There
can be no doubt that the subject of ‘valuation’ is a specialised one and covers
a wide range of purposes. In our country
the study of valuation as far as its legal aspect is concerned began with the
enactment of Land Acquisition Act of1894.
Whenever acquisition of land and building has to take place under the
provisions of the Land Acquisition Act estimating the market value of such land
and building became necessary for the purpose of assessing and payment of
compensation.
1.
With
the passage of time valuation came to be studied in other different areas and
contexts. Some of them are the
following.
a) MunicipalTaxation, Income tax, Wealth tax and Gift Tax Laws for the purposes of charging
and imposition of taxes on the property/particularly the real estate property.
b) Insurance
Laws for the purposes of determining the premium, salvage value of the property.
c) Town
planning Law for the levy of betterment charges.
d) Stamp
Laws for determining the stamp duty payable on the market value of the
property.
e)
Indian
Electricity Act which lays down a specific procedure for valuing assets when an
undertaking of a licensee (a person Licensed to supply electricity under the
Act) is to be sold on revocation of a Licence.
2.
One
of the most recent of the enactments which has provided for valuation of the
assets is the Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act (SARFAESI Act for short) and the rules framed there
under. The said Act was passed to
regulate securitization and reconstruction of financial assets and enforcement
of security interest and for matters connected therewith or incidental
thereto. While a detailed study of the
Act and rules is unnecessary for the present purposes certain salient features
of the Act and rules are enclosed to this paper.
3.
It
may be noted that under the SARFAESI Act the valuation of assets would become
necessary under the following circumstances.
Under Section 12 of
the Act which empowers the RBI to give directions to a securitization company
or an asset reconstruction company as to
a)
The
type of financial asset of a Bank or Financial Institution which can be
acquired by and procedure for acquisition of such assets and valuation thereof.
b)
The
aggregate value of financial assets which may be acquired by any Securitisation
company or reconstruction company.
Under the Security
Interest (Enforcement) Rules 2002, valuation of movable and immovable assets
taken possession of by the authorised officer of the Bank for the purposes of
recovery of the dues of the Bank is mandatory.
The relevant rules read as under.
After taking
possession under sub-rule (1) of rule 4 and in any case before sale, the
authorised officer shall obtain the estimated value of the movable secured
assets and thereafter if considered necessary, fix in consultation with the
secured creditor, the reserve price of the assets to be sold in realization of
the dues of the secured creditor.
Before effecting
sale of the immovable property referred to in sub rule (1) of rule 9 the
authorised officer shall obtain valuation of the property from an approved
valuer and in consultation with the secured creditor, fix the reserve price of
the property and may sell the whole or any part of such immovable secured asset
by any of the following methods.
(c) defines an
approved valuer which reads as under “Approved Valuer” means a valuer as
approved by the Board of Directors or Board of Trustees of the secured creditor
as the case may be.
4.
Reserve
Bank of India has framed guidelines regarding registration and functioning of
Securitisation and Asset Reconstruction Companies.
General guidelines
for securitisation companies / reconstruction companies have also been framed.
As regards
acquisition of Financial Assets para 3 (viii) and (ix) are the relevant
provisions of the said guidelines which provide as under.
viii)
The
valuation process should be uniform for assets of same profile and a standard
valuation method should be adopted to ensure that the valuation of Financial
Assets be done in scientific and objective manner. Valuation may be done internally and or by
engaging an independent agency depending upon the value of the assets ideally,
be entrusted to an asset acquisition committee which shall carry out the task
in line with an Asset acquisition policy laid down by the Board in this regard.
ix) A
record indicating therein the details of deviations made from the prescriptions
of the Board in the matter of asset acquisitions pricing, etc should be
maintained.
5.
UnderSARFAESI Act therefore valuation of Financial Assets and of properties over
which security interest is created would become necessary “Financial Asset” as
defined in Section 2(l) of the said Act.
This is an inclusive definition which defines financial asset as debt or
receivables including a claim to any debt or receivables or part thereof which
may be secured by the mortgage, charge of movable / immovable property. Security interest as per Section 2 (zf) of
the SARFAESI Act means right, title and interest of any ki9nd whatsoever upon
property created in favour of a secured creditor including any mortgage,
charge, hypothecation, assignment. Some
charges are excluded from the definition of security interest as provided in
section 31 of the SARFAESI Act.
6.
Essentially,
while acquisition of Financial assets by the Securitisation or Asset
Reconstruction Company has to take place, the valuation of such assets has to
be done in a scientific and objective manner and when valuation is entrusted to
an internal committee such committee has to carry out the task in line with the
assets acquisition policy laid down in this regard by the Board of the
Securitisation Company or the Asset Reconstruction company as the case may be.
7.
under
the relevant rules framed under SARFAESI Act, valuation of secured assets by
the approved valuer is mandatory. Rule 5
prescribes that Authorised officer of the Bank while enforcing security
interest shall obtain the estimated value of the movable assets and under rule
8 valuation of immovable property is required to be taken before sale of such
property.
8.
The
valuation process is undertaken to enable the authorised officer to fix a
reserve price in consultation with the secured creditor and thereafter sell the
assets for realisation of the dues of the secured creditor. The endeavour should therefore be to ensure
that such sales are upheld. In this
connection certain rulings given by the courts while considering validity of
sale in execution of a decree or during liquidation proceedings will be
relevant.
In S.
Sunderarajan vs Khaka Mahomed Ismail Saheb AIR 1940 Madras page 42 the Madras
High Court ruled that the auction sale is subject to confirmation by court
which power is necessary to interfere in case the sale is for an inadequate
price. The Hon’ble Court has observed as
under.
“It is
only right and proper that the sale should be subject to the confirmation of
the court. The condition is a safeguard
against irregularity or fraud in connection with the sale and against property
being sold at an inadequate price.”
In A
Subbaraya Mudaliar v/s K. Sundararajan AIR 1951 Madras Page 986, the same court
has observed as follows.
“ It
will therefore be not only proper but necessary that the court in exercising
the discretion which it undoubtedly has of accepting or refusing to accept
highest bid at the auction in pursuance of its orders should see that the price
fetched at the auction is an adequate price.”
The
Hon’ble Supreme Court of India in Union Bank of India v/s Official Liquidator
reported in 2000(4) SCC 554 held
“At the
outset, we would state that in the proceedings for winding up of the company
under Liquidator, the court acts as a custodian for the interest of the company
and the creditors. Therefore, before
sanctioning the sale of its assets, the court is required to exercise judicialdiscretion to see that properties are sold at a reasonable price.
For
deciding what would be reasonable price, valuation report of an expert is a
must. Not only that it is the duty of
the court to disclose the valuation report to the secured creditors and other
interested persons including officers.
Further it is the duty of the court to apply its mind to the valuation
report for verifying whether the report indicates reasonable market value of
the property even if objections are not raised.”
The
Supreme Court has relied on its earlier decisions Allahabad Bank v/s Bengal
Paper Mills Co. reported in 1994 (4) S.C.C. 383 and M/s. Navalkha and sons v/s
Sri. Ramanyadaa and others reported in 1969(3) Sec 537 at page 540.
9.
Therefore
whenever valuation is made the above principles be kept in view to sustain the
sale conducted by the authorised officer of the Bank so that all efforts can be
made to fetch adequate and reasonable price for the property sold and the
amount due to the Bank/Financial Institution is recovered in full and surplus
if any could be made over to the Borrower.
K.R.KEERTHI
Assistan General manager(law)
State Bank of Mysore, head
Office, Bangalore
(Source-Seminar on valuation
Scenario)
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