New norms by FY18 end may allow for better assessment of worth : Stressed assets valuation

Amid differences between lenders and bidders on the proper valuation of a stressed company, the government is considering a proposal to ask insolvency resolution professionals to get the enterprise valuation of the firm done, along with the current practice of assessing only the liquidation value, a senior official told FE. While the liquidation value will likely to be the base for bidding, the enterprise value is meant to indicate the ideal worth of the company as a “going concern”, he added. The idea is to enable both the parties to make a better assessment of the worth of the company and submit or accept bids accordingly, said the official. The government will come up with a new framework for valuation professionals by the end of the current fiscal, he said.Lenders and bidders have had stark differences on the valuation of stressed assets to be auctioned or transferred. Bidders feel such companies should be sold at the liquidation value, as indicated in the corporate insolvency resolution process (CIRP) regulations under the Insolvency and Bankruptcy Code (IBC). However, lenders believe enterprise valuation must also be taken into account so that bidding begins from a higher point.Analysts say while the proposal is well-intentioned, in the absence of a standardised formula, enterprise valuations may vary widely from one valuer to another. By contrast, the liquidation valuation exercise is less complicated and there is less subjectivity involved. However, once the Insolvency and Bankruptcy Board of India comes up with standardised valuation methods for stressed firms, the new proposal will be productive, analysts said.According to the CIRP regulations, liquidation value is the estimated realisable value of the assets of the corporate debtor if it were to be liquidated on the date of the commencement of the insolvency process.Manoj Kumar, partner and head (M&A and insolvency resolution services) at consultancy firm Corporate Professionals Capital, said additional information of the enterprise value of the stressed firm, besides its liquidation value, would be beneficial to the insolvency resolution applicants as they would be in a better position to gauge what value they would probably get from the business. Similarly, it would help lenders know what they should reasonably expect from bidders who want to run the business, he said.“However, as there is no fixed method of determining the enterprise valuation currently, there will be subjectivity involved in any such exercise, and sometimes it can create abnormal expectations among lenders, leading to rejection of bids. While considering the resolution plans, lenders have to understand that no one will give fair value to a distressed business,” Kumar said.As per rules, an interim insolvency professional has to rope in a registered valuation professional to assess the liquidation value of the company within a week of the commencement of the insolvency process. This value has to be mentioned as part of the information memorandum that will have to be made available to the committee of creditors and potential bidders before any resolution plan is taken up and approved.Theoretically, the enterprise value of a company is the sum total of its market capitalisation, debt, minority interest and preferred shares, minus total cash and cash equivalents. But practically, there is a lot of subjectivity involved in this exercise and there are various methods of doing such a valuation, said analysts.For instance, the market capitalisation of a company keeps moving and may not always reflect the right value of equity shares, given the fact that their movements can also be influenced by domestic and external factors entirely unrelated to the company or the sector it covers. For unlisted companies, the exercise becomes even more difficult.Noted insolvency lawyer Sumant Batra said ideally liquidation valuation is not meant to provide a floor value for resolution plans. But because the regulations require the liquidation value to be mentioned in the information memorandum to be provided to prospective bidders, it is being used as the base value to make bids.