New Delhi: The Insolvency and Bankruptcy Board of India (IBBI) has proposed a new format for distressed asset valuation professionals to make reports consistent, credible and reduce debt resolution litigation.
The new format prescribed on Wednesday increases the need to disclose information about valuation risks, potential conflicts of interest and how professional judgment is used in determining the value of assets. The aim is to increase stakeholder confidence in the due diligence process and make negotiations more realistic for better outcomes.
The move to standardize the valuation report comes as the reports are becoming the subject of litigation in some bankruptcy cases. The standardized format is expected to make evaluation easier for both lenders and potential investors. This is crucial because based on an assessment of the distressed business’s value, creditors will decide whether to rescue or liquidate the business.
The format mandates necessary information and documentation, requires disclosure of conflicts of interest, and covers return-related factors such as costs and economic trends.
IBBI will accept public suggestions for the format until December 10.
‘Guidelines for Achieving Consistency’
Yogendra Aldak, managing partner of Lakshmikumaran and Sridharan Law Firms, said the new The Insolvency and Bankruptcy Code (IBC) Valuation Guidelines will bring consistency, transparency and standardization leading to reports that are well reasoned and supported by sufficient evidence.
These guidelines, which seek to standardize valuation reports, are likely to promote more informed and effective decision-making by resolution professionals, Aldak said.
Experts also highlighted the problems in valuation that experts encounter in practice.
“IBBI’s proposal to standardize valuation reports under the IBC is a very welcome step that should improve transparency, credibility and consistency and help reduce the kinds of disputes that occur in cases like Ramkrishna Forgings Ltd. However, real-world issues remain,” said Krunal Sheth, Partner, NPV Valuation Services LLP.
“In insolvency situations, data is often incomplete or unreliable and many required qualitative assessments, such as ESG factors, management strength, promoter integrity and risks to customers or suppliers are difficult to assess objectively. Thus, while the framework brings much-needed discipline, valuation results will still depend heavily on available information and the valuer’s professional judgment. The proposal is currently a discussion paper and its actual impact will depend on how it is ultimately implemented,” said Sheth.
Aldak of Lakshmikumaran and Sridharan Lawyers said that well-informed and efficient decision-making by problem-solving professionals will lead to a reduction in litigation, as consistent valuation reports will be less contentious than inconsistent ones. “Less litigation ultimately maximizes the value of the corporate debtor’s assets,” he said.
A more accurate and complete view of a corporate borrower’s financial health, facilitated by these guidelines, will help creditors achieve better recovery, Aldak added.
