Profession in India at Cross Roads
Varun Gupta, Managing Director, American Appraisal India
Varun is a member of American Appraisal’s global strategic advisory board and global technical standards committee. An MBA from IIM Calcutta, Varun has been providing valuation and financial advisory services for over 18 years. He has carried out valuations of listed and unlisted companies, intellectual property, brands, stock options and other financial instruments across diverse industry sectors.
Valuation has been a much misunderstood science in India. Policymakers have regarded the valuation profession with some amount of mistrust and have preferred formula based approaches to valuation over internationally accepted judgment based approaches.
However, attitudes are changing fast. Regulators now actively encourage the use of judgment-based approaches to valuation; for example, FEMA guidelines mandate using the DCF method for valuation of companies. Similarly, the Finance Act of 2012 mandates investment transactions to be at fair market value (FMV).
"The key is to ensure that fair value is estimated by reliable and independent parties using
generally accepted valuation methods"
Earlier this year, several companies in India received tax assessment notices for under-pricing of shares. As per the government, in March 2009, a large oil company issued 867 million equity shares to its overseas holding company at INR 10 per share. The issuing company had applied the NAV method to value the shares. Revenue authorities insist on applying the DCF
method, and estimate the fair price at INR 183 per share. The merits of the case not withstanding, the episode highlights the acceptance and use of globally accepted valuation methods by Indian revenue authorities.
In the newly adopted Companies Act 2013, valuation has been recognized as a key requirement for several corporate actions, including further issue of shares, purchase of minority shareholding, non-cash transactions involving directors, liquidation/ solvency opinion, compromises, arrangements and amalgamations.
The reason for these changing attitudes is evident. As India becomes increasingly integrated with the global economy and Indian companies raise capital from international capital markets, they need to adopt internationally accepted financial reporting standards, which mandate fair value reporting. Also, with corporates increasingly using financial instruments to hedge business risks, stricter fair value disclosure requirements are becoming the norm. Finally, the protection of minority shareholders’ rights is high priority for all regulators, and they realize that the best way to protect those rights is to ensure that transactions take place at fair value rather than at a value estimated using a formula.
The key, then, is to ensure that fair value is estimated by reliable and independent parties using generally accepted valuation methods. Perhaps for this reason, the Companies Act has also introduced the concept of “Registered Valuer”. At the moment, the draft rules talk about Chartered Accountants, Company Secretaries, Cost Accountants and Merchant Bankers as being eligible for becoming Registered Valuers. However, it is hoped that other professionals like MBA (Finance) and CFA will also be allowed to become Registered Valuers as they possess very relevant qualifications.
