Insolvency and Bankruptcy
Vamshi KK Nakirekanti – Executive Director and Head, Valuation and Advisory Services, CBRE South Asia stresses on the importance of unbiased valuations and rightly understanding the intent of the Insolvency and Bankruptcy Code, 2016 to provide resolution to stressed companies.
The problem of stressed assets in India is significant with some estimates pegging the total value of stressed asset at approximately INR 10 Lakh Crore. The Insolvency and Bankruptcy Code, 2016 provides a structured and time bound platform for resolution of such cases involving various key stakeholders including creditors, resolution professionals, valuers, Insolvency & Bankruptcy Board, adjudicating authority, etc.
While the roles and responsibilities of each of these stakeholders has been clearly defined, it is the responsibility of all participants to make every endeavor to protect and preserve the value of the companies (and the value of their underlying assets in turn) of respective debtors. Amongst all participants, the valuer assumes a critical role in defining the liquidation value of these companies and underlying assets. As part of the resolution process, the resolution professional is required to appoint two Registered Valuers (person registered as such in accordance with the Companies Act, 2013 (18 of 2013) and rules made there under) within 7 days of being appointed as the resolution professional for any case.
The valuers are required to provide ‘Liquidation Value’ defined as the estimated realizable value of the assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date. Key consideration that valuers need to deliberate on while assessing the Liquidation Value would be the adjustment of market value for constrained / restricted marketing timeframe thereby hampering the effective marketing of the property and hence the value of the companies and underlying assets. Among other considerations, the valuers should refer to the internationally accepted valuation standards with special emphasis on Forced Sale valuation principles and guidelines.
Some challenges that valuers could face while ascertaining the liquidation value of assets such as plant & machinery, real estate (including buildings) and balance sheet items could be assessing the realizable value considering the limited marketing timeframe consideration, availability of liquidity in the system, identifying the set of buyers and their willingness to expand / acquire more assets. It becomes imperative for valuers undertaking such assignments to rely heavily on primary research to understand the pulse of the local market while relying on global benchmarks, international standards and globally accepted best practices for such valuations.
The valuer should adopt appropriate techniques depending on the company, the industry sector, the prevailing market conditions as well as the potential buyer segments. Various extrinsic and intrinsic valuation methods such as relative comparison approach, forecasting cash flows etc. can be employed by the valuer keeping the above factors in consideration. Also, the value opinion provided should be free from any pre-determined biases – for e.g. the fact that the company’s stressed position might drive the valuer to adopt a conservative position even when the associated sector is performing well. Such biases and pre-formed opinions might provide depressed liquidation values and hinder the resolution possibilities that could be evaluated.
To address the above challenges, it becomes pertinent that the valuers appointed should have relevant expertise on applicable rules & regulations, as well as expertise on the subject matter under the purview of respective cases they are handling. Considering that the cases referred under IBC would be spread across different regions within India, it becomes important for valuers to have relevant exposure through presence of localized teams across regions in order to determine the optimal discounts to market value while arriving at the liquidation value.