442

THEME THE CHARTERED ACCOUNTANT

Valuation as a tool for sustenance of public

interest under the Companies Act, 2013

The Companies Act, 2013 has ushered in a significantly

focused valuation regime by creating a new class of
professionals and provision of independent valuation
for critical actions under the Act. All this is stemming
from the core intention of using valuation as a tool in
sustenance of public interest under the Companies Act,
2013 as detailed in this article.
CA. T V Balasubramanian
Member of the Institute

Background Black’s Law Dictionary (6th In the context of Indian

T
here is no single,
universally accepted
legal definition of “public
interest” in legal jurisprudence.
However, the term is generally
understood to refer to matters
that affect the well-being of the
community as a whole, rather
than the interest of specific
individuals or groups. Public
interests may include issues
such as civil rights, civil liberties,
environmental protection,
consumer protection, and
economic justice.
Some examples of public
interests that have been
recognized by the courts include:
� Protecting the environment
from pollution
� Access to quality education
and healthcare for all citizens
� Rights of marginalized groups
and minorities
� Preventing corruption
and abuse of power by
government officials
Edition) defined Public Interest as
– “Something in which the public,
the community at large, has
some pecuniary interest, or some
interest by which their legal rights
or liabilities are affected. It does
not mean anything so narrow as
mere curiosity or as the interests
of the particular localities,
which may be affected by the
matters in question. Interest
shared by citizens generally in
affairs of local, state or national
government....”.
In the intricate world of legal
jurisprudence, the term “public
interest” carries a profound
significance. While there
isn’t a universally accepted
legal definition, it is generally
understood to encompass issues
that affect the well-being and
welfare of the broader community
rather than the interests of
specific individuals or groups.
Public interest encompasses a
wide spectrum, including civil
rights, environmental protection,
consumer welfare, economic
justice, and much more.
jurisprudence, the concept of
public interest plays a pivotal
role and has been explicitly
recognized in the Companies
Act, 2013. However, its
scope extends beyond mere
stakeholder protection and
fairness; it encompasses the
larger interests of society as a
whole.
This article delves deep into
the pivotal role of valuation in
safeguarding public interest
under the ambit of the
Companies Act, 2013. It explores
the historical evolution, legislative
developments, and practical
implications of valuation as a tool
for upholding the greater good.
Historical Evolution of
Public Interest
The notion of public interest in
legal jurisprudence has evolved
over centuries. It has been a
dynamic and adaptable concept,
reflecting the changing needs
and values of society. The roots
of public interest can be traced
back to ancient legal traditions,

30 OCTOBER 2023 www.icai.org


THE CHARTERED ACCOUNTANT
where rulers and governments
were expected to govern for the
welfare of the entire community.
Over time, the concept of public
interest found its place in modern
legal systems. Notably, in the
United States, the term “public
interest” gained prominence
in the early 20th century with
the establishment of regulatory
bodies like the Interstate
Commerce Commission, which
aimed to protect the interests
of the public against powerful
corporations.
In India, public interest has been
a cornerstone of jurisprudence,
emphasizing the need to
balance individual rights with
the collective good. It has found
expression in various laws and
regulations, with the Companies
Act, 2013, being a significant
milestone in this journey.
The Companies Act, 2013: A
Paradigm Shift:
The enactment of the
Companies Act, 2013, marked
a significant paradigm shift in
India’s corporate governance
landscape. It introduced a
comprehensive framework that
not only focused on stakeholder
protection and fairness but also
embraced the broader concept
of public interest.
One of the most notable aspects
of the Companies Act, 2013,
is the pivotal role assigned to
valuation as a tool for upholding
public interest. This emphasis
on valuation stems from the
recommendations of the Expert
Committee on Company Law,
chaired by Shri J.J. Irani,
which recognized the need for
transparency, fairness, and
accountability in corporate
transactions.
Earlier to this Committee, there
was a Committee (called the
Shroff Committee) appointed
by the then Department of
Companies Affairs that came
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out with a Report on guidelines
on the valuation of corporate
assets and shares. The J J Irani
Committee also took note of the
recommendations arising from
this report.
Specifically, the J J Irani
Committee Report brought
out the need for a law for
restructuring and liquidation
that prescribes a flexible but
transparent system for the
disposal of assets efficiently and
at maximum value.
In respect of valuation, the
Committee report recommended
various measures, specifically
including:
a) When a company opts
to delist from the stock
exchanges, it must offer
a buyback within three
years, and for this purpose,
appropriate valuation rules are
to be prescribed.
b) In the case of allotment
of shares for noncash
consideration, the law should
provide for an independent
valuation.
c) In respect of mergers where
shares are proposed to be
allotted against takeover of
the assets and liabilities, also
in the interest of protection
of interests, there must be a
valuation which is mandated.
d) The issue on a preferential
basis by a public unlisted
company also has a
mandatory requirement of
independent valuation to form
the basis for the proposed
issue. In this connection,
the report brought out
the fact that the SEBI has
already framed regulations
for preferential issues to be
made in respect of listed
companies and the need for
having some framework in
respect of unlisted public
companies too.
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e) In respect of buy out by
90% holder of the minority
stake provided under the Act
it should also be at the fair
value as determined by an
independent valuation.
f) Wherever a company is
mandated to have an Audit
Committee, then all valuations
would necessarily be referred
to the board through the Audit
Committee only to ensure
that there are enhanced
governance requirements
in respect of such valuation
matters.
Further, in a Chapter specifically
focussed on minority interests,
a whole sub-section had
been included to deal with
“fair valuation as a means of
safeguarding minority interests”.
This specified that there must
be a recognition of independent
valuation conducted on
recognized valuation principles
as a means of safeguarding
minority interests.
The appointment of such
independent valuers was to be
by the Board of Directors / Audit
Committee as the case may be
and the shareholders will have
the right to approach the court/
tribunal where they perceive the
process to be unfair. In such
cases, the tribunal should also
have the power to appoint a
valuer.
The report also emphasized
the need for independent
registered valuers, benchmarking
of valuation techniques,
The enactment of the
Companies Act, 2013,
marked a significant
paradigm shift in India's
corporate governance
landscape.
OCTOBER 2023 31
444
THEME
development of valuation
standards, and peer review
mechanisms for the valuers.
The report further, under the
Chapter on restructuring and
liquidation has a separate
section dealing with the valuation
of debtor estate and in this
section again had recommended
the need to have independent
valuation experts.
Legislative developments
in the past that contributed
towards focus on valuation
The Shroff Committee formation
itself was preceded by certain
key happenings, which had
indications of public concern
concerning valuation-related
issues and implications on
shareholder value.
The Sterlite Industries scheme
where reduction of capital
was undertaken without going
through the requirements of
Section 77A of the Companies
Act, 1956, and the Godrej
Industries scheme for reduction
of capital are worth noting.
In Godrej Industries matter,
the consumer redressal
forum held that the scheme
has been approved and the
option to hold or sell the share
was also communicated to
the shareholders hence the
scheme, which also results in the
reduction and purchase of shares
is valid.
In the Sterlite Industries case,
the company had undertaken a
32 OCTOBER 2023
scheme under the Companies
Act, 1956 provisions, and this
led to a reduction in capital also.
SEBI had approached the High
Court against this and it was held
that SEBI had no locus standi in
a scheme under the provisions
of law and when a scheme is
considered, specific provisions
in the act relating to buy back of
shares are also not necessarily
to be considered. Even the
Supreme Court declined to
intervene in this matter.
However, these have also been
addressed in the 2013 Act, where
it is now included in the Act that
notice is to be given to SEBI who
would have the right to make
representations to the NCLT in
the matter.
Larsen and Toubro’s buyback
scheme was rejected by SEBI –
L&T considered the standalone
financial statement to determine
the debt–equity ratio post buy-
back to meet the requirements
that it does not fall below 2:1,
while SEBI considered the
position as per consolidated
financial statements.
These developments significantly
contributed to the need for and a
focus on evaluating guidelines for
the valuation of corporate assets
and shares.
The provisions that have been
included in the Companies Act,
2013 are not only to protect
minority interests but also to
ensure that the interests of all
stakeholders are appropriately
THE CHARTERED ACCOUNTANT
taken care of and the common
interests are addressed.
Specific provisions in the
Companies Act, 2013
The Companies Act, 2013 and
the rules thereunder provide for
the concept of an independent
registered valuer who is to
be appointed by the Audit
Committee or in its absence the
Board of Directors, which should
also approve the terms and
conditions of such appointment
and impose responsibilities on
such valuer to make an impartial,
true and fair valuation of assets
that are being valued; exercise
due diligence and care; make
the valuation by the prescribed
rules; not to undertake valuation
of assets in which he has a direct
or indirect interest or becomes
interested at any time during or
after the valuation of that asset.
The Companies Act, 2013, and
the rules thereunder have enabled
a separate class of professionals,
namely, the Registered
Valuers, who are independent
professionals with the required
qualification, experience,
character, and accreditation. The
Registered Valuers are required
to have complete independence
from the company/asset they are
to value and by introducing this
requirement for various valuations
expected under the Companies
Act, 2013, significant emphasis
has been placed on protecting
public interest in respect of such
transactions through the use of
valuation as a tool.
The issue on a preferential
basis
Whenever a company proposes
to issue additional shares other
than by way of rights issue or
ESOP, the price of such shares is
to be determined by the valuation
report of an independent Valuer.
Here, it can be seen that the
emphasis is on “price” and
“determined by” and the logical
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THE CHARTERED ACCOUNTANT
The directors of the
merging companies
have to share a report
with the members
explaining inter-alia,
the share exchange ratio,
and any special
valuation difficulties.
interpretation is that the pricing
need not be exactly as per the
valuation report and could be
above such valuation too.
The essence of having this
requirement enshrined in
this section is to ensure that
preferential issues, which change
the shareholding pattern are
done at a price that is at least at
the valuation carried out by an
independent valuer.
Here it is not only the minority
shareholders’ interests (or the
other shareholders who are
not enjoying the preferential
allotment) being protected but
also it ensures that the interests
of other stakeholders such as
income tax authorities (who may
have concerns on change of
wealth amongst the members)
are addressed.
Noncash transactions with
Directors and their connected
persons
Companies Act also requires
members’ approval for noncash
transactions between the
director(s) and their connected
persons and the company in
the purchase or sale of assets.
In such cases, the notice to
be sent to the members must
include along with the details of
the transactions, the valuation
of the assets involved in the
arrangement by a Registered
Valuer.
This ensures that the members
who have to decide concerning
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such noncash transactions
are provided with appropriate
information for an informed
decision.
It is pertinent to note in this
regard that as the emphasis is
on an informed decision, the
provisions do not provide for a
blanket prohibition in transacting
at a value different from the
asset valuation computed by the
registered valuer but ensure that
the registered valuers’ valuation
is available for the shareholders
when they embark to decide on
the matter.
Where in general, any shares
are proposed to be issued
for consideration other than
cash, there is a need to have a
valuation report along with the
justification for the proposed
allotment on consideration other
than cash.
Compromise and
arrangements
In respect of compromise
and arrangements amongst
shareholders/creditors, there is
a requirement that the company
/ or the applicant to the Tribunal
submits a valuation report in
respect of the shares and the
property and all assets, tangible
and intangible, movable and
immovable, of the company.
Further, when a meeting is
proposed to be called for this
purpose, the notice should be
accompanied by a copy of the
valuation report.
Here again, it can be seen that
the parties who are to participate
in a meeting to decide on a
compromise/arrangement are
provided with a copy of the
valuation report for them to make
an informed decision, and also
the tribunal is placed with a copy
of the valuation report for the
tribunal to consider it on merits
along with all the other facts and
circumstances in approving the
scheme.
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THEME
This also enables any aggrieved
party to raise a dispute before
the Tribunal based on such
valuation report placed before
the tribunal.
Mergers and Amalgamations
The directors of the merging
companies have to share a report
with the members explaining inter-
alia, the share exchange ratio, and
any special valuation difficulties.
Along with this, the valuation
report is also to be shared.
A clear reading of the provisions
will indicate that it is for the
Board to explain the share
exchange ratio and even any
valuation difficulties it faces.
The valuation report is only
to accompany the notice for
members to understand the
valuation by an independent
valuer in the context of the
proposed scheme. Essentially, it
is left to the members to make
an informed decision and the
exchange need not be precisely
at the ratio prescribed in the
valuation report. The members
and the Tribunal (in case of any
disputes by shareholders) can
evaluate the rationale presented
for the deviation from the
valuation report, if any.
Acquisition of minority
shareholding
When acquirers have obtained
90% shareholding, they could
notify the company of their
intention to buy out the balance
shares and such offer to minority
shareholders must be based on
a price determined based on a
valuation report.
In contrast to the provisions
for schemes or mergers, in this
case, again, as in the case of
preferential issue, the focus is on
“price” and “determined based
on”. Essentially, this is to protect
the minority interest from being
offered a price that is below
the fair value as determined by
the independent valuer. Thus,
OCTOBER 2023 33
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Sweat equity is
another area where
shares are allotted to
specific individuals
(many times to people
who are in control of
the company) and for
consideration other
than cash.
the pricing in this case should
be at or above the valuation
determined by the independent
valuer.
Sweat Equity
Sweat equity is another area
where shares are allotted to
specific individuals (many
times to people who are in
control of the company) and for
consideration other than cash.
The Companies Act 2013 and
the rules thereunder require that
such sweat equity shares are
valued at a price determined by
a registered valuer, as the fair
price giving justification for such
valuation. Further it also requires
that the valuation of intellectual
property rights or know-how or
value additions for such sweat
equity be also valued by the
registered valuer.
Thus, in this scenario also it can
be seen that there is a specific
emphasis on “price” to be
determined by a registered valuer.
Loan to employees or trust for
purchase of shares
The Companies Act 2013 specifies
that in case of any loan by the
company for the purchase of its
shares by employees or a trust for
the benefit of employees, in case
of unlisted shares, such shares
shall be purchased at a valuation
made by the registered valuer.
This is again an area where there
is a need to ensure fair pricing is
34 OCTOBER 2023
involved, as the cash is provided
by the company to buy its shares.
Buy-back of shares
A buy-back scheme is where
there is no explicitly stated
requirement for a valuation
report in the Companies Act,
2013. However, the explanatory
statement to be shared with
members for approval of the
scheme is to contain the basis
for arriving at the buyback price.
Given this requirement, it may
be appropriate to consider
having a valuation report done to
justify the basis for the purchase
to be effected. Thus, in this
way, the need for a valuation
report to justify the price, when
the transaction could lead to
a change in shareholding or
have an implication for the
minority shareholders has been
addressed.
Transactions for which
valuation is not mandated
under the Companies Act, 2013
Rights issue
The rationale for having
a valuation report for the
preferential issue because it
leads to a change in shareholding
structure is exactly the rationale,
on the contrary, for rights issue,
which is offered on a pari passu
basis to all shareholders is
not covered by a mandatory
valuation requirement. However,
an opportunity to understand
the fair value to the existing
shareholders may go a long way
in terms of informed decisions to
participate in such rights issues.
ESOP issue
The Companies Act, 2013 gives
freedom of pricing for the issue
of shares on an Employee Stock
Option Scheme as the intent of
such schemes itself is to provide
an incentive to the employees.
Bonus Issue
Bonus issue leads to capitalization
of reserves of the company and
THE CHARTERED ACCOUNTANT
is given pari passu to the existing
shareholders. Accordingly, this
also does not have any impact on
the shareholding ratio or does not
lead to any change of wealth inter-
se shareholders and hence, there
is no pricing mechanism through a
valuation process prescribed.
Conclusion
The Companies Act, 2013,
stands as a cornerstone in
India’s corporate governance
framework, emphasizing the
role of valuation in safeguarding
public interest. Valuation, as
a tool, ensures transparency,
fairness, and accountability
in corporate transactions,
protecting the rights and
interests of all stakeholders.
In summary, the Act’s provisions
go beyond the protection of
minority shareholders; they
reflect a holistic approach to
consider the interests of all
stakeholders. Valuation is not just
a mechanism; it is a cornerstone
in preserving public interest
within the corporate sphere.
References
� Report of the Expert
Committee on Company Law
released in 2005
� Shroff Committee Report on
guidelines on valuation of
corporate assets and shares
� Securities and Exchange
Board of India v. Sterlite
Industries Ltd., (MANU/
MH/0339/2002)
� Ritu Bhargava vs Godrej
Industries Ltd & Ors on 23
January 2014 before the
National Consumer Disputes
Redressal Forum
� https://regtechtimes.com/
why-was-larsen-and-toubro-
buyback-rejected-by-sebi/

Author may be reached at
eboard@icai.in
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