connect the methodology indicated with the final figures derived by the RV, the Show Cause Notice further observed.
Thus, according to the SCN, the Registered Valuer is allegedly in violation of Rule 8(3) (h) and (j) of the Valuation Rules.
The RV in his response has submitted that he has estimated the fair value and liquidation value of assets by duly following all the procedure under principles of Plant and Machinery valuation as follows. Valuation Standards published by American Society of Appraisers do not recommend application of indexing in respect of older machines with age over 10 years as it only escalates gross value of machine as such can result in wrong conclusion. The RV had to use ASA principles in his exercise in the absence of machinery valuation standards published in India.
The RV has further submitted that though fair value and liquidation value are determined systematically by following principles of valuation and value arrived at are after due calculations, it escaped the attention of RV to attach calculation sheet to his initial report which has now been provided by the RV in his reply to SCN.
The authority found that the calculation sheet provided by the RV contains the details of the assets and the assumptions made by him was calculating the discounting factors for depreciation, refurbishment cost, etc. Although the calculations have been disintegrated into different items showing discounting for each factor, the basis for arriving at such discounting values is not clarified. Further, the calculation sheet does not provide detailed calculation for arriving at liquidation value of the assets.
It was also found that the valuer has the liberty to exercise his professional judgment while estimating the value, however, the assumptions with respect to the discounting factors must rest on some logical basis which should be recorded in the valuation report for consideration of its stakeholders.
The Disciplinary Committee of the Insolvency and Bankruptcy Board of India (IBBI) ruled that, “the reliability of the valuation report increases with enhanced reliance on objective criteria. Therefore, it is necessary that all the relevant information considered by the valuer during the conduct of valuation is disclosed in the valuation report itself. This gives comfort to the stakeholders while taking economic decisions on the basis of valuation reports. The report must clearly lay down the assumptions made in the report as well as the logic and basis of such
assumptions to safeguard the reliability of valuation estimate provided by him.”
“In view of the foregoing, after considering the allegations made in the SCN, the detailed reply provided by the RV and the materials available on record, the Authority therefore disposes of this SCN with the direction to the RV to be cautious, in future, in preparation of the valuation report on the basis of reliable assumptions and documentation there of”, Whole Time Member Sudhaker Shukla further stated.
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