Understanding ESOP Valuation: Essential Factors and Methods
August 31, 2024
A registered valuer is one of the crucial roles one plays in deciding an organization’s worth. However, there is confusion about what the registered valuer is. Why is an experienced registered valuer needed to value the business? Or even how to become a registered valuer?
To answer all these, we are here with a complete guide on registered valuer including valuer meaning, registered valuer importance, etc.
Before going through the valuation, let’s first understand the meaning of valuation and what the valuation report includes.
What is Valuation?
The valuation of an asset is based on the money you can get back from it. For example, a house's worth means the amount you can sell it for later. The true value of an asset is the profit you can make from it.
You should consider the asset's value and its use and remember to factor in any debts or liabilities when assessing it.
There are many types of valuation such as business valuation, ESOP valuation, IBBI registered valuer, startup valuation, valuation under the Companies Act, etc.
What is Included in The Valuation Report?
The valuation report includes the purpose of the valuation, the sources of information, and the steps followed to complete the valuation. It also covers all factors that affect the valuation.
Here, registered valuers must include 11 essential points in their report as per the Companies (Registered Valuers and Valuation) Rules, 2017. Registered valuers are recommended to include any potential conflicts of interest related to the valuation.
Now, you can assess the crucial role of a registered valuer in various types of valuation. Let’s know more.
What is the Meaning of a Valuer?
A valuer is a professional individual or entity who evaluates the value of stocks, bonds, intangible assets, and tangible assets. The valuers can be chartered accountants, surveyors, or experts in specific valuation fields.
What is a Registered Valuer?
A person or organization that is registered as a valuer with Insolvency and Bankruptcy Board of India (IBBI) and has an agreement with businesses is known as a registered valuer.
The idea of a registered valuer was first adopted for active companies in 2017 to oversee and balance the valuation of a company's assets and liabilities.
Section 247 of Chapter VXII of the Indian Companies Act was the first to introduce the idea of a registered valuer in Indian law for valuing a company's assets. The Ministry of Corporate Affairs released the Companies (Registered Valuers and Valuation) Rules, in 2017.
Why is a Registered Valuer needed?
A Registered Valuer is needed in financial, business, and legal deals because they offer key services that help with different decisions and processes. Their work ensures that asset valuations are accurate, fair and follow the rules.
Registered Valuers offer precise and professional assessments of the value of real estate, machinery, and financial assets. Their expertise ensures that these valuations truly represent the current market value, which is essential for making smart financial decisions.
Thus, accurate valuation protects financial interests and keeps transactions fair, avoiding cases where someone might pay too much or sell for too little.
Let's learn some more reasons why a registered valuer is important.
Importance of a Registered Valuer
1. Ensuring Fair Deals
Registered Valuers are important for making sure that buying and selling assets is clear and fair.
Their unbiased appraisals help both buyers and sellers understand the true market value of an asset, reducing disputes and fostering trust. This role is vital for keeping transactions fair and preventing financial conflicts.
2. Helping with Mergers and Acquisitions
Accurate valuations are crucial for fair negotiations in mergers and acquisitions.
Registered Valuers assess the worth of businesses or assets and offer reliable data to assist buyers and sellers in their discussions. Precise valuations are key to preventing financial losses and achieving fair deals.
3. Compliance with Law and Regulation
Registered Valuers help businesses by giving precise valuations needed for financial reports and taxes. This support helps companies follow laws and regulations, preventing legal issues from wrong valuations and promoting transparency with regulators.
4. Liquidation and Insolvency
When a company faces liquidation or insolvency, registered valuers assess the value of its assets. This helps ensure that creditors receive a fair share. Their evaluations are crucial for resolving financial issues fairly and protecting everyone's rights.
5. Boosting Investor Trust
Investors look for trustworthy valuations when considering investments. Registered Valuers help build this trust by ensuring that asset values are correct, which supports informed investment choices.
How to become a registered valuer?
If you want to become a registered valuer, you must complete the required training with three to five years of valuation experience, and a certificate of practice (COP).
To become a registered valuer, you must pass the valuation test provided by IBBI. You need to have a degree and five years of experience after qualifying. If you have a post-graduate degree, you need three years of experience and membership of a professional institute.
To be eligible for registration, you should have at least three years of work experience in asset valuation. You must be an adult Indian citizen and have no criminal sentence longer than six months.
What types of assets can a registered valuer evaluate?
Registered valuers can assess securities, financial assets, buildings, land, and machinery. They can register to value all three types of assets but can only value those for which they are registered.
According to the Companies Act, a Registered Valuer's report is needed for valuing equity shares in certain situations, such as:
- Under Section 62, new shares are issued to owners unless there is a rights issue.
- Sections 230-232 require asset or share valuation for mergers, amalgamations, or restructurings, including calculating swap ratios for share swaps.
- Existing shareholders with over 90% ownership can buy minority interests under Section 236.
- Companies can also distribute shares for non-cash payments and issue sweat equity.
- Additionally, under Section 68, a company can repurchase some or all its shares, and liquidation is governed by the Insolvency and Bankruptcy Code of 2016.
What are the Types of Registered Valuers?
Types of registered valuers include:
1. Valuer of machinery and plant
2. Valuer of financial assets and securities
3. Valuer of building and land
The Companies Act of 2013 brought this concept to India. Although it existed before, there was no proper oversight. A professional named Bill conducted the first valuation, which was delayed for many years. Consequently, on October 23, 2017, there was the Company Second Order.
To work as a valuer, one must register with the appropriate authority. Those registered with the IBBI can perform evaluations according to the Companies Act of 2013, which became effective on February 17, 2019.
What are the Duties of Registered Valuer?
A registered valuer performs appraisals based on the Companies (Registered Valuers and Valuation) Rules, 2017. The main principle is that valuations must follow legal guidelines.
To carry out their work, valuers can refer to the 2016 Bankruptcy Code, the Insolvency and Bankruptcy Act of 2013, and the Companies Act of 2014, as well as SEBI Regulations.
What are the Laws Related to Registered Valuers?
Registered valuers must follow certain rules and regulations, including:
- Stock Exchange Board of India
- Ministry of Business and Industry, and
- Insolvency and Bankruptcy Board of India
These organizations have taken actions based on Section 247 of the Companies Act of 2013, which defines terms like liabilities, total asset value, debentures, shares, and properties.
To qualify, you need to meet specific eligibility and experience requirements set by the relevant authority. An audit committee will appoint the registered valuer, but if there is no audit committee, the company's board of directors can make the appointment.
Final Thought
So, a registered valuer is a person who assesses the market value of your business and provides essential insights that can contribute to its growth.
And it is very important to talk to a registered valuer, i.e. an IBBI valuer, before making any financial choices, as companies often decide to merge or sell shares without thinking about what the business really needs.
If you’re looking for a registered IBBI valuer, then contact us. My Valuation is a certified IBBI valuer in India with years of experience in the business valuation services including startup valuation, ESOP valuation, valuation under companies act, etc.
Get in touch with us now!
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