Legal implications of using an unregistered valuer

Using an unregistered valuer when the law requires a registered one can create problems beyond an inadequate valuation report. It may leave the underlying transaction non-compliant, putting the company, its directors, and the valuer at risk. These issues do not always surface immediately. They often come to light months later during an audit, a fundraising round, or an acquisition.

When Is a Registered Valuer Required?

Section 247(1) of the Companies Act, 2013, requires valuations of property, shares, securities, goodwill, other assets, or a company's net worth to be carried out by a registered valuer when the valuation is required under the Act. The valuer must be appointed by the audit committee or, where there is no audit committee, by the Board.

For example, valuations may be required in certain corporate restructuring arrangements under Section 230(2). The insolvency framework and some SEBI regulations also prescribe valuation requirements. For preferential allotments by unlisted companies, Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, requires the issue price to be supported by a registered valuer's report.

The first step, therefore, is to identify the legal provision governing the transaction. Not every valuation requires a registered valuer. FEMA and certain income-tax provisions recognise different categories of eligible professionals. The key question is whether the applicable law specifically requires a registered valuer for that transaction.

What Happens to the Transaction?

If a registered valuer is legally required but the company uses someone without the necessary registration, the valuation requirement may not be satisfied. Depending on the transaction, this can create several problems.

Questions over the issue price. In a preferential allotment, the issue price must be supported by a valuation that meets the applicable requirements. If the report does not qualify, the company may struggle to demonstrate compliance with Section 62 and Rule 13. This can invite regulatory scrutiny, particularly where the pricing is also disputed or falls below the applicable benchmark.
Rejection of the valuation report. The Registrar of Companies (ROC), an authorised dealer bank, or the National Company Law Tribunal (NCLT), where relevant, may not accept a report that fails to meet the applicable requirements. The company may need a fresh valuation, potentially delaying the transaction.
Challenges at a later stage. An auditor, shareholder, or regulator may question the valuation after the transaction has been completed. This can bring the original pricing and the company's compliance position under scrutiny.

The precise consequences depend on the transaction and the provision involved, but using an ineligible valuer can turn what should have been a routine process into a larger compliance issue.

What Are the Risks for the Company and Its Directors?

Although Section 247 sets out specific obligations and penalties for valuers, the company may also face consequences if the underlying transaction does not comply with the Companies Act.

For example, a breach of the applicable allotment or restructuring provisions may lead to penalties under the relevant provisions of the Act. The company and its officers in default may be held accountable, depending on the nature of the violation.

Directors also need to pay attention to how the valuer is selected. The Board or audit committee is responsible for making the appointment, as applicable. Choosing someone who does not meet the legal requirements can raise questions about the diligence exercised before relying on the report. If the valuation is later challenged, directors may need to explain why the valuer was appointed and whether the company's compliance obligations were properly considered. The extent of their exposure will depend on the facts and the provisions that apply.

What Penalties Can the Valuer Face?

Section 247 of the Companies Act, 2013, sets out specific consequences for valuers who violate its requirements.

These include:

• Monetary penalty: A valuer who contravenes Section 247 or the rules made under it may be liable to a penalty of ₹50,000.
• Imprisonment and a higher fine in fraudulent cases: Where the contravention is committed with the intention to defraud the company or its members, imprisonment of up to one year and a fine ranging from ₹1 lakh to ₹5 lakh may apply.
• Refund of remuneration and damages: A convicted valuer must refund the remuneration received and pay damages for losses arising from incorrect or misleading statements in the report.
• Liability for false statements: A false statement in a valuation report may also attract liability under Section 448 of the Act, where the applicable conditions are met.

These provisions apply within the scope of the Act's valuation requirements. A person without the required registration who presents a report as though it were a compliant registered valuation can create serious problems for both themselves and the company relying on that report.

How Can This Affect Future Funding or an Acquisition?

A valuation issue may go unnoticed when a transaction is completed, but that does not mean it will remain unnoticed.

During due diligence, investors, acquirers, and auditors often review how earlier share issues, restructurings, and other transactions were valued. If a registered valuer was required but the company used an unregistered professional, the report can become a red flag.Depending on the circumstances, the issue may lead to requests for a fresh valuation, additional documentation, indemnities, price adjustments, or steps to address the earlier non-compliance. Resolving the problem at that stage can be expensive and time-consuming. It is generally easier to verify the legal requirements and appoint the right professional before the transaction begins.

When Is an Unregistered Valuer Acceptable?

Not every valuation requires a registered valuer under the Companies Act. The qualifications required depend on the law governing the transaction.

• Companies Act, 2013: A registered valuer is required where the valuation falls within the relevant statutory requirements.
• FEMA pricing: The applicable rules specify which professionals are eligible to undertake or certify the valuation. Depending on the transaction, this may include a Chartered Accountant or a SEBI-registered Merchant Banker, with some cases requiring a particular category of professional.
• Income-tax provisions: The requirements vary by provision and valuation purpose. Companies should check the current rules to confirm the required professional qualifications.

The important distinction is that professional eligibility is determined by the applicable law, not simply by whether someone has experience in valuation. A report can be technically sound yet fail to meet a statutory requirement because it was prepared or certified by the wrong category of professional.

How Can a Company Avoid These Problems?

A few checks before commissioning the valuation can help prevent avoidable compliance issues.

Identify the applicable law : Confirm which provision governs the transaction and whether it requires a registered valuer or another specified professional.
Verify the valuer's credentials: Check the IBBI registration number, the relevant asset class, and the registration's current status. Confirm any applicable professional membership requirements.
Document the appointment: Ensure the Board or audit committee formally appoints the valuer, as applicable, and retain the relevant records.
Check independence and engagement terms: Confirm that the valuer meets the applicable independence requirements and clearly document the scope of work.
Address existing issues promptly: If a report from an ineligible valuer has already been used, seek legal advice on the appropriate corrective steps. Depending on the circumstances, a fresh valuation may be necessary, but it may not by itself resolve every compliance issue.

Using an unregistered valuer is not automatically a violation in every situation. The risk arises when the applicable law requires a registered valuer and the company fails to meet that requirement. In such cases, the consequences can extend beyond the report itself, affecting the transaction's pricing, regulatory compliance, and future due diligence. The valuer may also face statutory penalties, while the company and its directors may face scrutiny under the provisions governing the underlying transaction.

The best approach is to identify the applicable legal requirements before commissioning the valuation, verify the professional's eligibility, and document the appointment properly. A few checks at the outset can help prevent much larger problems later.