1. Introduction

The Insolvency and Bankruptcy Code (IBC) has transformed corporate insolvency resolution in India, ensuring a structured approach to financial distress. One of the most critical aspects of the resolution process is valuation, which determines the financial viability of distressed firms and helps creditors make informed decisions.

Valuation under IBC is essential for assessing the fair and liquidation value of assets, ensuring transparency in the insolvency process, and protecting the interests of stakeholders. However, valuation in distressed scenarios comes with unique challenges, including unreliable financial data, fluctuating market conditions, and regulatory complexities.

This article explores the different valuation methods used under IBC, their challenges, and best practices to ensure accurate and effective valuation in insolvency proceedings.

2. Role of Valuation in the IBC Process

Valuation plays a central role in the corporate insolvency resolution process (CIRP) under IBC. It helps in:

  • Assessing Financial Health: Determines whether a company is viable for revival or should be liquidated.
  • Enabling Fair Bidding: Provides potential buyers with clarity on asset value.
  • Protecting Creditor Interests: Ensures creditors receive fair compensation during resolution.
  • Ensuring Transparency: Supports judicial and regulatory decisions by providing objective financial assessments.

Under IBC, valuation is conducted at two stages:

  1. During CIRP – To determine fair and liquidation value for resolution applicants.
  2. During Liquidation – To decide the value at which assets should be sold.

3. Key Valuation Approaches under IBC

Valuers under IBC rely on three primary approaches:

1. Asset-Based Valuation

  • Determines the company’s worth based on tangible and intangible assets.
  • Includes methods like the Net Asset Value (NAV) approach.

2. Market-Based Valuation

  • Compares the distressed company to similar firms in the market.
  • Uses methods such as Comparable Company Analysis (CCA) and Precedent Transaction Analysis.

3. Income-Based Valuation

  • Projects future earnings and discounts them to present value.
  • The most common method under this approach is the Discounted Cash Flow (DCF) method.

Each approach has its merits and limitations, especially when dealing with distressed assets under insolvency.

4. Asset-Based Valuation under IBC

Asset-based valuation is widely used for distressed firms, particularly during liquidation. It involves:

  • Net Asset Value (NAV) Method – Calculates the value of a company’s assets minus liabilities.
  • Liquidation Value vs. Fair Value – Determines whether assets should be valued based on immediate liquidation or potential market sale.

Challenges in Asset-Based Valuation:

  • Depreciation and obsolescence of assets.
  • Intangibles like goodwill and brand value are harder to assess.
  • Uncertainty in real estate and machinery valuation.

5. Market-Based Valuation Approach

This approach involves:

  • Comparable Company Analysis (CCA): Compares financial ratios of similar companies.
  • Precedent Transaction Analysis: Evaluates past transactions of comparable distressed firms.

Limitations:

  • Limited data availability for distressed companies.
  • Market fluctuations can distort valuation accuracy.

6. Income-Based Valuation Approach

This approach estimates the present value of a company’s future cash flows using:

  • Discounted Cash Flow (DCF) Method – Projects free cash flows and applies a discount rate.

Challenges:

  • Difficult to estimate cash flows for financially distressed firms.
  • Requires extensive financial modeling and assumptions.

7. Fair Value vs. Liquidation Value

Fair Value: Price at which an asset can be sold in a normal market condition.
Liquidation Value: Expected sale price when assets are sold under distressed conditions.

Under IBC, both values must be determined to ensure fair resolution and protect stakeholder interests.

8. Role of Registered Valuers in IBC

  • Registered with IBBI and classified under three categories: land & buildings, plant & machinery, and securities & financial assets.
  • Ensures compliance with IBC regulations.
  • Plays a critical role in preventing undervaluation or overvaluation.

9. Challenges in Valuation under IBC

  • Inconsistent financial records due to poor accounting practices.
  • Legal hurdles in asset liquidation.
  • Market volatility affecting valuation accuracy.

10. Case Studies of Valuation under IBC

Examining past insolvency cases helps understand:

  • Success stories in resolution.
  • Disputes arising from undervaluation or overvaluation.

11. Best Practices for Effective Valuation in Insolvency Cases

  • Ensuring transparent methodologies.
  • Adhering to IBBI guidelines.
  • Using technology-driven valuation tools.

12. Future Trends in Valuation under IBC

  • Adoption of AI-based valuation models.
  • Strengthening of regulatory frameworks.
  • Increased focus on sustainability in valuation.

13. Conclusion

Accurate valuation under IBC is essential for fair resolution, protecting creditors, and ensuring market transparency. By adopting best practices and leveraging technology, valuation professionals can improve insolvency outcomes and strengthen India’s financial ecosystem.