[Amogh Sharma is a B.A L.L.B (Hons.) student at HNLU Raipur]
On 30 August 2019, the Ministry of Corporate Affairs (MCA) had constituted a Committee of Experts to examine the need for an institutional framework to regulate and develop valuation as a profession. On the basis of the Committee’s recommendation, a Draft Valuers Bill, 2020 has been drafted to establish a National Institute of Valuers (NIV). This post seeks to analyse the Bill taking into account the valuation profession.
Tracing the Need for Valuation
Generally, a valuer is someone who values or estimates the worth of an asset. While the market often determines the pricing of an asset, price can be context specific. Logically, it is not always meaningful to wait for an asset to pass through the market to determine its worth. For such reasons, a valuer’s role in estimation helps quantify the value of an asset in a simulated context. Citing an example: the preamble of the Insolvency and Bankruptcy Code, 2016 (IBC) itself mentions the need for maximization of value of assets. Therein arises the requirement of an accurate valuation, which is dependent on the role played by a valuer. A case in point is the 1970s property crash in UK which accrued as a result of inaccurate valuation. This led to the widespread usage and acceptance of valuation standards such as those laid down by the Royal Institution of Chartered Surveyors (RICS), especially with respect to its acclaimed Red Book.
The Expert Committee on Company Law headed by J.J Irani had in its 2005 report recommended the need for the principle of valuation through an independent valuer. Notably, a draft bill for valuation was put forth by the MCA even in 2008, although it was not tabled before the Parliament. Currently, the Companies (Registered Valuers and Valuation) Rules, 2017 provide a structure for regulation of valuation as a profession. However, they encompass only the Companies Act, 2013 and the IBC. The recent Bill is in contra aimed at covering all valuation related services in the country. Therefore, for the purposes of such unification, section 247 of the Companies Act, which provides for valuation by registered users, will have to be modified and the pre-existing valuation rules will have to be rescinded.
Make-up of the Bill
The Bill envisages the appointment of the NIV to serve the purpose of developing the profession of valuers and regulating the market of valuation services. The general ambit of the NIV will be related to promoting practices and standards of professional conduct, including implementing education based standards for valuers. An individual will have to complete either a national or graduate valuation programme to be registered as a valuer, and such programmes will range from two to four years, depending on the educational qualifications of the applicant.
These programmes will comprise a specified number of subject credits common to every asset class, subject credits specific to an asset class, and practice credits specific to an asset class. Asset class will imply a distinct group of assets as determined by the Governing Council of the NIV. Take for example ‘W’. If ‘W’ has to complete her valuation programme in asset class ‘plant and machinery’, she will first have to acquire ‘X’ subject credits common to every asset class, then ‘Y’ subject credits specific to plant and machinery, and ‘Z’ practice credits specific to plant and machinery.
The Bill in its intent to elevate valuation to a distinct profession in itself also provides for separate designations to be given to different classes of valuers. On registration, as a valuer, an individual will be classified as an associate valuer. After gaining experience of minimum five years and demonstrating professional excellence, such valuer will be registered as a fellow valuer, and be entitled to prefix the letters ‘FV’ to her name. Any valuer recognised for extraordinary contribution to the valuation profession will be registered as an honorary valuer, and be entitled to prefix the letters ‘HV’ to her name, but will not be permitted to render valuation services. Interestingly, such demarcation in designation is not prevalent in other jurisdictions with well settled valuation legislation. New Zealand, Malaysia, United States, and Singapore, to enlist a few, do not provide for such distinction. The Bill’s drafting committee is attempting to reciprocate the distinction granted to senior counsel in the Advocates Act, 1961, in its bid to carve out a wider niche for valuation.
Similarly, akin to other professions like advocacy, a fee charged by a valuer will not be linked to the value of assets under valuation or success of the relevant transaction. Although, the Bill has resorted to leaving the fee subject to market forces, perhaps there is need for a protectionist initiative at the start of valuation as a profession. The risk of fee-undercutting or predatory pricing in the market underscores the need for fixed fee slabs, at least in phased stages at the beginning.
Judicial Take on Valuation
In India, regard has been given to opinions accorded by valuers. In Nelson Fernandes v. Special Land Acquisition Officer, South Goa, the Supreme Court held that reports given by government approved valuers could not be discounted, pertinently because the opinions of experts in their field bears merit (¶ 28). The Court in Chindha Fakira Patil v. The Special Land Acquisition Officer, Jalgaon reiterated such prominence given to reports of experts by specifying that the rejection by the High Court of such valuation in casu was an error (¶ 22).
Further, in G.L. Sultania v. The Securities and Exchange Board of India, the Supreme Court while taking into account valuation of shares, held that it was not only a question of fact but also raised complex and technical issues which may be appropriately left to the wisdom of the experts, having regard to the many imponderables which enter the process of valuation of shares. The Court also emphasised that it will not normally interfere unless it is shown that some well-accepted principle of valuation has been departed from without any reason or that the approach adopted is patently erroneous (¶ 32).
Likewise, in other jurisdictions, although there is no straightjacket formula of accepting valuation estimates, precedence is given to them. The Supreme Court of Singapore in Abhilash v. Yeo Hock Huat, while considering the principle of valuation, reasoned that it is well established that while the court is not obliged to unquestioningly accept expert evidence, even if it is unchallenged, the court would be slow to substitute its views for those of the expert’s in the absence of good grounds (¶ 88).
In New Zealand, though the courts take into heed estimations given by valuers, with respect to a mortgaged property, valuation evidence might carry significantly less weight than evidence regarding the price that purchasers in a properly tested market are actually prepared to pay for a property sold by a mortgagee. This was affirmed by the Court of Appeal of New Zealand in Gardiner v Westpac New Zealand Limited (¶ 86).
The South African Supreme Court in Minister of Rural Development and Land Reform and Another v. Phillips noted grounds of rejection for valuation by a valuer to include investigative laxity. It confirmed that it is trite when transactions are not properly investigated as they afford little assistance and courts can reject valuations on the grounds that valuers have not investigated sufficiently the transactions on which they have relied (¶ 21).
The development of valuation as a profession would put the country on par with systems in other jurisdictions, but hindrances are nevertheless widely existent. The valuation profession is in itself experiencing swift changes in its structure globally. The RICS has specified that computer generated automated valuation models have been developed to allow for rapid, cost-effective valuation outputs. Such technological driven valuations pose a significant challenge to the objective inputs of valuers. Critical perceptions of the profession also highlight that the valuation industry has not proved its mettle to the market; some investors look at the entire valuation process as nothing more than an investor requirement rather than a risk-mitigation tool that is valuable to all parties involved in the transaction. The unwillingness of clients in giving appropriate remuneration also burdens the profession.
As mentioned above, the Bill should ideally promote standardization of professional fees for certain phases in the beginning. Non-standardization would promote market driven competition in the long run, but fixed fee scales can help prevent any slide in valuation standards. The risk of low fees entails the possibility of limited interest in the profession. Moreover, when such constraints are coupled with the threat from automation, it brings about the possibility of disincentivizing the expansion of the profession. However, admittedly, technological transition will not be restricted to only valuation, and it will be the responsibility of the profession to holistically adapt. The drafting committee’s intention to develop valuation on par with other professions like medicine and advocacy will inevitably take time, but the overall uniform structure serves an advantageous end.
– Amogh Sharma