This comprehensive session covers the legal frameworks governing business valuation in India, including the Insolvency and Bankruptcy Code (IBC) which provides a time-bound resolution process for insolvent companies through the Corporate Insolvency Resolution Process (CIRP) with a 180-day timeline, and the SARFAESI Act which enables banks to recover Non-Performing Assets (NPAs) through asset reconstruction companies without court intervention. The session also explains the Income Tax Act Rule 11UA method for calculating fair market value of unquoted shares using the formula: FMV = [(A + B + C + D - L) × PV] / PE, where A represents book value of assets, B is open market value of jewelry/artistic work, C is fair market value of shares/securities, D is stamp duty value of immovable property, L is book value of liabilities, PV is paid-up value of equity shares, and PE is total paid-up equity share capital.
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Okay. So let's start today's session.
Today's session is on laws and compliances in business valuation. So this is one of the chapters which has been introduced by the institute of cost accountants of India in the uh syllabus 2022 itself. Prior to this this chapter was not there. Uh this this uh chapter is primarily a law related chapter where we'll we'll we'll figure out we'll read multiple laws which are surrounding the mergers and acquisitions the valuations etc etc. So multiple laws, multiple standards which are there surrounding this particular, you know, subject that we are going to read in this particular chapter which are important. Okay. As a valuer, I should be aware that in India, what are the norms of valuation? Where are the valuations required and what are the various forums that we need to value our assets on? I should be aware about the statute uh which is there for valuation. I know there's no particular way of computing value of a particular asset. There's no statute which tells us that this is the asset and you should value your asset in this way. There's no particular law which tells you that.
Okay. There's no particular statute which tells you that this is the law that we are doing. This is the you know statute which we are um following for computation of value of a particular asset. There's no in fact strict method of computing value of a set. Valuation of asset is totally you know um is totally um an arbitrary process.
Arbitrary means someone does it gets a different value. Other does it get gets a different value. You apply method one you get a different value. You apply method two you get a different value. So it is absolutely subjective. Valuation has got no statute. Valuation per se has got not has not got any legal backing legal backdrop whereby we can say that yes valuation should be done in this way or no valuation should not be done in this way. There is no such particular statute which is related to valuation.
But there are some statutes that affect valuations.
There are some statute under whose um you know provisions valuation is required.
So this chapter will tell us those acts those law those legal framework which are there in India under which value valuers are required to work and valuations are required for big big companies big big assets big big firms valuation is required. this particular um you know chapter will deal with all those uh you know small small areas all those you know avenues where valuation is required. So valuation per se is not a statutory thing in India as of now but valuation is definitely um you know required in certain places where you know valuation is mandatorily required and those areas we'll be studying this particular chapter. So let's start the chapter laws and compliance in business valuation. So what will be the laws and compliance in business valuation? That's what we are going to study now. Now the first and foremost things thing that we are going to study is insolvency and bankruptcy code.
The first thing that we are going to study is ill insolvency and bankruptcy code.
Insolvency and bankruptcy code. It is one of the most important laws which has been enacted in India not very long back. It's not an old law. It's a new law and it affects valuation a lot. It affects how valuation is done a lot.
Okay. So this is the insolvency and the uh bankruptcy code. So there are two words which are written in this particular act. words are insolvency and bankruptcy. Insolvency and bankruptcy.
These are the two words which are there in this particular law. Insolvency and bankruptcy.
And now I'm going to tell you some details about insolveny and bankruptcy law.
liabilities and assets.
Okay. So, insolvency and bankruptcy law applies to people whose net worth is negative. Whose net worth is negative.
What do you mean by net worth is negative? The meaning of net worth being negative is that. So you know companies have fixed assets, companies have current assets and the companies who are loss making companies, companies who are incurring losses have profit and loss account debit balance. Profit and loss account debit balance means the company is incurring losses. There are no reserves. There are no uh you know profits in the organization. There are no profit loss account credit balance.
But there's profit loss account debit balance which means there are huge accumulated losses with this particular organization. So profit and loss debit balance is there instead of profit loss credit balance and these companies have share capital these companies might also have borings etc. These companies might also have borings etc. Now what happens is you know if your say share capital is 100 borings is also 100. So the total capital which is infused in the business is 200 and maybe 50 rupees. We'll say that there are some current liabilities also. Okay. So some current liabilities also there.
Okay. Which are 50 rupees. So 250 is the total of the credit side. 250 is the total of the credit side. 250 is the total liability side. Now we talk about asset side. So you know assets fixed assets are say 50 current assets are say 20 and the remaining 10 80 is the losses of the business is the losses of the business 250 is the total. So consider this balance sheet. This balance sheet would be an alarming balance sheet for you. It is alarming balance sheet for anyone in the world.
If you are the shareholder of the company, if you're the stakeholder of the company, if you are the creator of the company, if you are the lender of the company who's given a loan to the company, if you are the uh you know person who has um you know has got any link with the company, you've got any stakes in the company, then you will be alarmed to look at this balance sheet.
Why would you be alarmed to look at this balance sheet? Because your assets are much less than your liabilities.
Your assets are only worth 70 lakh rupees and your liabilities are worth 250 lak. So it's an alarming situation.
This is a situation of having a negative net worth. Your net worth is negative.
Your net worth is negative.
So if today you know the the the ideal ideal way to detect that there is some sickness over here is if today this company goes for a liquidation.
If today this company closes its business, wrap ups its business, it goes for a liquidation. If today everything in this company gets w winded up, okay, everything is wind up in this particular company, then the shareholders will not be able to fetch their true deserving amount. Shareholders will not be able to fetch 100 rupees. Borrowings uh you know the borrower the lenders will not get their own due because the share the assets are only 70 lakhs.
There's a big problem with this company.
This company's net worth is eroded. It's known as erosion of net worth. What is the reason why the net worth is eroded?
The reason is very simple. Losses are so huge in this particular company. Losses or the negative expenses are so huge in this particular company that um you know the uh the assets of the company are much less than the liabilities.
liabilities have increased to a very high extent and the assets have decreased to a very high extent because obviously if profits are not there then assets are going to deplete deplete deplete deplete deplete. If earnings are not there then assets are going to deplete. That's the whole issue. Cash is going to reduce from the business.
Current assets are going to reduce and profit and loss debit balance will increase, losses will increase. This is a classic case where you know um uh we say that this company is insolvent. So the word which is used for this particular company is insolvent.
The word which is used for this particular company is insolvent. What do you mean by insolvent? Insolvent means this is a crisis situation. This is an SOS situation. This is a very very problematic situation. It is not a usual situation.
In this particular situation, shareholders should panic. Creditors should pan panic. Even the you know debtors of the company or the or the or the people who are associated with the company like employees also should panic. Everyone should panic in this particular situation. Why? Because the situation is critical.
The situation is that uh you know the assets are not sufficient enough to give a backing to the loans or borrowings or the debts which are there. The assets are not sufficient enough. Assets are very less and the liabilities are huge in this particular case. So that is a big big problem.
Now this particular situation is known as insolvency. Insolveny means your net worth is negative. your um your uh you know your liabilities are much more than your assets and you will not be able to sustain like this in the business for a very long time. You will not be able to sustain because everyone will be after your life to give them profits. You will not be able to give profits. You'll not be able to pay your loans on time.
You'll not be able to pay your creditors on time. Everything will be in a menace.
So this kind of situation is known as insolvency.
This situation is insolvency.
Now when this situation occurs, the management comes to the forefront.
Management comes for a firefighting situation. How does management come for a firefighting situation? The management will now take some active step to rejig the entire business to re-evaluate what are the reasons for losses to re-evaluate how can we convert our negative net worth to positive net worth. All these changes the you know the uh shareholders will do the you know the people who are associated with the company will do the management specifically will do to you know uh reevaluate what is going wrong in this particular company what is wrong with this particular company everything will be re-evaluated everything will be revised in this particular uh you know uh company everything will be rethought of you know we will rejig the entire um uh scheme of things in this particular company and that is the position when insolvency be converted into solvency. So we'll take active steps to introduce new products in the company. The existing products which are lossmaking products they will be excluded from the company.
They will be removed from the company.
The the operations which are suboptimal operations. The operations which are loss making operations. The operations which are not appropriate not up to the mark those operations will be um you know driven off the company. They will be um uh you know chucked from the company. People who are not performing they will be check out of the company.
People who are you know highly performing they will be given appraisals they will be given positive feedback so that they can improve their performance.
So all those measures which are required to rejig the entire company to reshape the entire company will be taken so that management can actually save the company from diluting from you know uh from from ex extinguishing otherwise company will extinguish. company will will extinguish guys otherwise company will will not survive. Company will not survive.
So simple insolveny is a state uh of of company where the company is into losses is into negative net worth is into um huge uh huge loans. Loan loans are huge in a particular company and due to all these factors the company is sick. The company this company is known as a sick company or an insolvent company.
Now for 4 years the management takes ample effort to make this company a solvent company. They take many efforts.
They take many steps in hand. They take a lot of action so that this company becomes a you know a proper company but they cannot you know turn this company into a proper company. In fact in next four years the losses further increases.
The losses increased to 220 lakhs.
The losses are increased to 220 lakhs.
The assets are depleted further. The assets are depleted further. The assets are further depleted.
Okay. So fixed assets become 20. Current assets become 10 and losses are increased to 220. So losses have further increased in next four years. And now management gives up. Management says I cannot do anything more with this company. Now I cannot run this company anymore.
I want to dissolve this company because I have put in ample amount of efforts which should have been put in by me which could have been put in by me to reject this this company to revamp this company but no result has been acured because of my efforts. So I will now uh you know dissolve this company. I will now um you know uh uh totally dilute this company. So the management takes a decision that we will dissolve this company. We will now whatever assets are left we will sell off those assets and pay to the um uh shareholders and pay to the um all the uh stakeholders. We'll pay to the borrowers and we'll go away.
This company is worth to be dissolved.
Okay. So insolvent company which is worth to be dissolved now will arise the conflict. Conflict of shareholders with the management, conflict of borrowers with the management. Now management will try to do some um some weird things.
What are those weird things? Whatever assets are left in the organization, management would want to give those assets to their favorites. One ideally borrowing should be given the first chance to uh you know get anything from the assets, right? But management of the company will want the shareholders to get more funds which is wrong which is incorrect.
you know the assets will be sold off and whatever funds are acquired from the selling off of the assets that will be given to the shareholders of the company that will be transferred to the shareholders of the company however those should have been transferred to the borrowers so there'll be conflicts now conflicts will start to arise just like you know in case of partition whenever you know a joint property is parted then all the brothers fight with each other no this is mine this is mine this is mine this is right all the brothers fight with each other right so in this case also all the stakeholders with fight with each Sunday creditors will also fight. Borrowers will also fight. Share capital shareholders will also fight. They will all fight amongst each other. They would all think that oh my money is being given to the shareholders. Oh, my money is being given to the borrowers. No, no, borrowers don't deserve this. I deserve this because there's lack of money.
So everything will be haywire.
Everything will be chaotic. Everything will be very very um you know messy.
And moreover, one more thing will be there. There'll be long delays in doing this insolvency in doing this dissolution. There'll be long delays.
There'll be long delays. Court proceedings will be there. You know the uh borrowers will file a court case.
Borrowers will say, "Oh, my money is given to the shareholders." Um, you know, the current liabilities, the sun creditors will file a court case that my share is being given to this. So, everyone will be fighting with each other for their share of this particular company's assets. That is the whole problem which will arise um during the uh dissolution process.
So after seeing this chaos and all the companies which are insolvent and they are insolvent for a very long time you know they could not recover from insolveny and now going for dissolution.
Every such company faced the same cat fight. This cat fight was there with every company and every company went to Apple Tribunal the national company law tribunal with such cases with s such claims. So everything was chaos when a company uh was insolvent.
To resolve this problem, to resolve the problem of chaos, to resolve the problem of insecurity, to resolve the problem of partiality which happened during dispersal of funds to the stakeholders to solve all this problem. Government came with a solution. Government said that soon as insolvency is proved and the management is taking no further decision to improve insolveny, management is not taking any steps to improve the insolveny.
We will have a formal proceedings known as bankruptcy.
There'll be a formal proceeding known as bankruptcy.
During bankruptcy, government of India will decide who should get what.
Government of India will take over the management of the entire company.
Government of India will take over the assets of the company. Not government of India but the act you know I I'm just saying government of India for saying sake but the act uh you know but um the the essence is that the act will take up but a third party will take up this entire responsibility. So the act or the government of India will take up these assets. Government of India will sell this assets and government of India will decide whether these assets will be um you know given to the shareholders or the borrowers or the current liabilities who should have the first claim over the funds which are received from the assets. Government will decide this and no one else will decide it. No management will decide it because management is going to be partial towards the shareholders always and always.
So simple law, simple act which has come into force. Seeing the chaos which happens when you know insolveny happens.
The chaos which happens which um when the dissolution happens after seeing all this chaos, government of India came with a regulation. Government of India came with the act known as the insolveny and bankruptcy code and the entire bankruptcy proceedings. Bankruptcy proceedings means when insolveny is resulting into a dissolution where you know um you know the the organization is going to uh dissolve get dissolved it'll get liquidated then what is the formal procedure what is the legal procedure to be followed in such a case that is known as bankruptcy so insolveny is a state of affairs it's a state in which a company is that is liabilities are more than assets bankruptcy is a legal proceedings according to which the funds of such insolvent money will be distributed to the various stakeholders in a time bound manner. No delays will be there in getting their money. Uh no no undue you know time will be taken for giving money granting money to the stakeholders. That is the insolveny and bankruptcy code. So now did you understand the reason why insolveny and bankruptcy code was introduced in India? Do you understand the reason? If you understood the reason please say a yes. So this is the insolveny and the bankruptcy code. So what is insolveny?
Insolveny is a financial state of an individual or an organization. Okay. And um when it is unable to meet outstanding financial debt. So whenever a company or individual is not able to meet its financial debt which means its assets are less and its liability is more then it is known as insolvency. Now what is bankruptcy? Bankruptcy is a legal process under which it is undertaken by a court. It is a process which happens in the court. Okay. After insolvency is proved, the court liquidates the property and distributes amongst the creditors or the people who are stakeholders according to who deserves what. That is known as the bankruptcy.
So bankruptcy is the legal process.
Insolveny is a financial state of a company or or an individual. So this is the difference between insolvency and bankruptcy.
This is the difference between insolvency and bankruptcy.
Okay. So this is the basis of insolvency and bankruptcy code IBC. This is the basic premise in which on which the IBC or the insolveny and bankruptcy code is uh situated. Now what are the objectives of insolveny and bankruptcy code? So guys these charts are made for all of you. These are already saved on the app.
These chart can be a quick revision methodology for your pre-examination revision. Okay. So just get these charts. PDF is saved on the server and you can download the PDF, get it printed also because these unprintable format and keep it with you. Get it spiraled and keep it with you. This will be very very useful for you to you know revise in the last moment of the examination.
We'll now come to our um you know PDF.
So sale features of insolveny and bankruptcy code 2016. Insolveny bankruptcy code represents the legal mechanism for dealing with the debt default of companies and limited liability entities partnership firm or individuals. So the companies which are defaulting in their debt which are unable to repay the debt unable to repay the debt or who are making default in their debt. So all the organizations which are unable to repay their debt which are unable to um you know uh uh repay their um you know debt of the company those companies are dealing with uh those companies are dealt with in the insolveny and bankruptcy code. So they can be a company it can be LLP it can be partnership firm it can be anything. Now what is insolveny? Insolveny is a financial state when an entity individual organization is unable to meet it outstanding financial debt. So when uh the individual or the company or the organization is unable to meet its outstanding financial debt, it is known as a situation of insolveny towards its lenders. People who have given money towards its lenders when they are unable to do it that that is known as insolveny is considered as insolvent. Insolveny may be resolved using the following ways. Changing the repayment plan for loans. Sometimes you know to stop bankruptcy to stop dissolution. We take some steps to you know resolve insolveny so that insolveny can be converted into solveny. We take some steps. Okay, like we um change the repayment plan of loan.
We defer the loan. Okay, we uh talk to our lenders and we ask them that you know please stop our EMIs. We will pay the EMIs but at a later point in time, not right now. We don't have profits right now. We'll pay the EMIs at a later point in time. We request them to defer our you know loan liabilities. Second is the assets may be sold to pay off the outstanding debts. Some of the assets can also be sold to pay off the outstanding debt if nothing works out.
Okay, management might try to fight the insolvency um you know financial state in in any manner whatsoever. But when the push comes to the shore when nothing is possible then we have to sell our assets only. Now generally an official assenee liquidator appointed by the government of India realizes the assets and allocates them among the lenders credtors of the insolvent. So the government of India will appoint a third party so that no biasness happens guys.
No delay happens, no biasness happens, no partiality happens, no influence happens. So third party will be assigned will be appointed who will be the official assigne or the liquidator and he will have the responsibility to sell off the assets of a particular organization and pay the remaining amount due to the different um different um you know claimment there too. So official liquidator or the assigne will be assigned this this activity of selling the assets, realizing the money and distributing it to the lenders. Now what is bankruptcy guys? Bankruptcy is a legal process. It is undertaken by court. An entity voluntarily declares itself as insolvent. So when an entity declares itself as insolvent and tells the government of India that now we cannot do anything to revive this company to make this company solvent there's no possible way. Losses are going huge. things are going south and we are not able to control things controls things are not in our hand then they give the control to government of India goes to the court it is considered as bankrupt on declaring as bankrupt the court is responsible to liquid property of insolvent and hand it out to the creditors now the court will uh you know um sell off the property of the insolvent and the court will hand out the money to the um creditors to all the people who are responsible in Hindi this word bankrupt is also known as in Hindi it's known as Diwalia Diwalia you must have heard this word in Hindi okay declare that is a word in Hindi um which defines bankrupt bankrupt in Hindi means Diwalia so that is how the um bankruptcy happens now what is the objective of this code this code is the IBC codes why is it you know created what was the purpose behind creating this code and I've already told you in brief why was it created what what was the confusions what were the insecurities what were the delays which were there earlier because of this code was enacted I've already told you that but let's see what are the objectives of this code means a legal framework whereby some process is you know told by government of India that you follow this process follow this process so that no chaos happens no um you know no um uh conflict happen follow this process the following process is known as a code it's a legal process so consolidate the multiple laws relating to insolveny of companies, unlimited liability entities, unlimited liability partnerships and individuals contained in several legislations into one single legislation. So now this particular law is um you know uh states that you know we need to consolidate multiple laws which are existing for um for purpose of our um you know um for purpose of our uh insolveny and bankruptcy. There were earlier multiple laws which dealt with how to go bankrupt, how to sell your assets and how to distribute your money into various um you know uh uh various Okay. So you also had this uh code in detail in law paper group three. Very good. So that will supplement our you know um this paper also not in that detail in which you studied in law but in you know fair bit of um uh you know not in detailed manner. It'll support you. Okay. So earlier there were multiple laws relating to insolveny and bankruptcy code. There were multiple various various small small steps which people used to do under various laws.
But now there's a consolidated code.
There's a code which is one under which all the laws were unified and only one law is there now. Whether it's a partnership, whether it's a you know company or a limited liability partnership or an organization law is consolidated into one law and that is the unified code which is the IBC provides rel resolution in a time bound manner for maximization of value of their assets. So resolution is there in a time bound manner. So people would often say that okay please if if we are at a loss if we are not getting our full worth then guys at least don't delay the amount that we should get at least don't delay the amount at least the amount should be given to us in the fullest form you know in the fullest value the amount should be given to us at least don't delay the um the worth which we should get okay so this is uh this code is providing a resolution in a time bound manner in a specified manner the resolution is being provided for maximization of value of assets it provides clarity in law. It provides clarity on what are the steps required to be taken under um you know insolveny situation and bankruptcy situation. What are the steps which are required to be taken? Um so clarity is there on those steps which are required to be taken. It facilitates the application of consistent and coherent provisions to different stakeholders affected by business failures or inability to pay. So now this is very very important guys. The payment which is um you know the treatment which is done for the different stakeholders, the payment which goes to different stakeholders that should be consistent.
You know uh uh partiality should not happen. Everyone should be treated in the similar manner same manner.
Partiality should not happen. Should not be so that if you are the shareholders of the company then you will get undue advantage. Okay. Advantage first should be given to the outside liabilities like creditors, like borrowers, like lenders.
Right? If you're shareholders, you'll be partial. The company should be partial to you. That should not be the case. So, consistent uh you know, provisions should be applied to all the different stakeholders affected by the business failure. Provides fasttrack insolveny resolution process in in you know, insolveny resolution process is quite quick. You know, within 180 days, 6 months, the entire process is over.
Maximum time limit is 180 days. Uh you know, almost 6 months. So, within 6 months, entire process is over. So, you need not wait for your dues. you need not wait for your money for a very long span of time. That is the advantage of this particular code. Now, corporate insolveny resolution process. So, what is the CP? What is the process which is to be followed for corporate insolveny resolution? And now we're going to see those steps where any corporate debtor, corporate debtor commits a default.
Corporate def determines company or any organization.
Okay. Company or any organization commits a default. A financial creditor.
Okay. Default means in repaying the amount. What kind of default is it?
Default is repaying the dues.
So if a debtor if a corporate debtor corporate debtor means a company organization LLP anything of that sort commits any default default means it doesn't pay the dues to the person who receive who has to receive that dues so it doesn't pay the dues repaying the dues default in repaying the dues to a financial citor financial creditor means a lender or bank a lender or bank or maybe creditor An operational creator or the corporate dattor itself may initiate CR in the following manner. So in this situation where the debtor or the company or the organization is unable to pay its debt to the creditor creditor means any lender, bank, financial institution, creditor, you know all those stuff. Then this proceedings can be invoked. It can be invoked either by the debtor itself.
Dtor can say see I don't have money to repay. So I want bankruptcy. Dtor can say this or creditor can go to the court and say that he's not paying my money for so much time. He's saying that I will turn solvent. I will turn solvent.
I will turn solvent. He's not turning solvent. I don't know when will he turn solvent. It has been 5 years. He's not turned solvent. You please give my money back to me. So in uh the bankruptcy proceedings can be initiated by the DTOR, the company as well as the creditor. Credtor can also go to the court or the DTOR can also go to the court. Okay. So what is the process?
Step number one, an application to initiate an insolveny resolution process um is first of all filed with the uh government of India. So an application is initiated to file the insolveny resolution process. It is either made by the DTOR or by a credtor. either the deter or the creator makes this insolveny resolution process application application can be admitted only if minimum amount of default is 1 cr rupes so ad admission of this application requires a monetary threshold so the default amount should at least be 1 cr rupes you know it should not be so that company is unable to pay um 50,000 EMI to bank bank will say no I will you know initiate the res insolveny proceeding it is not possible the minimum default should be 1 cr rupe only then the you know this proceeding can be initiated Step two, appointment of interim resolution professional. Now an independent third party. Who is this person? Interim resolution person. He's an independent third party will be appointed by government of India by under this act.
under this act by government of India.
It'll be a third party who a professional insolveny professional and he has knowledge of how insolveny happens, how bankruptcy happens, how to sell off the assets, how to distribute the uh funds which are received from the assets to the various stakeholders. He knows everything. He is known as the insolveny professional. So an insolveny professional is appointed. From the date of appointment of the insolveny professional, the management of corporate dattor shall be west with the insolveny professional. So the date when this third party is appointed the management of the entire company is transferred to the insolveny pro profession. Now management will have no say. Management cannot sell the assets.
Management cannot repay the shareholders. Management cannot repay the borrow lenders. Management cannot do anything in the company. Management is now powerless. Once this third party is appointed everything is taken over by this third party. Management now is powerless. there's no um you know um there's no um uh role of the management.
Now step three formation of committee of creditors. Now we'll form certain committees. This this particular professional will form certain committees to know the grieviances to know the defaults to know what is the situation of the company to know what is the state in which company is in currently to know the entire thing to analyze the entire thing uh uh uh you know a committee will be created and that committee is known as committee of creators. All the creators will have a say in this committee. They will tell their grievance that why uh you know insolveny proceedings should be initiated and they should get what whom should get what what is the due to the company. Every citor should present its view in this particular committee. Then preparation of information memorandum by the IRP. So the IRP will create a detailed document where he will write down all the things um you know why is this company under losses? How many losses are there? What are the credtors claims and how much are the assets worth? Whether assets selling will suffice the credtor's claim or not. How much will be the loss which will have to be you know borne by each of the citors and you know who will be eligible for the funds first. What is the sequence of priority of funds to be dispersed?
Everything will be written by this insolveny professional in an information of information memorandum. Then resolution plan proposed by COC. COC the all the creditors will in together you know propose a plan of uh dissolution.
how to dissolve the company and how to distribute the funds. The all the creditors will sit together and will propose this particular plan and finally the plan is approved by the COC with at least 75% of the majority. This plan is then approved by all the stakeholders, all the creditors whether they are shareholders, whether they are borrowers, whether they are sunstor or any kind of liability government can also have statutory use. Okay. So first claim is of government of statuto use.
So now the professional will pay play a key role to make everyone understand that who deserves what. Professional will play the key role. Professional will be the epicenter of this entire uh system because he's a knowledgeable person. He's a third party. So he's not biased towards any of the parties and he um is is you know uh leading the entire show. So he will decide and he will tell with logical reasoning that who should deserve what and according to the recommendations of the um you know IRP the COC will then pass this particular plan with 75% majority at least 75% majority should be there if this majority is not attained then again this process happens of replanning renegotiating and everything goes in the loop again okay time limit the CP shall be completed within a period of 180 days from the date of admission of the application so 18 days is the last full and final timeline which is uh you know applicable for uh you know initiating the CRP. This can be extended if at least 66% voting um 66% voting of the uh committee happens. So you know uh if 66% people of the COC feels that no this 18 days should be extended a little bit more then they can extend this um you know uh this committee meeting committee timeline but 18 days according to statute is the final limit. Yes. COC if they decide together with 60 plus 6% voting they can move it to 200 days or 300 days as the case may be as desired.
Now is the liquidation. Okay. If the COC cannot agree on a workable resolution plan, so if the COC says that no things are not working out. Okay. Uh you know the uh company has to be the company cannot revive uh from the insolvency and uh the the steps which are taken even if we delay our you know receipt you know what what is the request which the company's doing to the um to the lenders that please don't collect your dues right now. Please give me 2 years time, 3 years time to collect your dues. I will pay your dues. Don't worry, I will pay your dues but not today. Okay. If the COC, the committee of creators are you know not agreeing with this proposal of the management then they can ask for a liquidation. So if COC cannot agree on the workable resolution plan within the IRP period that is 180 days extendable once by another 90 days the COC decides to liquidate the company the NCT shall national call company law tribunal shall pass an order requiring the liquidation of the company. The last resort is the liquidation of the company. COC is first requested to amicably settle the dispute. Okay. to give some extra time for repayment of debts to see if things work out to see if insolveny turns into solvency. But when COC feels that no now nothing can be done committee of credit saying no now nothing can be done then they will approach the NCT and LCT will pass in order to dissolve the entire company liquidate the company make a public announcement of corporate dattor entering liquidation. So everyone should be made aware that this particular company is getting insolvent require liquidation order to be sent to the registering authority of the corporate dattor. Uh you know the registered authority of the corporate dattor what where is the registered place of the corporate dattor? A written letter will be posted to that corporate dattor and that written letter will be you know um uh uh sent with the details of the uh you know order which NCT has passed. Now what is the liquidation process? Passing of winding up order. First of all, the NCT will pass up a pass a winding up order. Realization of assets. Then assets will be sold. Okay. Distribution of realization proceed among the creators. Creators will be given the you know the appropriate share in the funds which are received from dissolution of assets. Dissolution of corporate data.
Corporator is then uh struck off. The name of the company struck off from the register of the companies.
Distribution of datas and other aspects.
Now this is the most critical part of the entire process of liquidation for the entire process of bankruptcy. How should distribution be done? How should the assets be distributed amongst various claants or amongst various creditors? How this distribution should be done? This is the you know most important part of the entire bankruptcy process of the entire insolvency process.
So let's start this.
Okay. So what is the process of distribution and other aspects?
The proceeds from the sale of assets will be distributed in the following order of priority. So order priority is also stated in the act itself. The cost of insolveny resolution process. First of all, all the cost which has been incurred for the insolveny resolution process including the remineration of the IRP.
Remineration of IRP that is the first claim. Okay. First claim of the funds should be uh you know towards the insolveny cost. the cost which is to be paid to NCT or any other professional or even the IRP those cost should be first allocated. Second is the um you know sunundry creators including wages unpaid dues of the employees. Second claim is of the sunundry credtors secured creators sorry sunundry no secured citors. Third claim will be of the unsecured creditors the creators which are not secured. The third claim will be of the unsecured citors. Then fourth claim will be of statutory dues that is government of India. Okay. Government of India will have the fourth claim. Then fifth claim will be the remaining debts and dues. Whosoever has got any remaining debts and dues, any kind of vendors who have got any debts and dues, the fifth claim will be for them. Then dues for preference shareholders, whatever is the dues for the preference shareholders, that will be the sixth claim which will be there. Then dues for equity shareholders or partners. Last will be the dues for the equity shareholders. And of course guys, you know, they have the last say in the funds. They have the last right in the funds because they are the owners.
Whatever is the loss should be borne by them only. Now if this code was not there then partiality would have happened and these people would have been paid first and that is the reason why this code is there.
Then dissolution of corporate data where the assets of corporate datas have been completely liquidated. The liquidator shall make an application to NCLT for dissolution of such corporate data. So the dissolution happens by application to NCLT. Registration pertaining to valuer interim registration professional the IRP shall within seven days of his appointment appoint two registered valuers to determine the liquidation value of the corporate data. So you know two registered valuers are required to be appointed. Registered value means person registered uh as in such accordance with the company's act 2013 and the rules made there under uh uh uh uh registration 21 m and liquidation value is the estimate realizable value of the assets of the corporate data if corporate defa were to be liquidated. So yes over here guys the valuers have a chance of work valuation is done at this particular point and this is where the valuers means you and me will pitch in.
This is where you and me will enter the entire system. We'll enter the entire process. You and me will have a say in this particular case where valuation needs to be done for the assets for the entire company for all the you know um all the commodities or all the assets which are there with the company. So this is the place where we are going to pitch in. Valuers are going to pitch in at this particular place you know inter resolution process is you know uh started and he will appoint the IRP will appoint us. US means the registered value but it's just one important thing is there you need registration in the company's act please get yourself registered in the company's act you should be a registered valuer any valer cannot be appointed only the registered value can be appointed so we need to get registration over here so do we need degree of CMA to become a registered valuer answer is no there's a course there's a test which happens under the company's act you just need to pass that that's it you need not be a CMA you need not be a CA or a lawyer or any other profession professional degree. You don't require any professional degree to become a uh registered valuer. Okay.
Then liquidation value shall be determined in the following manner. How will the liquidation value be determined? Liquidation value shall be computed in accordance with the internationally accepted valuation standards after physical verification of inventory fixed assets of the corporate dattors. Now how would valuation be done? Would valuation be a pen and paper exercise? Answer is no. Valuation will not be a pen and paper exercise. The first step which valuers does is that the valer will visit the factory premises. The valer will visit the entire company's premises where fixed assets are kept, machinery is kept, plant is kept, inventory is kept and after physical verification of all these assets, the valuation is to be done. So liquidation value shall be computed in accordance with the internationally accepted valuation standards. After physical verification of the inventory and fixed asset of the corporate data.
So physically the inventory will be verified. Physically the fixed asset will be verified and then the entire liquidation value will be determined. If the value values given by the two valuers are significantly different IRP may appoint another registered valuer who shall submit an estimate computed in the same manner. So you know if two valuers because initially two valuers are selected for this particular valuation two registered values are selected so that you know two opinions are there on the liquidation value because you know that valuation is subjective. Okay valuation might differ from person to person. If the these two people are also two valuers are also giving absolutely different uh you know estimates of valuation then a third valuer will also be appointed and his valuation wherever it is close to whichever other values out of three those two are similar to each other that valuation will be agreed to because you're already aware guys valuation is a subjective matter. We cannot um just say that this is the right way of doing valuation. Okay.
the valuer given by the two the values given by the two valuers are significantly different then the IRP may appoint another registered valueer who shall submit an estimate computed in the same manner and the average of two closest estimates okay so the two closest estimates the average of them shall be considered as the liquidation value so yes the act only is uh you know doing away with all the ambiguities which might arise during the liquidation process valuation might be a subjective task so act has itself said that you to choose Choose two valuations which are close to each other and take an average.
Choose two valuations which are close to each other and take an average. Okay, that is the process. Then guys, the company's act section the company's act section 1923 230 231 247 281 are also important from a liquidation standpoint.
You must read these sections of the company's act and you must also you know learn them for this particular chapter.
So this is required to be done by you.
All right. Now we come on to the second act which is related to valuation in which valuation is required. This is the second act in which valuation is required and the name of the act is securitization and reconstruction of financial assets and enforcement of security interest which is known as the SARC act. SARCA act. Okay. Now what is this act all about? What is the underlying principle of this particular act and what does this act deal with?
Let me explain what is the surface react.
So banks as you're aware are the financial epicenter of the company. They are the financial hubs of the country.
Banks are the financial epicenter of the company. They are the financial hubs of the country.
And what is the role of the banks? Banks would give loans to various corporates, to various people who need loans to do their business.
Banks will give loans to various corporates, various companies, various individuals who want to do their business. Banks, banks would provide loans. Obviously, as per the RBI guidelines, RBI will be the supreme authority uh which will tell the banks what is to be done, how much loan is to be given, how much loan is not to be given. everything is to be done by um the banks as per the guidelines which are given to the banks by the RBI. So this is the entire framework of um you know uh the the banking sector in the country. Banking regulation in the country is determined in this way. Okay.
Now there was a increasing problem in banks. What was the increasing problem in banks? NPAs.
What do you mean by NPA?
NPA means non-performing assets.
Guys, you must have heard about Vijay Mallaya.
You must have heard about Nira Modi.
They took huge loans from bank for their businesses.
They did not pay it. They did not repay it. And then they had flown bank flown to UK, flown to America, flown to various western countries, had their bungalows there. And they're staying they're leading a very good life in the in those countries.
This is the uh you know this is the heart and soul of um the MPAs and those are the big names. Okay.
So there are two three Mahul Choki also being one of them. Uh so these are the big names. But if we talk about the small names in the entire country, there are hundreds and hundreds and thousands of people who take loan from bank but they do not repay the bank giving a big hit to the economic system of the country including the farmers including the agriculturist.
Agriculturists have got this um you know have got this problem of not repaying the loans but the the golden line is that loan from loan for agriculturist even if they don't pay it bank cannot enforce um you know anything on the agriculturist farmers so that loan is also a big hit to the economy that is also considered as an NPA non-performing assets so guys for a bank the loans which they give is their asset Okay. And this asset of a bank are highly unpredictable. They're highly um you know volatile. People are not repaying the loans which they have you know um uh taken from big big banks.
People not people are not repaying that loan. That is a big problem which is there with government of India. Today government of India is facing this problem that people do not repay these loans. NPA are uh you know are a very common uh point today. You know today even if you want to buy a mobile phone you'll get it on EMI. You want a washing machine you will get it on EMI. You want a TV fridge any of the household appliance you'll get it on EMI banks will give you EMI on them.
But when the EMIs are not paid it's a big hit to banks. Now the problem is when the the EMIs are not paid then banks approach the customers and they try to recover the money. They approach the customers and try to recover the money. They approach the customers to force them to recover the money or they sometimes even want to go to the customer's home and pick up that asset um you know against which the loan was taken like the TV, fridge or the washing machine. They want to take the washing machine with them against which the loan was uh taken. So banks want to do that.
Banks want to enter into that entire you know process. But the problem is there are two problems over here. Problem is number one bank's reputation is lost.
Bank's reputation bank's name is lost.
Why? Because you know the people who will be neighbors of this particular uh you know organization or the people will say that oh how bad the bank is taking away the you know the mobile phone or the uh fixed asset that bank that this person you know gave so you know bank is so rude bank is so bad reputation of bank is at stake under this circumstance reputation of bank is under st under s stake. So reputation of entire bank, reputation of entire um you know legal system is at stake. Like HDFC bank, the HDFC bank is at stake. Its name is at stake. It's it's its brand name is at stake that yes HDFC bank is so bad that you know it it just um you know uh comes and takes away the assets from the people. So the name of HDFC bank or the you know the reputation of HDFC bank is at stake. So they generally don't want to enforce any uh action on the defaulting debtors in their own name.
They don't want to do that and they don't have the resources also. They don't have the resources also. This is a problem with banks. Banks are in a very very bad state. A they're not getting EMIs from their customers. B RBI is continuously having strict controls on banks regarding their NPA, regarding their policies. And if you know banks if they do some kind of a uh you know uh mistreat the client mistreat the customer then bank's reputation is also at loss. So bank is actually uh you know facing problems from all around. Bank is the person who's really you know facing this entire problem of NPA. A they do not have time to you know go to every house and you know just uh uh collect the money. They don't have time for doing that because their core work is banking. Their core work is not collection. Right? So they suffer at that front. Plus their reputation is at stake. They suffer at that front. Plus RBI norms are very strict on banks. They suffer at that front. So banks used to suffer a lot due to NPA, non-performing assets.
After seeing this kind of a situation, um you know asset reconstruction and securization concept was started. What do you mean by asset reconstruction and securitization? Now there are various companies which have been launched which are known as asset reconstruction companies. In short, I will call them A R C. In short, I will call them A R C.
Now, what will happen? What will happen is that bank suppose banks have loan worth rupees 200 crores. They will sell off the banks to ARC. They will sell off the loans to ARC.
Loan is the asset to the bank. Okay? So, this bank has a loan worth 200 crores.
They will sell off the loan to ARC.
Which means that now the um the the ownership of this loan is with ARC the asset reconstruction company. They will sell off their loans to ARC. Now the ARC will be owner of this loan. Whatever proceeds will come from this loan it will be uh it will be going to the ARC's bank account. So ARC will be owner of this loan. So the bank will sell off their loans to ARC and in return the ARC will give their shares to banks.
The ARC will give their shareholding to bank. They will become the shareholders.
The shareholders will be the bankers.
Bankers will be the shareholders of these ARC companies.
So what will happen? Why is this? Why is this transaction happening? Because now bank doesn't want to recover the money.
So they have delegated the responsibility to a third party. This is a third party ARC. Bank has delegated the responsibility of collecting the money to a middleman to a third party.
third party will be responsible for collecting this particular um you know loan. Uh maybe they can use any measure.
They can you know go and use um some forceful measures to collect the debt.
It's their responsibility. It's not bank's headache. Bank's reputation is not at stake. Secondly, bank is getting some financial instrument which is worth it. This was not reaping any benefit to bank because b was not getting any EMI on this 200 cr rupees. But now bank has got the shares of a particular company.
So this is actually worth it. Okay. This this worth is there. This is this was of no worth because emis were not getting elected. So now bank in turn is getting something of value something of worth.
Shares of an arc is something valuable which bank is getting in return to their assets which were non-performing assets.
And what is the benefit of the arc? What is the benefit of the um asset reconstruction company for a loan of 200 rupees? They will only pay shares worth 150 cr.
Yes. They will discount the the shares.
They will give shares worth less than the loans which they receive. They will give shares worth less than the loans which they receive. So the loan which is received by ARC is 200 crores and the ARC will repay the bank in terms of shares.
So the share value will be 150 and the loan value will be 200. Bank will say ARC will say oh we are discounting the value of loans although the value of loan is two 200 crores but we are discounting it. We'll pay you only shares worth rupees 150 crores. That's it.
Both the problems are resolved.
So yes, the banker's problem is al resolved that they um you know get to um get to uh transfer their liability to someone else, transfer their bad work to someone else and their responsibilities also their purpose is also resolved that they will earn huge profit if they are able to um you know avail all the funds.
If they are able to recover all the funds, they will avail huge profits.
Even if 200 crores are not received, even if 180 crores are received from these, you know, uh uh loan lenders, then also ARC is at a profit. ARC uh earns profit by the differential between the shares which are issued by ARC and the loans which are received by ARC. So the uh differential will be treated as the profit of the ARC. So both these companies will be at a profit. This entire process is known as securitization and securitization and asset reconstruction. So I'm reconstructing this asset. Securization and asset reconstruction. This is the entire concept of this particular law.
If you understood the concept, please write a yes in the chat box.
So we can start the chapter. The concept is clear. Yes sir. The surfacey act was framed to address the problem of non-performing assets. The enactment of surfacey act enabled the banks and financial institution to sell off their NPA to asset reconstruction companies registered with RBI.
So the banks and the financial institution used to sell off their uh loans their NPAs to uh some uh asset reconstruction companies but obviously these companies are registered with RBI.
They specialize in recovering the um you know the NPA. Sarasia act seeks to mobilize blocked funds of the bank and MPAs. So now we need to mobilize.
Mobilize means transfer or sell off.
So surfacey act will transfer or sell off the blocked funds in the banks. The funds which are blocked in the banks as NPA as non-performing assets. Surface Act seeks to sell them off or transfer them off to the uh you know uh to the uh different parties creators that provides the legal framework for secretization activities that also provides a legal framework a law for you know securization. Securization means these assets will be sold off to ARC and ARC will issue shares to the bank. It gives procedure for transfer of NPS to asset reconstruction companies for reconstruction of assets that enforces security interest without court's intervention. So you know the securities are uh you know uh securities are well taken care of. They are well preserved even before court's uh intervention.
Court's intervention is not required because you know for the bank to go to court against any every um every lender is not possible. Bank cannot do this entire you know concept of going to you know court for every uh loan which it has given. It is very tedious for bank to do that. So bank doesn't do that.
Without course intervention the security interest is enforced that gives powers to the bank and financial institution to take over the immoral property that is hypothecated or charged to enforce the recovery of debt. So act gives power to the banks and financial institution.
Power is given to the bank and to financial institution to take over the immo immo property. So uh the the confiscation of property can happen in case of um you know if in case RFC act is applied the the you know the uh takeovering over of property can also be there that provides three methods of recovery of NPAs. NPAs first is securization uh you know securities and ARC should be issued to the banks.
Second is asset reconstruction. Now the arc will you know um think what is to be done with this particular asset whether it can be recovered successfully. If not then what can be you know the measures which can be taken to um take money from this particular lender to from this particular borrower. How can we extract money from this particular borrower? All this you know uh thought process will be done by the arc. Asset reconstruction will happen. Enforcement of security without intervention of court. How can we if nothing is working out if no reconstruction is working out then how can we um take back our asset and sell it off in market and um repay the debt.
How can we do that? All these three things are to be done by um the this particular act gives us a guidance. Now what is a securization? Securization is the process of pooling and repacking of financial assets financial assets like loans into marketable securities.
So what is being sold? What is being sold?
Loans are being sold and what is being received?
shares are being received and these shares are nothing but marketable securities.
These shares are nothing but marketable securities. So who are selling their loans? Banks are selling their loans.
And who are selling their shares? The A R C is sh selling their shares. This is a transaction which is taking place in the context of bad assets. Bad asset management. Securization is the process of conversion of existing less liquid assets into marketable securities. The securization company takes custody of the underlying mortgage asset of loan taker. So it can initiate the following uh uh steps. So the secretization company the arc can take custody of the underlying mortgage asset. Whatever are the mortgage assets the uh you know the uh the those mortgage assets can be undertaken by the ARC and following steps can be taken. Acquisition of financial assets from any originator.
Financial assets can be taken from any originator like loans can be taken from any originator and raising of funds from the investors by issue of securities. So you know securities may be issued to the banks of against this loan. Acquisition of financial asset may be coupled with taking custody of the mortgage land or building. So whatever is mortgage with banks. Okay. So banks also have secured loans. Okay. And for secured loans mortgage of land and building is there with bank. So whatever property papers are there with bank. whatever mortgage assets are there with the bank which the lender would have um given to the bank at the time of taking the loan that can be taken over by the uh ARC and ARC is free to do whatever with that land and with that building. Now ARC is the head of uh you know uh thinking of what is to be done done with this particular um assets. So ARC can do whatever they want. Then what is asset reconstruction?
Now it is upon the ARC to decide what is to be done with the land which is mortgage whether it it needs to sell it or whether there's some other way that you know the loan can be recovered from the lender from the borrower uh what are the steps that is to be taken to just uh clear of this loan arc will think through it that is known as asset reconstruction activity of converting a bad or non-performing asset into a performing asset you know sometimes you know companies are under debt sometimes companies are long Sick companies, insolvent companies are there. But ARC sometimes when ARC take over takes over that company, they turn a sick company into a healthy company. They turn an insolvent company into a solvent company. This happens many of times. If an external third party takes over the management of an insolvent company, then insolvent company becomes a solvent company. So ARC does exactly the same role. ARC never wants to sell off the mortgage asset. It doesn't want to liquidate the companies. ARC would never want to do that because that will result into losses. It will not be sold at the exact price. It'll be sold at loss for sure.
So ARC will never want to do that. What rather ARC will take steps is ARC will chip into the management of the company.
Step into the management of the company and will try to reject the entire company so that losses can be turned into profits. That is the aim which um you know the the um ARC will be working at. So that is how the uh assets are reconstructed. So we are the uh the arc will endeavor to convert the non-performing assets into the performing assets. The process of asset reconstruction involves the following step. First of all, purchasing the bad assets by the asset reconstruction company. ARC will buy the bad assets at a discounted rate. Then converting the bad assets into good assets, then dispose of such assets.
Reserve Bank of India regulates the asset reconstruction company in a changing business environment. RBI carries out audit and conduct inspections of an ARC from time to time.
The RBI may impose a penalty where an ARC fails to comply with any directions issued by RBI. Other functions of ARC what are the other functions of ARC? So ARC any secretization company or reconstruction company registered for an agreed fees may act as an agent of bank.
So they may act as an agent of bank.
They might not take over the loan uh completely. They might not issue their securities completely but they might act as agent of the bank and on bank's direction they can work towards asset reconstruction. Um uh they can do that.
They can work as agent of the bank. Then they can work as a manager between the parties. Okay. The middleman between the bank and the borrower. Then they can act as a receiver if appointed by the court or trial. Whatever is being received after selling the assets, they can manage that receipt and they can maximize that receipt. They can optimize that receipt. That receipt should be maximum. That can be the endeavor of the ARC.
Then enforcement of securities interest.
Now um uh this is a very important power which has been given by the Sarface act uh to the banks and to the ARC's. Okay.
Now earlier when you know the the confiscation happened earlier when bank used to go to home of the borrower and say that oh please give this AC to me I will take this AC with me or please give this um washing machine to me. I will take this washing machine because you have not paid the EMI of this washing machine. You know whenever this used to happen earlier then you know um the bankers would face a resistance.
Obviously anyone will face the resistance and then there was criminal matters there were police involved and sometimes even you know by force things used to happen and sometimes some bit of uh violence also was noticed earlier in those times violence violent measures were also noticed. So uh it was a chaotic and a messy proposition. It was a very messy and chaotic proposition earlier when uh you know all these things used to happen. But when uh you know all these things all this chaos all this uh mess was um uh you know uh there then you know bank realized one thing that we cannot do this we cannot file a court case to you know we cannot file a court case. Okay, we cannot file a um uh file a you know um have a legal proceeding for each and every loan lenders. We cannot do that.
There has to be a specialist who assists us in doing that. Uh and the law should also give power. Law should also give the necessary uh you know powers to that particular person to even take up the take up that asset with themselves. Law should give that power. So yes, this act enabled the bankers, enabled the arc's to give them power to even take the assets to confiscate the assets which are you know um which are taken on loan against which the loan was taken. The power to confiscate this assets was given to the banks was given to the um arcs and that is how the um arc's or the banks got really good powers under the surface act. Now one question I would like to take. How can bad asset be converted into a good asset? Anyway, a defaulter may not pay. Okay. Now the question is how can a bad asset turn into a good asset? Very good question.
Let me demonstrate with an answer.
So this is Mr. X. Mr. X is running a startup.
Mr. X is running a startup.
Mr. X approached SGFC Bank for a loan.
Mr. X approached SGFC Bank for a loan.
SGFC Bank gave a loan worth 50 lakh rupees to Mr. X.
Mr. X got a loan of 50 lakh rupees from HDFC Bank.
Over a period of time, Mr. X whatever idea was there with Mr. X, Mr. X could not execute that idea well. So, he ran into losses.
Mr. X ran into losses because his idea was not executed well. His idea was good but it wasn't executed well because Mr. X didn't have any um experience of doing business. As a result, Mr. X started defaulting in the EMI payments. So, whatever EMI payments Mr. X was doing to SGFC Bank, Mr. X started defaulting in the EMIs. Mr. X stopped paying the EMIs.
Mr. that didn't pay the EMI. He might pay EMI. He was paying EMI earlier. So about 1 lakh rupees was repaid by him under EMI. But then he stopped paying the EMIs. He did not pay the EMIs to HDFC Bank. He stopped paying the EMIs.
Now this asset which earlier was a good asset. This turned into a bad asset for this turned into a bad asset for SGFC Bank. For HGFC Bank, this is a bad asset. This is an NPA non-performing asset.
This is a bad asset for SGFC Bank. Now guys, SGFC Bank doesn't have expertise or doesn't have the acumen to help Mr. X in um the operational business in the operations and reconstruct his business.
Mr. um X wants this kind of a you know support. SGFC Bank doesn't have it. So now what happens is when this becomes an NPA, this becomes a bad asset. SGFC Bank sells this asset to a asset reconstruction company.
SGFC Bank sells this asset to a asset reconstruction company.
Okay. ARC is there and SGFC Bank sells this particular asset to a uh asset reconstruction company. It sells off this asset, it sells off this loan of Mr. X to a asset reconstruction company.
And when SGFC Bank sells off this loan to a uh ARC to asset reconstruction company, then guys asset reconstruction company has the acument, has the power, has the knowledge to turn this startup into a profitable startup because they are experienced people. They are not bankers. They're not into banking profession.
They're not into um you know a profession of uh giving loans and taking loans. No, no, no. They are experts and they can convert this bad asset into a good asset. This is known as asset reconstruction. They have the capability to reconstruct this asset. This is known as asset reconstruction.
NGFC bank cannot do asset reconstruction. They don't have the acument. They don't have the quality.
They don't have the expertise. But ARC has got the expertise to convert this bad asset into a good asset. The ARC has got this expertise. So that is how the good assets are created. uh and the the asset reconstruction happens not by the bank but the ARC that's the that's the concept of asset reconstruction okay okay so as a matter of last resort so when nothing works out asset reconstruction doesn't work out the company is not profitable as a matter of last resort that confers power to bank to enforce security interest on the assets of the defaulting borrower by following the provisions of the act take possession of the security so bank has the power to take possession of the security whatever asset is You know the bank has power to claim that asset from the uh borrower. Sale, lease or assign that right over security. So the bank has power to you know sell that right lease that right or security to someone else. Appoint manager to manage the security. The bank has the right to appoint someone to you know manage that particular asset. Ask any dattor of the borrower to pay any sum due to the borrower. So bank can also ask any you know debtor of the uh company uh the defaulting company to pay the dues not to the company but to the bank. Bank has the got right to receive the payments if any which are received by the debtor. So bank can ask the uh dattor of that particular company to prepay to him. So these are steps very powerful steps which the surfacey acts allows a banker to do in case of a um in case of a asset default loan default.
This these are the powers which are conferred to banks by the law. Before proceeding with the above steps, the lender or the banker must issue notice to the defaulting borrow borrower calling to repay debt within 60 days of date of notice. So before that this the banker should inform the borrower to repay the loan within 60 days at least 60 days time should be given to the uh dattor. the decision about enforcement of surface provisions will be applicable only 75% of creditors agreeing um without intervention of the court. So sometimes the ctors can also um you know enforce surfacy act. Uh sometimes ctors can also um have this this particular right in surface act. But the condition is that 75% of the creditors should be agreeing to this uh steps. Right of the borrower. What are the rights of the borrower? What are the you know the borrowers who's taken the loan? What are the what are his rights? His rights are the borrower can object the measures undertaken under this act. The borrower can say no no don't apply Sarpacy on me.
Uh the debt debt the with debt recovery terminal uh within 45 days of the order without paying any amount. Okay. Or with debt recovery appate terminal with the debt recovery appate tribal after depositing 50% of amount outstanding deposit can also be reduced to 25% as a discretion of applet tribal.
So d can go to the court. Okay. Dtor can go to the court. Dtor can go to the applet tribal dattor can go to the tribunal claiming that sar faces should not be applied on me. Yes, I have defaulted in law but sarfacy should not be applied on me. Please hear me out.
Dtor has that uh you know right in law and d can go to the criminal as well as the app criminal for getting his matter heard for getting his matter you know resolved under the surface act. So sarfacy application is a very strict measure. So da has the right to um request the code that don't apply sarfacy on me. So this right is there with the data.
All right. So this was the suraracy act for all of you. This was the surfacey act for all of you.
Please let me know in the chat box if you have any questions regarding the suraracy act. Otherwise, we're going to start the last topic of our discussion and the last topic is the last topic is valuation standards.
International valuation standards.
Perfect.
The last topic is international valuation standards.
So guys as all of you are aware you know valuation doesn't have any law valuation doesn't have any statute which should be followed while valuing a particular asset. There is no fixed method according to which valuation needs to be done. There is no strict guidelines according to which evaluation needs to be done. There are no procedures. There are no principles which um you know govern our evaluation proceedings. But there are certain standards. So standards are not legal as of now which means they are not backed by any legal backing but still they are guiding factors to guide all the valuers how valuation is required to be done and that guiding factor are these valuation standards. Now you know standards are many you have studied your standards in your accounting standards. Accounting standards are there then cost accounting standards are there in cost audit. Okay.
So those standards are mandatory.
Companies act 2013 mandatorily tells you to follow those standards. If you do not follow the standards, alter is going to give you a qualified report. Alter is not going to give you a clean report if you do not follow those standards. So those standards are mandatory to be followed by you. They are mandatory standards. But these standards are not mandatory. They are just recommend nature. They are the guiding principles.
They would uh you know uh tell you what to do, what not to do. They will guide you on uh you know valuation aspects, valuation methodologies, valuation principles. But they will not um you know um really be enforced on you. They will not be strictly enforced on you.
They will not be strictly um you know um uh strictly imposed on you. These are the valuation standards. But since we are the values, we should be aware about what standards are prescribed internationally for valuation. So international valuation standards IVS are the standards for undertaking valuation assignments. So valuation assignments uh for undertaking the valuation assignments. The standards are there using generally recognized concept and principles. So the idea is to give you the generally recognized concepts and principle. The international value standards council is an independent notfor-profit organization committed to advancing quality in the valuation prof profession and develops the IVS. Now what are the core principles of valuation? What are the uh you know um the policies and the principles that are to be followed in your valuation spree?
The principles are ethics. Number one, ethics. Ethics is one very important thing which every valuer should follow.
So guys, valuation is a non-stutory field. It all depends on your acumen. It all depends on your um you know on on your assumptions what will be the value.
So now what happens is there are two companies. Okay.
A B A is the bidder company. B is the target company. A is going to acquire B.
Okay. Now if I am appointed as the valer of A then I will give a lower valuation and if I am appointed as the value of B, I will give a higher valuation of the same company.
This might happen because I know where to put what assumption to lower the valuation, where to put what assumption to increase the valuation. I can do partiality. I can do biasness in this particular respect. So whosoever appoints me, if A appoints me, I will give a lower valuation. So at A needs to pay less. I will favor A. A will need to pay less. And if B appoints me, then I will give a higher valuation so that B receives more.
Guys, this should not be done by valuers. Valuers can do this for sure.
Valuers can tweak assumptions. Valuers can tweak numbers. The complex models which valuers make, they are all depending on assumptions and u you know techniques. Valuers can um you know goof up in these numbers to increase or decrease the valuation. So first and foremost principle which which is the guiding principle for any valuer is ethics. The valer should be having integrity, objectivity, impartiality, confidentiality, competence and professionalism to promote and preserve the public trust.
So all these positive factors should be there with the valuers. Integrity, objectivity, impartiality, confidentiality, competence, professionalism to promote and preserve public trust. Valuers should be very very very very um professional. They should be ethical. They should work in the most ethical manner in the most uh you know um ethical manner. They should work. They should not be biased towards the parties. They should give a unbiased opinion about the valuation. That is the first principle. Second, competence. Of course, the valuer should have technical knowledge and technical skills. So, if you don't know how to compute discounted cash flow, how will you uh value a particular company? So, techniques like discounted cash flow, net asset value method, all these methods should be very clear in your head. How to compute the you know the the present value factor, how to compute the present value annoty factor. All these things should be very clear in your mind. You should be able to analyze and you should be able to you know calculate these things well. So that is the second you know principle of a valuer. He should be competent. He should be competent enough. He should be skilled enough technically and in any every way he should be very very competent. Compliance. Compliance is um you know a very important element of valuation process that you know valor should at least follow the guidelines which are there for valuation. I know they are not mandatory to be followed but if there's any digression from those guidelines valer should give why has he digressed from those guidelines at least some fair bit of guidelines should be followed compliance should be made to the standards of valuation or to the you know published valuation standard the compliance to the published published valuation standard should be done by the valuers basis so what is the basis of valuation right we have you know we have studied so many ways of valuing shares in the last class only we had computed value of shares We have the dividend discount model, Gordon model, um dividend yield model, earning capacity model, NAV model. There are so many models to compute the fair value of a particular share, which method have you used? What is your assumption? What is your basis of valuation that should be clearly indicated in the report? So valer must select a basis of valuation appropriate for the assignment and follow all applicable requirements. Now depends on person to person who's acquiring those shares. Is controlling interest being being acquired or only minority stake is being acquired. What is being acquired?
According to the acquisition also the valuation methodology changes. So the valuer should disclose the basis of valuation in the report and should carefully choose the uh you know appropriate basis for valuation. Date of value. Uh what is the date on which the value is being done? Because value can change according to the date also because rate of interest, rate of um you know return is changing every day. Rate of interest, rate of um uh you know uh rate of um capitalization rate, cost of equity, cost of debt, everything changes. Uh even the tax rate changes um into assessment years. So the valer should be very clear on which date has it done the valuation and this should be disclosed in the report because at a later date the value may be different.
So validation date is very very important which is to be uh you know really um uh written by the valuer. It should be disclosed in the report.
Assumptions and conditions whatever assumptions the author has made whatever conditions the as a order has the valuer has um you know uh um assumed all those should be mentioned in the report.
Intended use what is the intended use of this valuation? Whether the valuation is being used for reporting purposes, whether it is used for valuing a particular asset, sale and purchase of asset, merge and acquisition of an asset. What is the purpose of this particular um valuation study? That should be clearly you know uh disclosed intended users. So who can use this report? Can bankers use this report? Can government of India use this report? So so the value should be very specific.
Who should use this report? Users of the report should be given by the valuer.
Scope of work. What was the scope of work of the valuer? What work has he performed and what work has he not performed? So the valer should clearly indicate what work has he performed and what work has he not performed. So scope of work should be clearly mentioned by the valuer. Identification of subject of valuation. What is being valued? Is it the land and building which is being valued? Is it the shares which is being valued? It is the is it the uh you know any kind of assets which is being valued. What is being valued? The value should be very clear on that aspect that what is the subject matter of the valuation. The value should must clearly identify the subject matter data. What data what information has the value used for this valuation that should be clearly and transparently mentioned in the audit the valuation report. So the data and the information should be clearly disclosed in the auditor's report. Valuation methodology what is the appropriate valuation technique valuation way valation method which has been used by the valuer that should be clearly disclosed by the uh valuer.
Communication of the valuation, what is the you know valuation um uh you know what is the amount of valuation the analysis of the valuer everything should be disclosed in the report and should be communicated well in advance to the intended users. Then record keeping valuer must maintain some level of uh you know records for the the the records which are used to value that particular asset. What are the data underlying information? What are the calculations?
Everything should be well maintained by the valuer. Valer should be well aware of what are the records which are referred to while valuing that particular um asset. So the record keeping is a must record should be uh uh kept by the valuer. Scope of work the the valuer must communicate the scope of work to the client. The value should be upfront in stating that okay I have valued the plant and machinery but I have not valued the building.
I have valued the business considering that it has only two divisions plastic division and leather division. I have not considered the other divisions of the business. So whatever is the scope of work of the valuer, whatever he has done, whatever he has not done should be appropriately disclosed in the report.
So scope of work should be disclosed in the report. Identify the valuer. Who is the valuer? Identify the client. Who is the client? Okay. So who's the valuer?
Who has valued the report? Who is the client? You know who has for the report?
Uh what is the identity of other intended users who will use this report?
What is the asset being valued? Whatever asset is being valued, identify that asset that this asset is being, you know, valued. What is the valuation currency? What is the currency in which valuation is done? Is it rupee? Is it dollar or what? What is the purpose of valuation? Why is this valuation being done? Is the entity being merged with another entity? Is the entity being acquired by another entity? What is the purpose of this valuation? That should be clearly uh indicated. Basis of value used. What is the basis? Valuation date, nature, extent of valuer's work. What is the nature extent? Nature and source of information. Um what is the source of information? assumptions that he has made uh you know the type of report which he's prepared restrictions on use of or publication of the report the valor can also state that please don't use this report for any you know public purposes valor can state that so what is the um you know use uh for which the this report can be used that can shall also be stated by the valuer that valuation will be prepared in compliance with the IVS IVS will be followed while valuation is done that is to be stated in the report investigations and compliances um you know before obviously doing any valuation investigations and compliances are mandatory to be done. So valuation assignments must comply with the principles set out in IVS. So whatever principles are set out in the valuation standards those principles must be uh followed by the uh by the valuers. So valation assignment must comply with the principles set out in IVS. Investigation made during the assignment must be appropriate for the purpose of valuation assignment and basis of value. So whatever investigations are made by the valuer they should be you know very relevant to the valuation assignment. They should be relevant to the asset being valued.
Whatever asset is being valued the investigation must accend to that valuation. Sufficient evidence. Evidence must be collected for the valuation. For the valuation um you know entire stent must be gathered to ensure that valuation is proper. Limits may be agreed on on to the extent of valuation investigation. What will be the uh extent of valuers's investigation? Till what extent will the value valuer you know go for investigation like if you are the valuer and you are said that uh the dattors of the company are worth 20 crores then can you go to the dtors and take a confirmation from them yes that yes whether they are dtor or not whether they had used to the company or not can you do that so what is the extent to which investigation will be done by the valer because valuer wants an accurate valuation and valuer can go to any extent to uh get the accurate valuation So limit should be agreed to the valuer's investigation information received by the valuer from other sources whatever information is received from the valer from any of the sources third party management owner etc record must be kept for work performed of reasonable period after completion of the assignment. So proper record proper books of accounts proper calculations proper calculations should be maintained uh for the work performed uh for this valuation purposes. So all the proper record keeping should be there for valuation purposes and uh IVS 03 is reporting.
What reports are required to be prepared? What reports are required to be you know um uh uh given for the valuation? So validation report must contain the following. The scope of the work intended use intended users purpose of the report the approach or the methods which are used methods key inputs what are the inputs what are the assumptions what is the conclusion. So all the same things are to be given in the report also. Obviously report is going to be comprehensive. It should contain all the relevant factors and features which are affecting the valuation. So report has to be relevant.
Report has to be you know absolutely up to the mark.
And what will be the basis of value?
What do you mean by basis? You know basis of value sometimes called as standards of value. Describe the fundamental premise on which the reporting is done. What is the fundamental promise on which the reporting is based? Okay, that is known as the basis. So the it is critical that basis or basis of value is appropriate to the terms and purpose of valuation assignment. The basis can be market value, market rent, equitable value, investment value, synergy value, liquidation value or fair value. There are various kind of values, right? So the valuation should be on the basis of a proper basis. The value should be on the basis of proper premise. Okay? And these are the various promises. market value, equitable value, investment value, synergistic value, liquidation value. These are the bases on which the value is based. Then valuation approaches and methods. What are the various approaches of valuation? What are the various methods of valuation?
Market approach is there, income approach is there, cost approaches there. And yes, we have also studied these three approaches for valuation.
And amongst these uh various approaches there are various various methods.
Methods are there, several methods are there of market approach, several methods are there of income approach, several methods are there of cost approach. So yes approaches can be further divided into various methods. So all these things uh you know uh com compose our uh valuation strategies compose our valuation ways in which valuation is required to be done. All these things are indicative of the valuation that we are going to do. Okay.
Now we going to start the we're going to step into one of the ways in which valuation is done as per the income tax act 1961.
Now although I have already told you that there's no statute which guideline which gives us guidelines on how the valuation is required to be done mandatory but there is one exception to this fact. There's income tax act income tax act rule 11 UA gives a specific way and method how valuation is to be done specifically for income tax purposes so that ambiguity is not there. So yes, it's good to learn about this method which you might have learned in your group 3 direct tax paper also 11 UA rule 11 UA tells us the guidelines tells us the way in which valuation needs to be done mandatory only this method is to be used assumptions no changing of methods no appropriate basis to be chosen no approach to be changed exact same method is to be used for valuing specifically shares of a particular company according to income tax act relevant for the income Income tax act 1961 only. The idea is to just um you know just be specific in our valuation with respect to the income tax act 1961 idea is that okay so fair market value of shares and securities according to the income tax act 1961 what will be the fair market value 11 UA rule 11 UA the fair market value of quoted shares and securities shall be determined in the following manner.
Okay. So in case of shares and securities if they are quoted quoted means they are quoted and received through any recognized stock exchange.
So they are uh quoted share quoted shares means which are listed in recognized stock exchange. They are the quoted shares which are listed in recognized stock exchange. Um you know so if they are quoted share then valuation is nothing but the market price which is reflecting in the recognized stock exchange. Transaction value as recorded in the stock exchange.
Simple. So if I buy shares of Reliance Industries Limited today, whatever is the market price of Reliance Industries Limited, that is the that is the um uh you know uh uh value of the share. No, no, this is there this method is there in the book. Yes. Yes. In the book, this method is there.
Okay. So now uh if you have received the shares using a recognized stock exchange if you received the shares uh from a stock exchange then obviously the transaction value which is quoted in the stock exchange that will be the value of the share. Secondly when you have quoted shares and you have received it through any other source other than recognized stock exchange like you know there are shareholders and existing shareholders get a bonus or one is to one share. So now the shares are not received through bonus through recognized stock exchange.
It is a private placement. In case of private private placement, if these shares are quoted share, which means they are recognized in stock exchange, then whatever is the price quoted in a recognized stock exchange on the valuation date or on the immediately preceding valuation date, that will be the price which is there for these particular shares. So if they're quoted shares and quoted shares are received uh uh you know through any other thing that apart from recognized stock exchange, quoted shares are not received through recognized stock exchange. they receive through any other you know um thing apart from recognized stock exchange then what will happen the price which is quoted in the recognized stock exchange which is uh there in the recognized stock exchange that will be the uh price of the that particular share then finally the uncoded share what do you mean by the uncqued share what is the you know um uh the uh uh meaning of the uncqued share uncoded share means the fair market by uncoded shares means these shares are not recognized on the stock exchange.
These shares are not recognized on the stock exchange, they don't have any presence in the stock exchange. Stock exchange doesn't have these shares uh quoted. And when stock exchange doesn't have these shares quoted when stock exchange doesn't have you know listing of these particular shares then they are known as the uncqued shares. And these uncqued shares are actually the shares which are um you know not quoted in the stock exchange. And these shares when they are not quoted in the stock exchange then guys obviously these shares are um you know um not valued.
They are not recognized in the stock exchange. When they are not recognized in the stock exchange these are noted shares. Then where to find the value of these shares? How can we find the value of these shares? How can we really uh find out what is the value of these shares?
Okay. Now for these particular shares the uncqued shares we have a specific method of calculation of fair market value.
For these uncoded shares we have the specific method of calculating the fair market value for these uncoded shares.
We have a specific method of calculating value of these uncqued shares. And what is the method for calculating these unqued shares? What is the um method we have for uh you know calculating these unqued shares that is prescribed by the income tax act 1961.
That is how 1961 act comes into picture.
That is when 1961 act tells you that yes these are the uncqued shares which are not quoted in the stock exchange and their value can be computed as under. So FMV of the uncqued shares um you know uh which are uh you know uh which are not there in the stock exchange FMV of these unqued shares are calculated according to this formula and the formula is a + b + c + d minus l a + b + c + d minus l multiplied by p vide by p. This is the formula which is to be used. So what is this formula?
This formula is you know uh this is this formula I'm going to explain you using a example using an illustration. Okay.
This is the you know the abbreviations for this formula. A is the book value of all the assets. Whatever is the book value of the assets that is A. It is all the assets. Uh other than jewelry, artistic work, shares, securities. Then B is the you know open market value of jewelry, artistic work etc. B is the value of the uh you know assets like jewelry, artistic work etc. So this is B. A is value of all the assets and B is the open market value of jewelry, artistic work etc. C is the fair market value of shares and securities. Whatever is the shares and securities. C is the fair market value of shares and securities. D is the stamp duty value of imole property. Whatever is the imole property uh the stamp duty value of imole property is D. L is the book value of liabilities shown in the balance sheet. So whatever liabilities are shown in the balance sheet. The book value of those liabilities is L and liabilities which is shown in the balance sheet.
These are the liabilities which are shown in the balance sheet and the value of these liabilities are L. This is the value of those liabilities which are denoted as L. Okay. So these are the book value of liabilities. So you add up all the assets reduce liabilities from the assets that will give you the that will give you the uh value of the uncqued shares that will give you the value of the unqued shares. Okay. So PV is the paid up value of such equity shares and PE is the total amount of paid up equity share capital as shown in the balance sheet. So I'll tell you guys I'll tell you uh one example let's take one example and then we are going to uh see how the value is calculated. Okay this is very easy method simple method just apply a simple formula and your value will be uh you know determined your value will be computed.
Okay, let's see illustration number one.
Balance sheet of Exm limited for the year ended 31st March on 24 are as follows. So balance sheet of exam limited is uh given to you uh as on year ended 31st March on 24 are as follows.
Equity share capital other equity non-current liabilities current liabilities this is the total and then we have property plant and equipment we have capital work in progress loans and advances current assets and the total is given to you. Asset side total is given to you liability side as total is given to you. Calculate the fair market value of equity per share for the purpose of issue of shares. So we need to calculate the fair market value of equity per share for the purpose of issue of shares. We need to calculate the fair market value of the equity shares of this particular company according to rule 11 UA of the income tax act. Rule 11 UA will tell us the value of these shares.
Competition of fair market value. Uh assets A assets L liabilities. P is the amount paid up equity share. PV is the paid up value of equity shares.
Statement of computation of FMV of uncqued equity shares as on 31st March on 24 is to be prepared by us. FMV will we'll you know produce the all the assets all the liabilities. We'll reduce the assets from liabilities and then we'll compute the value of the shares.
Okay. So first of all let's compute the book value of the assets. So what will be the book value of the assets? Let's compute the book value of all the assets of this particular organization.
Okay. So what is the book value of assets of this uh of this particular organization? Book value of assets is the total of the asset sides guys. But you know please note that what kind of assets are there in the asset side. We have property, plant and equipment, capital work in progress, loans and advances, current assets. We have this is the total of um assets. Okay.
172853389 is the book value of assets.
1728 53389 is the book value of assets.
So this is the book value of total assets.
Now what is the book value of liabilities?
And we are talking only about external liabilities.
What is the book value of liabilities?
So what is the total value of the liabilities? What is the total value of liabilities? So total liabilities are again 178 53. So same is the value of total liabilities 17 28 53389 1728 53389 Okay.
Okay. Now we are going to uh reduce the book value of liabilities from uh uh this particular uh liability side. So paid up share capital is 60 lakh.
Paid up share capital is 60 lakh. What is reserves and surplus except depreciation? What is reserves and surplus?
3 9 06 1 0 other equity is the reserve and surplus action 3 9 0610 that is reserve and surplus. So we'll get the book value of liabilities.
Liabilities we mean excluding the share capital. Excluding the equity holding excluding the equity holding what whatever is your liability that we mean by the outside liabilities. This is the outside liabilities. 728 53389 1728 533 389 Minus 60 lakhs minus Okay. So, what is the liability?
16 29 47 279. This is the book value of liabilities.
This is the book value of liabilities and amount of paid up equity shares.
Amount of paid up equity shares is of course 60 lakh rupees.
Then what's the paid value of each equity share?
Okay, I'll show one uh working note one.
Working note number one is this. What's the value of p value of one equity share? It is 100.
990610 and zero.
Okay. So this is the book value of assets.
This is the book value of asset.
Okay. Now we'll apply the simple formula.
We'll apply the formula book value of assets minus book value of liability.
We'll divide by the total paid up equity shares and we'll multiply it by the paid up value of equity shares.
So we'll apply the simple formula.
Okay. So 990610 this is the value book value of the total assets of the company which are attributable to the equity shareholders.
990 610 divide by the paid up equity shares amount of paid up equity shares multiply by the face value which is 165.10. So what is the fair market value of uncoded shares? 165.10 165.10 10.
So this is the method of computation of value of shares according to the income tax act 1961.
Fair market value of uncoded shares is 165.10 165.10 1 Z.
So 165.10 is the value of the uncqued share according to the income tax act 1961 165.10 1 Z value share is 165.10 Okay. You can conclude by writing that the fair market value of the shares is computed as as per section as per rule 11 UA. Okay.
As per rule 11 UA, the fair market value of the shares is computed as rupees 165.10.
Yes, that's okay.
Decimal difference is okay. 165.10 if you are getting uh you know FM in decimals. I'm also getting FMV in decimals only. And if decimals here and there one two point decimal here and there that's okay.
Okay, understood the concept.
Now it can so you know when you divide 9990610 99610.
You divide by 60 lakhs. You divide by 60 lakhs. Okay?
You get 1.6510.
You multiply it by 100, you get 165.10.
You multiply it by 100, you get 165.10.
Okay? So 165.10 10 is the fair market value of the uncquated equity shares.
Okay. So this is the value of shares. So please write the conclusion. Hence the fair value of equity shares of the companies are computed as 165.10 per share. And uh that is the conclusion.
165.1 per share.
Okay. So yes guys, um this was the 11 UA method. 11 UB method. This was for shares and this method 11 UB is for uh uh other other things uh like you know inventory. This is for inventory. So land or building or both when this is the inventory then SDV the time duty value of human property will be the uh you know valuation technique jewelry archeological collection drawings paintings then you know 11 UAS to be referred to in case of property other than those specified above like inventory open market value of such property like open market value of inventory is to be taken as the value of that particular inventory. So 11 UA and UB are strictly to be followed while you are valuing for income tax purposes. Not for every purpose. It's not for every purpose only for income tax purposes.
You know um 11 UA and 11 UB is to be followed. The method is to be followed specifically for income tax purposes because uh you know in this particular case the NAV or the market value is to be computed in this particular way. That is the you know ask that is the requirement. Okay. So yes guys that's all for this chapter of valuation of shares and oh sorry valuation of valuation compliances there are some more practical question with respect to 11 UA technique okay income tax act references only income tax act so you can practice those if it comes in the examination moranza points because very very easy computation simple straightforward calculation so it'll be really uh you know beneficial for you to remember this entire computation and yes theoretical point of view this chapter is quite important I've given some MCQs at the end of chapter which you need to re uh go through yourself. These MCQs you need to go through yourself. Yes, these MCQs are quite important from an exam standpoint and these MCQs are um you know relevant for an exam standpoint also. Okay, so that's all for this particular session guys. We'll be meeting in a subsequent session for more chapters on valuation. Till that time, all the very best and happy studying.
Bye-bye. See you in the next session.
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