Valuation of stressed assets under IBC

With the enforcement of Insolvency and
Bankruptcy Code (‘IBC’), all the stakeholders, i.e., Lenders, Borrowers,
Bidders, Insolvency Professionals and even the government are undergoing
‘teething troubles’ for its effective implementation. These stakeholders seems
to be at crossroads on every vital issue.

A pertinent question is arising about
the valuation methodology to be adopted for a fair valuation of the stressed
company’s assets.  The lenders and bidders contradictory opinions about
the valuation of the company stressed assets.

According to the IBC regulations,
liquidation value of the company is to be specified in the information
memorandum shared with the prospective bidders.

On one hand, the bidders for the
stressed assets are of the opinion that these assets should be evaluated at the
liquidation value. The lenders, however, feel that to accommodate bidding from
a higher point, an enterprise value of the company should be taken into
consideration for evaluating the stressed assets.

The enterprise value of a company is
market value of common stock, market value of preferred equity, minority
interest and market value of debt minus cash and investments. Liquidation
value, on the other hand, is the estimated realizable value of the assets of the
debtor if it were to be liquidated on the date of the commencement of the
insolvency process.

From a practical perspective,
enterprise valuation involves a lot of subjectivity and such valuation can be
done adopting several different methods. The Liquidation valuation, on the
other hand, is less complex in nature and less subjectivity is involved in the
process.

There is an apprehension among select
quarters that the prospective bidders will not be too receptive to bid for the
assets of a stressed company at the enterprise value of a company given the
current state of the company as well as further deterioration in the financial
position of the company. Further, ascertaining the right value of shares of
stressed company is not possible due to the everchanging price of such shares
in the capital market. This change could even be due to completely unrelated
events or circumstances.

While no single valuation can be fool
proof, inclusion of enterprise value along with the liquidation value in
information memorandum may help insolvency resolution applicants in evaluating
what value they will get out of the stressed assets. It may also help lenders
in identifying what amount of bid value they can reasonably expect from the
bidders.

In view of the above, the Government
is likely to introduce new norms for evaluation of the stressed assets of a
company. Apparently, such a proposal is under consideration and norms are
likely to be in place by this fiscal end.

For effective operationalization of
the IBC, which tries to be fair to all the parties concerned, a specific
approach as to valuation of stressed assets will go a long way.

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The author is a seasoned international
corporate lawyer and can be contacted on bhumesh.verma@corpcommlegal.com.

Research and inputs by Paruchuri
Baswanth Mohan