Wide range of valuation methodologies causing confusion: IBBI Chairman

There is a need for standardising valuation methodologies adopted to value corporate debtors undergoing corporate insolvency resolution process, says IBBI chairman Ravi Mittal in the Insolvency and Bankruptcy Board’s latest quarterly newsletter.

He says the registered valuers follow a wide range of standards and methodologies while assessing the value of assets of a corporate debtor. This, he says, may lead to different valuation and interpretation causing confusion, undermining the credibility of the valuation process and disrupting the decision-making process.

According to the IBBI chairman, valuation rules prescribe that government notify the standards. However, in absence of such a notification, valuers are required to undertake valuation based on internationally accepted standards or valuation standards adopted by any registered valuers organisation (RVO).

Further, valuations depend on various assumptions such as growth rates, discount rates and terminal values. “These subjective hypotheses can lead to inconsistencies in valuation outcomes. Moreover, different valuation techniques like discounted cash flow, comparable company analysis, replacement cost, residual income, etc can produce different conclusions,” says Mr Mittal.

The chairman highlights that Regulation 27 of CIRP Regulations tries to address this issue by suggesting appointment of a third valuer, but he says that the third valuer might come up with an entirely different valuation only adding to the confusion.

Therefore, he stresses on the need for Uniform Valuation Standards with international acceptance are necessary in order to establish consistence, uniform, and transparent valuation and ensure comparability and credibility of valuation assessment under IBC.

He also calls for the need to quantify permissible assumptions, limiting subjectivity and chartering scope of work with accountability in order to achieve consistent, fair and more transparent valuation outcomes benefiting all stakeholders in the corporate insolvency resolution process.

He says that uniform standards would help in identifying potential biases or errors in the valuation process thus minimising the risk of misrepresentation. Mittal further says that valuers must disclose to committee of creditors the valuation methodologies they are going adopt before finalising the valuation report.

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