Independent valuations: A problem without a solution

Finding a valuer who is completely objective and independent of the company remains a problem, especially for minority stakeholders

Suppose you hear from the lawyer of a distant uncle who has passed away. He has left you a stake in a company he helped found. Now, his partners ask if they can buy you out. You are not sure if you will be able to put an accurate price to the stake. ‘No problem,’ they say, ‘we can appoint an independent valuer.’ 

This valuer is paid by the very company that your uncle’s partners now control. Should you be comfortable with the price he sets for your stake?

The Securities and Exchange Board of India’s (Sebi) move to empanel experts who can provide an independent view on open offer prices has been favourably received by market participants. Since it is Sebi and not the company who is appointing the valuer, there is a greater degree of independence which can be expected.

But one problem remains – independent valuation will be paid for by the companies. And companies in India are often indistinguishable from their promoters.

But this problem of a conflicted independence is not unique to valuers. Rating agencies are supposed to provide impartial ratings on entities who will also decide on their payment. And if rumours of rating shopping are to be believed, they may (through their ability to choose one agency over another) even determine if they are to be paid at all. 

But what is unique to valuers is that while rating agencies may come up with an opinion on the likelihood of whether or not a firm is likely to default, a valuer must assign a clear number value to this opinion. Are the shares of a company worth Rs 1,500 or Rs 1,750? The difference can mean a lot to minority shareholders, as well as the company. 

The credibility of these numbers, therefore, is open to question.

In a January 5 note titled ‘Valuations: The Emperor’s New Clothes,’ Institutional Investors Advisory Services (IIAS) points to the lack of performance measures for such valuers. 

“Almost all market participants - from companies, equity research houses, to rating agencies – have a measure of their performance. Independent valuers don’t – as yet. In the absence of an established performance measure and historical performance indices, the quality of the valuation is centrally driven by the credibility of the valuer,” the note said.

So how does one figure out a way to appoint a credible valuer who will be completely impartial in all respects?

For the moment, that remains a problem without a solution.