IBBI is responsible for regulating Insolvency process under the IBC 2016 in India. It continuously comes up with regulatory guidelines to simplify the insolvency process. Recently, IBBI has notified guidelines regarding the utilization of Caveats, Limitations, and Disclaimers in Valuation Reports issued by Registered Valuers (RV). These guidelines shall inherit force on or after October 01 2020, and are added to Rule 8 of the businesses (Registered Valuers and Valuation) Rules, 2017 (Rules). RVs shall be required to organize their reports in accordance with the rules also because of Rule 8.
These guidelines are formulated to ensure credibility in the creation of the valuation reports and to give sufficient guidance to RVs within the use of Caveats, Limitations, and Disclaimers. The rules also come up with an exhaustive list of the Caveats, Limitations, and Disclaimers which shall not be utilized in any valuation report.
The latest guidelines are as follows:
Definition of Limitations, Caveats, and Disclaimers
The guidelines have delineated the terms Caveats, Limitations and Disclaimers within the following manner:
- Warnings or cautions are given in form of Caveats to the client/user of services.
- The limitation may be a restriction on the scope of the RV’s work including inspection or investigation of the info available for analysis. Any such info must be known to the RV while valuation engagement or during the analysis of valuation.
- The disclaimer is defined in the guidelines as a statement intended to specify/ delimit the scope of rights/obligations which will be exercised or enforced by parties during a legally recognized business partnership. These are often the press releases that deny responsibility intended to stop civil liability arising for any particular act or omission. Subsequent points could also be considered while providing disclaimers during a valuation report. Any RV may:
- Identify the rights he/she wants to protect;
- Identify the areas where he/she could be subject to liability;
- Clarify that the information contained in the valuation report pertain to some specific use by the company; and
- Caution the reader of the potential risks.
However, a disclaimer won’t, by itself, be ready to exclude an RV’s liability in respect of negligence in the performance of his duties.
Usage of Limitations, Caveats, and Disclaimers
The guidelines dictate the subsequent principles be followed regarding the usage of Caveats, Limitations and Disclaimers:
- Clarity/specificity related to the use of Limitations, Caveats, and Disclaimers in Reports: Any limitation, caveats, and disclaimers to the report must be absolutely clear.
- Duty of “due care” of the RV: Within the preparation of a valuation report, the RV shall not disclaim liability for his expertise or deny his duty of “due care”.
- Management’s responsibility: It is recognized that an RV, shall prepare the valuation report of the corporate supported information and records concerned as provided by the management. The management remains responsible for the correctness and veracity thereof. However, any significant inputs given to the RV by the owners or management should be considered, investigated and /or corroborated based on the findings of the investigation. In cases where the credibility of data supplied can’t be supported, consideration should tend on whether or how such information is employed.
- RV to assess reliability and credibility of projections: RV factors his response and therefore the valuation assessment on the reliability and credibility of the knowledge. the varied projections of business growth, profitability, and cash flows etc., which are utilized in the valuation report are the company’s estimates. Any RV should consider the reliability of projections after testing the assumptions made by the company’s management/owners as per the given market conditions through sufficient inspection, and analysis. The RV may afflict the projections if they’re conjectural or bordering on the unreal and accordingly make necessary modifications.
- Right to demand relevant information and basis of projections: RV has the proper to demand relevant information and basis of the projections before commenting. It is the duty of the entity being valued to be fair and to supply correct and true information about the topic asset.
- Duty of RV to hold out sufficient inspection, enquiry, computations and analysis: In preparation of the valuation report, the RV can state that the assumptions are statements of fact provided by the corporate and not generated by the RV. This warning statement is important as data provided by the corporate is usually construed be a neighborhood of the valuation report. However, RV remains responsible to hold out sufficient inspection, enquiry, computations and analysis.
- Additional Information within the Valuation report: All valuations are to be administered in sufficient details to suit the want of “due care”. However, it’s often reasonably expected that circumstances may place certain limitations regarding access to information or the time available. The knowledge or the time available to finish the valuation should be stated within the valuation report, alongside appropriate explanation and implications. The trouble, level of experience. and diligence applied by the relevant Registered Valuer (RV), got to be stated within the valuation report.
Since valuation reports provided by an RV form the idea of several transactions as per law, by contorting the language of the valuation report, the rules are likely to make sure that RVs don’t evade their responsibilities and duties. It is expected that these guidelines would effectively bring uniformity and reliability to valuation reports.
Guidelines for Contents of a Valuation Report
The following matters should be covered within the valuation reports through clear, unambiguous and non-misleading statements, according to the necessary measures to maintain confidentiality:
- Background Information on the asset being valued;
- Purpose of valuation and appointing authority;
- Bases of Value;
- The premise of Value;
- Identity of the RV and the other experts involved within the valuation
- Intended Users of the Valuation;
- Disclosure of RV interest or conflict, if any;
- Valuation date, Date of appointment, and date of the report;
- Inspections and /or investigations undertaken;
- Business interest, ownership characteristics;
- Nature and sources of information;
- Significant Assumptions, if any;
- Procedures adopted in completing the valuation and valuation standards followed;
- Restrictions on use of the report, if any;
- Major factors that were taken under consideration during valuation;
- Conclusion; and
- Caveats, limitations and disclaimers.
Procedure Involved in Preparing a Valuation Report
In order to make sure transparency, pertinence and uniformity in valuation reports, guidelines have suggested that the RVs should mention the subsequent key elements:
- The principal procedures adopted by the RV in completing the valuation should begin briefly within the report. Such procedures may typically include:
- Review of past financials;
- Review and analysis of monetary projections;
- Industry analysis;
- SWOT analysis;
- Comparison with similar transactions;
- Comparison with other similar listed companies;
- Discussions with the management;
- Review of principal agreements/documents etc.;
- Site visit (external, internal or both) or a desktop valuation;
- Any assumption made for the internal condition must be stated like just in case of desktop valuation, an RV must state that the idea of the report is photographs and documents provided and secondary research only; and process of site identification, i.e., self-identified or with the assistance of clients representative or client itself.
- The RV should also include in his report: An affirmative statement that information provided and assumptions employed by management/others in developing projections are appropriately reviewed, enquiries made regarding the basis of key assumptions in the context of the business being valued and therefore the industry/economy; and an affirmative statement on the adequacy of data and time for completing the valuations.
- The RV should mention any key factors which have an enclosing impact on the valuation, including inter alia the dimensions or number of the assets or shares of the corporate, its/their materiality or significance, minority or majority holding and changes on account of the transaction, any impacts on interest, diminution or augmentation therein and marketability or lack thereof; prevailing market conditions and government policy within the specified industry as a disclaimer depending upon the factor.
- Just in the case of valuation of tangible assets, there could also be an impact on the worth thanks to faulty structural design or contamination. supported the individual circumstances, the RV may choose the way to use such information within the valuation report.
IBBI regularly comes up with guidelines that consolidate the IBC law which is responsible for consolidating laws related to insolvency procedures. The regulatory oversight of IBBI ensures that the liquidation procedures of any company are done in a seamless manner. It also regulates and promotes the working practices of insolvency professionals in India. therefore, it is advisable for budding insolvency professionals that they keep checking with the IBBI website to keep up with the latest updates by IBBI.
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