With the deadline until which valuation services are permitted to be rendered without registration under Insolvency and Bankruptcy Board of India ('IBBI') i.e. 31st January 2019, it is most important now than ever to know the provisions of the Companies Act, 2013 ('the Act') which either recommend or mandate a valuation report by a registered valuer. Although the last date for rendering valuation services without a certificate is 31st January,2019, if a valuation assignment has been accepted before 31st January 2019, it can be completed up to 30th April 2019.
This article summarises the provisions of the Act and the extended rules that discuss valuation, touching upon only the relevant parts in the context of the entire section.
To begin with, registered valuers are empowered under Section 247 of the Act that specifies that any valuation requirements under the Act shall be fulfilled by a person having the prescribed qualifications and experience and is registered as a valuer.
Rule (2)(1)(f) of the Companies Registered Valuers and Valuation Rules 2017 define registered valuer as a valuer registered with the Registration authority for carrying out valuation of assets belonging to a class or classes of assets. Rule (2)(1)(g) defines the registration authority as the Insolvency and Bankruptcy Board of India.
The registered valuer shall be appointed by the audit committee or in its absence, by the Board of directors of the Company.
1. Provisions related to issue of shares/debentures
Section 62: Further issue of capital
When a company having share capital proposes to increase its subscribed share capital by a fresh issue of shares, such shares shall be offered to:
- Existing shareholders i.e. rights issue
- Employees under a scheme of employees' stock option
- Any other persons except those mentioned above, if authorised by a special resolution: Issue of shares on a preferential basis
In all of the above cases, the price of the shares issued must be determined by the valuation report of a registered valuer subject to prescribed conditions.
Rule 12 of Companies (Prospectus and allotment of securities) Rules 2014: Return of allotment
After having made an allotment of securities, a company shall file a return of allotment within thirty days thereafter in the specified form with the Registrar of Companies. A valuation report of the consideration received by a registered valuer shall also be attached along with the return.
Rule 8 of Companies (Share capital and Debentures) Rules, 2014: Issue of sweat equity shares
This rule applies to all companies except listed companies issuing sweat equity shares to its directors or employees. The rule prescribes that the sweat equity shares shall be issued at a price determined by a registered valuer as the fair price giving justification for such valuation. Also, the value of the intellectual property or know-how or any other value additions, for which the sweat equity shares have been issued to its directors or employees shall be determined by a valuation report of a registered valuer.
If the sweat equity shares are issued for a non-cash consideration, the value of such non-cash consideration shall be based on a valuation report by a registered valuer. Additionally, if the sweat equity shares are issued pursuant to acquisition of an asset, the value of such asset shall also be determined based on a valuation report by a registered valuer.
Rule 13 of Companies (Share capital and Debentures) Rules, 2014: Issue of shares on a preferential basis
This rule complements Section 62 as discussed above mandating a valuation report for shares issued on a preferential basis. It also prescribes guidelines w.r.t convertible securities issued on a preferential basis. The price of the shares pursuant to conversion shall be determined:
- Upfront at the time of offer of convertible securities based on a valuation report by a registered valuer
- When the holder of the convertible securities becomes eligible to apply for the shares or at the most thirty days before such eligibility, based on a valuation report by a registered valuer given not earlier than sixty days before the holder becomes eligible.
When the shares or securities are to be allotted for a consideration other than cash, the valuation of such consideration shall be performed by a registered valuer who shall submit a valuation report to the company giving justification for such valuation.
Rule 16 of Companies (Share capital and Debentures) Rules, 2014: Provision of money by company for purchase of its own shares by employees or trustees of employees
An unlisted company shall not make a provision of money for purchase or subscription of its own shares, if such shares are to be held for the benefits of the employees, unless the valuation at which the shares are to be purchased is performed by a registered valuer.
Rule 2 of Companies (Acceptance of deposit) rules 2014: Exclusions from Deposits
Per the rule, deposit includes any receipt by way of deposit or loan or in any other form by a company but does not include, among other things, money raised by issue of debentures secured by a charge on company's assets. The amount of such debentures shall not exceed the market value of the assets as determined by a registered valuer.
Although, Rule 18 of Companies (Share capital and Debentures) Rules, 2014: Debentures does not make reference to the market value of the assets against which issue of debentures is secured, such a requirement is highlighted by the definition discussed above.
2. Provisions related to restructuring of companies
Section 230: Power to compromise or make arrangements
In case of an application of a compromise or arrangement of a company proposed between a company and its members or creditors submitted to the Tribunal, the Tribunal may call for a meeting of the members or creditors. Among the disclosures to be made by the applicant to the Tribunal, a scheme of corporate debt restructuring submitted must include a valuation report by a registered valuer in respect of the shares, and tangible and intangible property of the Company.
Section 232: Merger and amalgamation of companies
When an application for a compromise or arrangement made to the Tribunal involves a merger or amalgamation, the Tribunal may order a meeting of the creditors or members as the case may be. The section enlists documents to be circulated for such a meeting including a report laying out the share exchange ratio, specifying any special valuation difficulties.
Section 236: Purchase of minority shareholding
This section deals with a scenario in which an acquirer becomes a registered holder of 90% or more of the issued equity share capital of the company, by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, the acquirer shall notify the company of its intention to buy the remaining shares of the company. The price offered by the acquirer to the minority shareholders for their shares shall be determined on the basis of a valuation by a registered valuer.
Section 260: Powers and duties of Company administrator
A company administrator appointed by the Tribunal under section 258 of the Act to prepare a scheme of revival and rehabilitation of a sick company, shall perform such functions as may be directed by the Tribunal u/s 260. He/she may also cause to be prepared, inter alia, a valuation report in respect of the shares and assets in order to arrive at the reserve price for the sale of any industrial undertaking of the company or for the fixation of the lease rent or share exchange ratio.
Section 281: Submission of report by Company liquidator
In the event of a winding up order passed for a sick company, a Company liquidator is appointed by the Tribunal. The liquidator shall submit within 60 days of passing the order, a report which, inter alia, provides the value of the assets and securities held if any, of the company. The value shall be determined per a valuation report by a registered valuer.
Section 305: Declaration of insolvency in case of proposal to wind up voluntarily
Where a proposal for voluntary winding up has been made by a company, a declaration must be made by the board of directors that the Company has no debt or whether it will be able to pay its debt in full from the proceeds of assets sold in voluntary winding up. The declaration made must be accompanied by, among other things, a valuation report prepared by registered valuer of the assets of the company.
Section 192: Restriction on non-cash transactions involving directors
When a company enters into an arrangement with a director of the company or its holding, subsidiary or associate company to acquire assets for consideration other than cash or vice versa, such an arrangement shall be accorded by a resolution of the company and if the director is a director in the holding company, then a resolution in a general meeting of the holding company shall also be required. The notice for such resolution shall include a valuation report of a registered valuer for such assets.
The aforementioned provisions highlight the indispensability of registered valuers going forward. Be it arriving at a fair price for the minority shareholders, determining the fate of the shareholders of the transferor companies or meting out a true reward to the employees of the companies, opportunities and challenges await registered valuers in equal proportion.