ICMAI RVO

Saturday, April 18, 2020, Delhi

on
C O N T I N U I N G E D U C AT I O N
PROGRAMME
Gagan Ghai
FC A , A C M A , C VA , F I V
9899 522 635
[email protected]
 Key Pointers

Valuati on of companies in Distress

 C o m p a ny i n D i st re s s
 Va l u ati o n u n d e r I B C
 Va l u ati o n C h a l l e n ge s
I V S
 A s s u m p ti o n s & L i m i ti n g C o n d i ti o n s

18-04-2020 CEP CMA RVO on IBC Valuation 2

 Distress Reasons

Operational

Financial

Legal

Regulatory

Other Factors

18-04-2020 CEP CMA RVO on IBC Valuation 3

 Distress Impact
Product Stock Losing
Quality Issues piling up Customers

Over Loss of key Failed

leveraging staff M&A

Macroecono Manageme
mic pressures nt indecisive Litigations

18-04-2020 CEP CMA RVO on IBC Valuation 4

 Distress Valuation
In recent years, the need for business valuations has increased significantly.

Performing a business valuation involves specialized knowledge and skill.

Valuations and valuation analyses may encompass entities that are deemed distressed.

Traditional valuation methods may require significant adjustments to reflect the unique
situation of a firm in distress,

18-04-2020 CEP CMA RVO on IBC Valuation 5

 Valuation under IBC
o Regulation- IBBI –Insolvency Regulation Process for Corporate Person Regulations, 2016

o Resolution Professional (RP) to appoint 2 registered valuers to determine Liquidation

Value(LV) and Fair Value(FV) of assets of Corporate Debtor at Insolvency Commencement
date(ICD)

o Fair value and Liquidation value to be computed in accordance with internationally

accepted valuation standards, after physical verification of the inventory and fixed
assets of the corporate debtor.

o RP to appoint third valuer if the estimates of the two valuers are significantly different,

 The average of the two closest value estimates is considered as final value(FV, LV).

o At the time of Liquidation, Liquidator relies on the CIRP valuations outcome or

Undertakes a fresh valuation.

18-04-2020 CEP CMA RVO on IBC Valuation 6

 Fair Valuation
o Fair value means -
 Estimated realizable value of the assets of the corporate debtor
 If they were to be exchanged on the insolvency commencement date
 Between a willing buyer and a willing seller in an arm’s length transaction
 After proper marketing and where the parties had acted knowledgeably, prudently
 and without compulsion

18-04-2020 CEP CMA RVO on IBC Valuation 7

 Liquidation Valuation
o Liquidation value means
 the estimated realizable value of
 the assets of the corporate debtor,
 if the corporate debtor were to be liquidated on
 the insolvency commencement date.
o Indicative floor value to RP/COC and the likely haircut on the loans in the event of
No feasible resolution plan
Under Liquidation Process Regulations-
o Assumes the sale of a single asset or group of assets on a piecemeal basis
o Assumes orderly sale- reasonable amount of time to sell assets and
o Not forced sale- fire sale
o Relevant for liquidator in liquidation
o However, Realization on liquidation may be different
• cost to sell/liquidate
• time required to sell
• impact of cases / litigation
• change in scenario as on Appointment Date vs Liquidation

18-04-2020 CEP CMA RVO on IBC Valuation 8

 Asset Class
 Land & Building
 Plant & Machinery
 Capital WIP
 Intangibles Across Asset Class
 Non Current Investments
 Inventory
 Receivables
 Loans & Advances
 Other Current Assets

18-04-2020 CEP CMA RVO on IBC Valuation 9

 Asset Class
Book Value VALUE

P&M

Land Discovery

Building

Financial Assets Destruction

Intangibles

18-04-2020 CEP CMA RVO on IBC Valuation 10

 Intl’ Valuation Standards
●
Consist of general principle for valuers

Framework ●
Objectivity, judgement, competence, acceptable
departure from IVS

●
Design for conduct of all valuation
General Standards assignment for all type of asset class

●
Includes requirement for specific type of assets
Asset Standards ●
Special considerations for each asset specific
requirement

18-04-2020 CEP CMA RVO on IBC Valuation 11

 IVS Framework

Compliance with standards

●
Applies to Assets (& Liabilities)

Valuer
●
Objectivity (Impartial, transparent)

Competence (Within firm or outside Experts)

●
Departure

18-04-2020 CEP CMA RVO on IBC Valuation 12

 IVS General Standards
IVS 101 Scope of work

IVS 102 Investigation

IVS 103 Reporting

IVS 104 Bases of Value

IVS 105 Valuation Approaches & Method

18-04-2020 CEP CMA RVO on IBC Valuation 13

 IVS 101 Scope of Work
1. Describes the fundamental term of valuation engagement
2. Applies to:
 Valuers for their own employers
 Valuers for clients
 Valuation Reviewer

3. Valuer must communicate to client:

1. Identity of Valuer
2. Identity of client
3. Identity of any other intended user
4. Assets being valued
5. Valuation currency
6. Purpose of valuation
7. Basis of value
8. Valuation date
9. Sources of information
10. Significant assumptions
11. Any limitation in Valuer work

18-04-2020 CEP CMA RVO on IBC Valuation 14

 IVS 102 Investigation
• Investigation made during the course of the assignment must be appropriate for the
purpose of the valuation assignment and the basis of value.
• Limits may be agreed on the extent of the valuers investigation.
• A record must be kept of the work performed on which the conclusion were reached for
a reasonable period after completion of the assignment, having regard to any statutory
or legal requirement.

18-04-2020 CEP CMA RVO on IBC Valuation 15

 IVS 103 Reporting
• The report must convey the minimum the following:
• Scope of work performed
• Approaches adopted
• Methods applied
• Key inputs used
• Assumptions made
• Conclusions of value
• Date of report

18-04-2020 CEP CMA RVO on IBC Valuation 16

 IVS 104 Bases of value

IVS Bases
of Value

Other Bases of value – Fair value (IFRS), Fair Market value (OECD), (US IRS),
Fair Value (Local Legal Bodies)

18-04-2020 CEP CMA RVO on IBC Valuation 17

 IVS 104 Bases of value
• Compliance with this mandatory standard requires a valuer to select the
appropriate basis (or bases) of value and follow all applicable requirements
associated with that basis of value whether those requirements are included as
part of this standard (for IVS-defined bases of value) or not (for non IVS-defined
bases of value).

• Common elements of basis of value:

1. Assumed transaction

Order Piece
2. Assumed party to the transaction
3. Assumed date of transaction
Syner
ly meal
getic
Trans Liquid
Value
Normal Business
transactions
Distress Business
transactions

18-04-2020
action ation
CEP CMA RVO on IBC Valuation 18
 IVS 104 Bases of value
Premise of value

Highest and best Use

Current Use/ Existing use

Orderly Liquidation

Forced Sale

18-04-2020 CEP CMA RVO on IBC Valuation 19

IVS 105 Valuation Approaches

Asset Valuation
Approaches
IVS 105

Market Cost Income

Approach Approach Approach

Estimates value based on Estimated value based Estimates value based on

instances of sales/quotes of on the replacement cost of expected future cash flows
similar assets in the market an asset of equivalent associated with such cash
utility and depreciation flows.
including obsolescence

18-04-2020 CEP CMA RVO on IBC Valuation 20

IVS 105 Valuation Approaches
Selection Process

Respective
Appropriate Strength &
weakness of
basis of each
value approaches &
method

Appropriate Availability
ness of each of reliable
method information

18-04-2020 CEP CMA RVO on IBC Valuation 21

 Asset Standards

IVS 200 IVS 210

Business Intangible
Interests Assets

IVS 300 IVS 400

Plant & Real Property
Equipment Interests

IVS 410 IVS 500

Development Financial
Property Instruments
18-04-2020 CEP CMA RVO on IBC Valuation 22
 Value Realised

18-04-2020 CEP CMA RVO on IBC Valuation 23

 Value Realised

18-04-2020 CEP CMA RVO on IBC Valuation 24

 Valuation Process

Reports
Valuation method & basis, Modelling, Limiting factors, Iterations &
reviews, Opinion & Reporting
Planning Inspection
Physical
Purpose, Critical Data Site visit,asset
Collection, Market
class,survey, Corroborative Analysis,
Normalisation,
Methods selection Value drivers

18-04-2020 CEP CMA RVO on IBC Valuation 25

 Valuation Challenges
Significant Uncertainty

Absence of Reliable data

No/ Limited Comparables

Strict Timelines

18-04-2020 CEP CMA RVO on IBC Valuation 26

 Challenges
INTANGIBLES ASSETS
 Intangibles such as Brand/ Trade names / Customers Relationships / Distribution
network are valuable especially in B2C
 Bidder / Buyer may look to capitalize on the existing intangibles and possible
synergies which makes them a key factor in their resolution plan
 Difficulties in getting such information for non-operational business or for listed
companies
 Intangibles not included in FS
 Requires detailed info, brand specific CFS etc

UNQUOTED INVESTMENTS / VALUE OF SUBSIDARIES / ASSOCIATES / JVs

 Availability of information i.e, latest financials statements and projections
 Holding Company's interdependencies with the subsidiaries / Associates / JVs may
affect its Fair Value e.g Subsidiary / associte
 Unavailability of PROJECTIONS of subsidiaries / associates / JVs results in reliance on
nrt assest value approach which may be higher or lower .
 Requirements to asses the value of the investments held in the sub companies and
NOT the liquidation value of the asset of such Investee Companies .

18-04-2020 CEP CMA RVO on IBC Valuation 27

 Challenges
PHYSICAL VERTIFICATION
 Inventory movement PV happens at a date much later than the insolvency
commencement date – consider inventory movement sheet
 Limited time – focus on high value items
 Physical verification of Raw Material and WIP considering its nature and stage of
operations .

TRADE RECEIVABLES
 Recoverability assessed based on audited accounts , ageing and discussions
 Balance confirmation

18-04-2020 CEP CMA RVO on IBC Valuation 28

 Challenges
LEASEHOLD LAND :
 Consideration of terms of leases, End Usage, etc
BUILDING
 Building are made for specific requirements
 However , liquidation Value of RESIDENTIAL BUILDINGS may be close to fair value , as
they could sold on as . is basis…..

PLANT & MACHINERY

 Will requirement adjustment / discounts to the fair value based on nature of the
assets , usage , prospective market , possibility of it being sold on a piecemeal basis
and the likely salvage / scrap value
 Soft costs like installation & com missioning and dismantling costs require adjustment
while assessing liquidation value
 FV adjusted for Obsolescence from DRC.

18-04-2020 CEP CMA RVO on IBC Valuation 29

 Valuation Documents
Documents required as on CIRP commencement date-
• Detailed fixed asset register for plant and equipments comprising of
Year of purchase of asset
Cost of asset acquired
Make/model
Recent WDV
• Detailed fixed asset register for land, buildings & structures comprising of
Year of construction of asset
Cost of construction & improvements if any
Measurements
Approved maps & property papers
Recent WDV
• Detailed list of Inventory including both raw material and finished goods (SM, FM)
• List of loans and advances with agreements, purpose and related details
• Acknowledge copy of invoices from the debtors and bank statements for last one
year along with balance confirmations on yearly basis.
• Details of Non current investments stating their purposes, agreements, end use etc
• Any intangibles
• CIRP dated balance sheet

18-04-2020 CEP CMA RVO on IBC Valuation 30

 Takeaways
LIQUIDATION VALUE AND FAIR VALUE IS ‘’CENTRAL’’ TO THE RESOLUTION PROCESS
AND NOT JUST A REQUIREMENT

AT THE COMMENCEMENT OF VALUATION DEATILED SCOPE MUST BE CLEAR :

 Which the intangible asset are not be valued
 Whether value of Business is to be assessed
 The subsidiaries / investments which also needs to be fair valued
 Key information which is required and who would be providing the same
 Valuation scope is different from Inspection Agency

UNDERSTANDING THE BASIS OF FAIR VALUE AND THE REASONS FOR DIVERGENCE
WITH LIQUIDATION VALUE ENABLES BETTER EVALUTION OF THE RESOLUTION PLANS

18-04-2020 CEP CMA RVO on IBC Valuation 31

 Limiting Conditions
Illustrative List of Assumptions and Limiting Conditions for a Distressed Business Valuation
• The conclusion of value arrived at herein is valid only for the stated purpose as of the date of the valuation.
• Financial statements and other related information provided by [ABC Company] or its representatives, in the
course of this engagement, have been accepted without any verification as fully and correctly reflecting the
enterprise’s business conditions and operating results for the respective periods, except as specifically noted
herein. [Valuation Firm] has not audited, reviewed, or compiled the financial information provided to us and,
accordingly, we express no audit opinion or any other form of assurance on this information.
• Public information and industry and statistical information have been obtained from sources we believe to be
reliable, which are disclosed in our report. However, we make no representation as to the accuracy or
completeness of such information and have performed no procedures to corroborate the information.
• We have generally assessed the reasonableness of key information used in arriving at the valuation results,
such as projected financial information; however, we do not provide assurance on the achievability of the
results forecasted by [ABC Company] because events and circumstances frequently do not occur as expected;
differences between actual and expected results may be material; and achievement of the forecasted results is
dependent on actions, plans, and assumptions of management.
• The conclusion of value arrived at herein is based on the assumption that the current level of management
expertise and effectiveness would continue to be maintained, and that the character and integrity of the
enterprise through any sale, reorganization, exchange, or diminution of the owners’ participation would not be
materially or significantly changed.

Source- AIRA

18-04-2020 CEP CMA RVO on IBC Valuation 32

 Limiting Conditions
Illustrative List of Assumptions and Limiting Conditions for a Distressed Business Valuation
• This report and the conclusion of value arrived at herein are for the exclusive use of our client for the sole and
specific purposes as noted herein. They may not be used for any other purpose or by any other party for any
purpose. Furthermore the report and conclusion of value are not intended by the author and should not be
construed by the reader to be investment advice in any manner whatsoever. The conclusion of value represents
the considered opinion of [Valuation Firm], based on information furnished to them by [ABC Company] and
other sources.
• Future services regarding the subject matter of this report, including, but not limited to testimony or
attendance in court, shall not be required of [Valuation Firm] unless previous arrangements have been made in
writing.
• [Valuation Firm] has not determined independently whether [ABC Company] is subject to any present or future
liability relating to environmental matters nor the scope of any such liabilities. [Valuation Firm]’s valuation takes
no such liabilities into account, except as they have been reported to [Valuation Firm] by [ABC Company] or by
an environmental consultant working for [ABC Company], and then only to the extent that the liability was
reported to us in an actual or estimated amount.
• If prospective financial information approved by management has been used in our work, we have not
examined or compiled the prospective financial information and therefore, do not express an audit opinion or
any other form of assurance on the prospective financial information or the related assumptions. Events and
circumstances frequently do not occur as expected and there will usually be differences between prospective
financial information and actual results, and those differences may be material.

18-04-2020 CEP CMA RVO on IBC Valuation 33

 Limiting Conditions
Illustrative List of Assumptions and Limiting Conditions for a Distressed Business Valuation
• We have (not) conducted interviews with the current management of [ABC Company] concerning the past,
present, and prospective operating results of the company.
• Except as noted, we have relied on the representations of the owners, management, and other third parties
concerning the value and useful condition of all equipment, real estate, investments used in the business, and
any other assets or liabilities, except as specifically stated to the contrary in this report. We have not attempted
to confirm whether or not all assets of the business are free and clear of liens and encumbrances or that the
entity has good title to all assets.
• For purposes of this report, I have, of necessity, accepted as accurate the accounting records produced in this
matter, except as stated herein. My findings and conclusions stated herein are subject to revision upon further
investigation and document discovery. Had I or my staff performed additional procedures, other matters might
have come to our attention that would have been reported.
• This report is based on the books and records of [ABC Company] as produced by [ABC Company or Counsel]
including financial records, certain correspondence, interviews with management and testimony as identified in
[Attached Exhibit]. This report and my opinions may be amended based on any additional information that
comes to my attention and additional work that is later requested and performed. I reserve the right to amend
this report upon further investigation.
• My opinions are based on the facts and circumstances in this case and my experience in similar matters. Please
note minor differences in reported amounts as shown in this report and all supporting exhibits are the result of
rounding.

18-04-2020 CEP CMA RVO on IBC Valuation 34

 Limiting Conditions
Illustrative List of Assumptions and Limiting Conditions for a Distressed Business Valuation
• Information furnished by others, upon which all or portions of this report are based, is believed to be reliable,
but has not been verified in all cases. No warranty is given as to the accuracy of such information.
• No responsibility is taken for changes in market conditions and no obligation is assumed to revise this report to
reflect events or conditions, which occur subsequent to the date hereof.
• The contents of this valuation are an opinion of value for the purposes as stated. In no way should this be
construed as a recommendation to buy or sell the underlying asset, business or security or as a
recommendation to accept a plan of reorganization (in the context of a best interest of creditors test).
Furthermore, this valuation is not intended to establish a formula for the value of the security. We support only
the opinion stated in this report and assume no responsibility for the use of formulas or other approaches
based on these conclusions.
• The value conclusion is predicated on the financial structure prevailing as of the date of this report, unless
otherwise noted.

18-04-2020 CEP CMA RVO on IBC Valuation 35

 Questions …

18-04-2020 CEP CMA RVO on IBC Valuation 36

 Thank You

CREST VALUATION is a full service valuation firm for all assets for all purposes since 2004 with its
techno commercial team articulating solutions to complex situations PAN INDIA have executed more
than 300+ IBC Cases.

Gagan Ghai
FC A , A C M A , C VA , F I V
Delhi, Mumbai, Kolkatta 9899 522 635
Patna, Ludhiana, Bangalore
[email protected]

18-04-2020 CEP CMA RVO on IBC Valuation 37