The Companies Act 2013: A Comprehensive Guide for Valuation Professionals

The Companies Act, 2013 serves as the foundational legal framework for corporate governance and financial regulation in India, bringing the domestic valuation industry in line with international standards. For a Registered Valuer, understanding this Act is critical, as it mandates specific instances where a formal valuation is a statutory requirement, particularly concerning share capital, corporate restructuring, and insolvency.

1. Share Capital and Debentures (Chapter IV)

The structure of a company’s capital is governed by Chapter IV, which defines the rights of shareholders and the procedures for altering capital structures.

Types of Share Capital

Under the Act, share capital is primarily divided into two categories:

• Equity Share Capital: This includes shares with voting rights or differential rights as to dividend, voting, or otherwise.
• Preference Share Capital: This capital is deemed "preference" if it carries a preferential right to receive dividends (fixed amount or rate) and a preferential right to the repayment of capital in the event of winding up.

Basic Provisions and Transferability

• Nature of Shares: Shares and debentures are considered movable property, transferable in the manner provided by the company's Articles of Association.
• Identification: Every share must be distinguished by a unique number, and shareholders must be issued a certificate under the company's common seal.
• Duplicate Certificates: These can only be issued if the original is proved lost, destroyed, or surrendered to the company in a defaced or mutilated state.

Voting Rights (Section 47)

Every member of a company limited by shares holding equity shares has a right to vote on every resolution placed before the company. Their voting right on a poll is in proportion to their share in the paid-up equity capital.

Structural Changes and Valuation Requirements

The Act specifies several scenarios where the capital structure changes, often necessitating professional valuation:

• Further Issue of Share Capital (Section 62): When a company proposes to increase its subscribed capital, shares must first be offered to existing shareholders (rights issue) or employees (ESOPs). If offered to "any other person," the price must be determined by a valuation report of a registered valuer.
• Issue of Bonus Shares: These are fully paid-up shares issued to members out of free reserves, securities premium, or capital redemption reserves. Notably, bonus shares cannot be issued by capitalising reserves created by the revaluation of assets.
• Reduction of Share Capital: A company may reduce its capital by special resolution, subject to confirmation by the National Company Law Tribunal (NCLT). This can involve extinguishing liability on unpaid shares or cancelling paid-up capital in excess of the company's needs.
• Buyback of Shares: A company can purchase its own shares using free reserves, securities premium, or proceeds from a fresh issue. A buyback must be authorised by the Articles, approved by a special resolution, and cannot exceed 25% of the aggregate of paid-up capital and free reserves.

2. Compromises, Arrangements, and Amalgamations (Chapter XV)

Chapter XV outlines the legal procedures for corporate restructuring, where the role of a valuer is paramount to ensure fairness to creditors and members.

Compromise or Arrangement (Section 230)

A company can enter into a compromise or arrangement with its creditors or members.

• Tribunal Oversight: The NCLT may order a meeting of the concerned parties to vote on the proposal.
• Valuation Requirement: Any application for a scheme (such as debt restructuring) must include a valuation report detailing the value of the company’s assets and liabilities, prepared by a registered valuer.
• Approval Threshold: The scheme requires approval from at least 75% in value of the creditors or members.
• Auditor’s Certificate: No scheme is sanctioned unless the company's auditor certifies that the proposed accounting treatment conforms to the prescribed accounting standards.

Mergers and Amalgamations (Section 232)

The requirements for compromises are equally applicable to mergers and amalgamations.

• Documentation: Companies must file details regarding the transfer of assets, the share swap ratio, and the impact on employees.
• Dissenting Shareholders: If shareholders opt out, the company must provide provisions to settle their consideration based on a professional valuation report.
• Foreign Mergers: Mergers involving foreign companies require additional approval from the Reserve Bank of India (RBI) and must comply with foreign exchange regulations.

Purchase of Minority Shareholding (Section 236)

If an acquirer becomes a registered holder of 90% or more of a company’s equity through amalgamation or share exchange, they must notify the company of their intention to buy the remaining shares. The offer to minority shareholders must be at a price determined by a valuation from a registered valuer.

3. Registered Valuers (Chapter XVII)

Section 247 of the Companies Act, 2013, provides the statutory basis for the valuation profession in India, establishing the necessity for "Registered Valuers".

Statutory Mandate (Section 247)

Whenever a valuation is required under the Act—whether for property, stocks, shares, debentures, securities, goodwill, or net worth—it must be conducted by a registered valuer.

Appointment and Conduct

• Appointing Authority: Valuers are appointed by the Audit Committee or, in its absence, the Board of Directors.
• Professional Duties: A valuer must make impartial, true, and fair valuations, exercise due diligence, and strictly adhere to prescribed valuation rules.
• Conflict of Interest: A valuer is prohibited from undertaking a valuation if they have a direct or indirect interest in the assets, or if such interest arises 3 years prior to appointment or 3 years after the valuation.

Penalties for Contravention

• General Fine: Contravening the provisions of this chapter can lead to a fine of INR 25,000.
• Fraudulent Intent: If a valuer acts with the intent to defraud the company or members, they are punishable by up to one year of imprisonment and a fine between INR 1 lakh and INR 5 lakh.
• Civil Liability: The valuer is liable to refund their remuneration and pay damages for any loss arising from incorrect or misleading statements in their report.

4. The Companies (Registered Valuers and Valuation) Rules, 2017

To make Section 247 effective, the Ministry of Corporate Affairs (MCA) notified these rules in October 2017, delegating authority to the Insolvency and Bankruptcy Board of India (IBBI).

Key Definitions

• Registered Valuer: An individual or entity registered with the Registration Authority (IBBI) for a specific class of assets.
• Valuation Professional Organisation (VPO/RVO): An organisation recognised by the IBBI to conduct educational courses, grant practice certificates, and maintain quality control over members.

Eligibility and Qualifications

To register as a valuer for "Securities or Financial Assets," an individual must generally possess:

• A graduate degree in any stream plus membership in a professional institute (CA/CS/CMA) OR an MBA/PGDBM with a finance specialisation.
• At least 3 years of relevant experience after completing the qualification.
• Passing of the Valuation Examination conducted by the IBBI.

Disciplinary Proceedings

If a valuer or VPO fails to comply with the rules, the Registration Authority may issue a show-cause notice. Potential outcomes include warnings, suspension, or cancellation of registration.

5. Winding Up (Chapter XX)

Winding up is the legal process by which a company's existence is terminated, and its assets are liquidated to pay off debts.

Winding Up by the Tribunal (Section 271)

The NCLT may order winding up if:

1. The company is unable to pay its debts.
2. The company has passed a special resolution for winding up.
3. The company has acted against national interest or sovereignty.
4. The company was formed for fraudulent purposes.
5. There has been a default in filing annual accounts or returns for five consecutive years.
6. The Tribunal finds it "just and equitable" to wind up the company.

Role of the Company Liquidator

Once a winding-up order is passed, a Company Liquidator is appointed from a panel maintained by the Central Government.

• Custody of Assets: The liquidator takes control of all property, effects, and actionable claims.
• Reporting: The liquidator must submit a report to the Tribunal detailing the value of assets (requiring valuation), details of trademarks/intellectual property, and subsisting contracts.
• Final Settlement: The Tribunal settles the list of contributories and applies assets to discharge liabilities in a prescribed order of priority.

Key Takeaways for Valuers

• Statutory Compliance: Valuation is not just a commercial exercise but a legal requirement under Sections 62, 230, 232, and 236 of the Companies Act, 2013.
• Standardisation: The 2017 Rules aim for greater transparency, accountability, and fairness in professional conduct.
• Independence: Avoiding conflicts of interest is a core ethical mandate; a valuer must not have an interest in the assets for a window of 3 years before and after the assignment.
• Liability: Accuracy is paramount, as valuers face significant criminal and civil penalties for misleading reports.

Important Terms