[2018] 94 taxmann.

com 161 (Article)

[2018] 94 taxmann.com 161 (Article)
Date of Publishing: June 12, 2018

The Concept of ‘Fair Market Value’in Corporate Law

DR. VIJAY KUMAR SINGH

Prof. UPES School of Law

The Concept of 'fair market value' is not very clear from the corporate law perspective for
want of a Valuation Standard. While the terms 'fair value', 'market value', etc. have been used
in different contexts, its legal perspective and interpretations vary. This article traces the
concept, its present status and potential requirements.

In India, the concept of valuation has been a matter relating to tax law enforcement and has
accordingly evolved over a period. Until the concept of Registered Valuer was recognized
under Section 247 of the Companies Act, 2013, valuation under company law was also being
carried out by the professionals registered under the Wealth Tax Act and Rules 1 known as
registered valuer therein. However, there was a lot of confusion as to the jurisdiction and
asset class these valuers may do a valuation of as well as on the liability of the valuers.

Registered Valuers in Companies Act 2013

1. Section 247 of the Companies Act introduces the concept of registered valuer formally into
corporate law as a distinct profession. In corporate law, valuation may be required in respect
of any property, stocks, shares, debentures, securities or goodwill or any other assets or net
worth of a company or its liabilities. Valuation in corporate law would generally be required
for determining the share exchange ratio in M&A transactions, determining the value of
liquidation estate in corporate resolution under IBC, and during liquidation process. Central
Government notified the Valuation Rules2 and as per the Rules, a professional to be
recognized as a registered valuer must undergo a valuers examination 3 for a class of asset to
be conducted by IBBI4. Before one can appear for exam, she must register herself with a
recognized Registered Valuers Organization (RVO)5 and obtain the requisite credit
certification (50 hours) undergoing the syllabus prescribed6.

The Concept of Valuation

2. "It is impossible intelligently to discuss methods of valuation without reference to some

assumed definition of value."7 In the case of Municipal Committee Patiala v. Model Town
Residents Assn8., Supreme Court observed that 'valuation' is subjective exercise. Valuation
involves an element of guess work. Valuation does not involve a straightjacket formula.
Valuation would depend upon the kind of asset is being valued. Market value approach is one
of the three widely used valuation techniques (the other two being the cost approach and
income approach or yield method and asset value method). It may be observed that if we
search the concept of 'valuation' and 'fair market value' in a legal database, the search results
would mostly point us to the matters relating to valuation of land (this becomes relevant for
companies when they area acquiring land for their purposes)9 or fixation of rent10 or cases
related to taxation11.

Fair Market Value in cases of Land Acquisition

2.1 While we are not focusing upon this aspect of valuation, it may be noted that the
standards of valuation in land acquisition cases depend on a lot of factors including the social
perspective12. The concept of fair market value is essentially a fiction in the context of
takings of property13. Fair market value does not apply where it would be too difficult to
measure or where manifest injustice would result. In India, post the Right to Fair
Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act,
2013, the issue of compensation has undergone a significant change with introduction of the
concept of market value and multiplication factor.

Registered Valuers

2.2 As per the Companies Valuation Rules14, the Registered Valuer is required to comply with
the Valuation Standards as may be notified by the Central Government. The valuation
standards shall be as per the recommendations of the 'Committee to advise on Valuation
Matters'15. The said valuation standards are yet to be formulated and the registered valuers
yet to be in place following the process of examination and registration with IBBI. In the
meanwhile, proviso to Rule 8 states that until the valuation standards are notified, a valuer 16
shall make valuations as per

♦   internationally accepted valuation standards;

♦   valuation standards adopted by any registered valuers organisation.
It may be noted that the RVOs are already being recognized by IBBI and they have
established valuation standards17 for different class of asset and have been doing valuations
accordingly. Hence for now the concept of fair market value must be understood from the
existing literature and case laws under the taxation laws.

Fair Market Value

3. The most commonly known and accepted standard of value is fair market value, especially
from the point of view of corporate law where we are concerned with the valuation of shares
most of the times. Usual rule is to take shares of the going concern at quoted (listed) market
value18. Rule 3 of the Income Tax Declaration Scheme Rules19 provides for determination of
Fair Market Value (FMV) and it may be noted that for different class of assets different
formula has been given, for example the value of bullion, jewellery or precious stone shall be
the higher of (i) its cost of acquisition; and (ii) the price such bullion, jewellery or precious
stone shall ordinarily fetch if sold in the open market as on the 1st day of June 2016, on the
basis of the valuation report obtained by the declarant from a registered valuer.

Section 56 of the Income Tax Act, 1961 defines the concept of 'Fair Market Value' of a
property20 (other than immovable property) as the value determined in accordance with the
method prescribed in Rules21. A detailed provision has been laid down to value different class
of property mentioned.
Concept of Fair Value

3.1 As per Ind AS 113, 'fair value' is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date22. While the term 'fair value' appears in Companies Act 2013 in relation to
calculation of profits23 and definition of free reserves24, the concept of 'market value' in
general instructions for preparation of balance sheet25. The concept of 'fair market value' has
not been used therein.

While the concept of 'fair value' and 'fair market value' may appear to be synonymous 26, they
are not. Appropriately stated by an author, "the expression fair value is an example of
ambiguous terminology used in the field of commercial appraisal. In order to understand
what the expression means, it is necessary to know the context of its use 27." Generally, the
concept of 'fair market value' is utilized from a tax regulation perspective and is accordingly
subject to tax court rulings. The concept of 'fair value' comes from accounting perspective
and is based on the experiences from the tax court rulings. As noted above, since fair value is
a separate standard, determinations of fair value for financial reporting purposes are not
subject to tax court rulings28. It may be said that while fair value and fair market value
definitions are similar, fair value and fair market value valuation procedures are different.

In a ruling by the Hyderabad Income-tax Appellant Tribunal (Tribunal) 29, it has been clearly
laid down that if a valuation method has been laid down by the Rules, a divergence in the
procedure of calculating the same is not permitted by the income tax officials. ITAT relied
upon the Supreme Court decisions30 and decided that31:

Where a method had been prescribed by the legislature, that method alone should be
followed for computation of FMV. Accordingly, adoption of "market value" of shares in place of
"FMV" as per Rule 11UA of the Rules for the purpose of section 56(2)(viia) of the IT Act was
incorrect. It further held that where the legislature in its wisdom had given a formula for
computation of FMV, the same could not be ignored by the lower authorities.

Conclusion

From the aforesaid discussion, it may be found that the concept of 'fair market value' in
corporate law would presently depend upon the context it is being used and we have to wait
for the valuation standards to come up under the Valuation Rules. Until then, the valuation
standards being following by the RVOs would be utilized subject to varying judicial
interpretations depending upon the facts and context of the case. The judicial interpretations
already in place in the context of tax matters, land acquisition matters, etc. may not be of
great help. So, the need of the hour is to have the valuation standards as expeditiously as
possible.

■■

1. Under Section 34AB of Wealth Tax Act, 1957, the Chief Commissioner or Director
General maintains a Register of Valuers and registers the persons as valuers
having prescribed qualifications under the Wealth Tax Rules (Rule 8B). It may be
noted that w.e.f. 1st day of April 2016 the Wealth Tax Act is no more available by
the amendment introduced by Finance Act of 2015.
2. The Ministry of Corporate Affairs vide its notification no. G.S.R. (E). dated 18th
October 2017 has notified the Companies (Registered Valuers and Valuation)
Rules, 2017. Vide notification dated October 23, 2017, the Ministry of Corporate
Affairs (MCA) has delegated the powers and functions pertaining to Registered
Valuers, as mentioned in Section 247 of the Companies Act, 2013, to the
Insolvency and Bankruptcy Board of India (IBBI).
3. This examination is mandated under section 247 read with sections 458 and 469
of the Companies Act, 2013 (18 of 2013)
4. Companies (Registered Valuers and Valuation) Rules, 2017. There are three asset
classes in which valuation examination is being conducted by IBBI, i.e. land &
building, plant & machinery, and securities or financial assets.
5. There are six RVOs recognized by IBBI, see http://ibbi.gov.in/rovs.html
6. See IBBI - Valuation Examination FAQ, available at http://www.ibbi.gov.in
/FAQ_VE_ver5.pdf
7. James C. Bonbright, The Valuation of Property: A Treatise on the Appraisal of
Property for Different Legal Purposes, I (Charlottesville, VA: The Michie
Company, 1937), p. 128 cited in Shannon P. Pratt, The Opinion of the College on
Defining Standards of Value, Valuation, vol. 34, no. 2 (June 1989)
8. (2007) 8 SCC 669 [Coram: S.H Kapadia and B. Sudershan Reddy, JJ] decided on
1.8.2007.
9. Bijender v. State of Haryana, [2018] 11 SCC 180 [Coram: RK Agrawal and AM
Sapre, JJ] decided on 27.10.2017.
10. VS Kanodia v. A.L. Muthu, [2012] 11 SCC 269
11. Appropriate Authority v. Kailash Suneja [2001] 6 SCC 563, Amrit Banaspati Co.
Ltd. v. CIT, [2014] 16 SCC 166 (ruling on relevancy of fair market value to
determine value of assets eligible to wealth tax).
12. See for a good debate on this from a US perspective, Katrina Miriam Wyman,
The Measure of Just Compensation, University of California, Davis, [Vol. 41:239]
2007.
13. Thomas W. Merrill, Incomplete Compensation for Takings, 11 N.Y.U. ENVTL. L.J.
110, 116-17 (2002)
14. Rule 8 of Company Valuation Rules: Conduct of Valuation
15. Rule 19 of the Company Valuation Rules: The Committee shall comprise of a
Chairperson who shall be a person of eminence and well versed in valuation,
accountancy, finance, business administration, business law, corporate law,
economics with other nominated/representative members (up to 13 members).
16. Rule 2(1)(j) of the Valuation Rules – "valuer" means a person registered with the
authority (IBBI) in accordance with these rules and the term "registered valuer"
shall be construed accordingly.
17. See for example, https://www.iovrvf.org/
18. Hindustan Lever Employees' Union v. Hindustan Level Ltd., [1994] 2 SCL 157
(SC) [Coram: MN Venkatachaliah, CJ, RM Sahai, and SC Sen, JJ.] decided on
24.10.1994.
19. 2016, available at https://www.incometaxindia.gov.in/Communications
/Notification/Notification33_2016.pdf
20. "property" [means the following capital asset of the assessee, namely: —] (i)
immovable property being land or building or both; (ii) shares and securities; (iii)
jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii)
sculptures; (viii) any work of art; or[(ix) bullion;]
21. See Income Tax Rules 11U and 11UA.
22. Indian Accounting Standard (Ind AS) 113: Fair Value Measurement, available at
http://mca.gov.in / Ministry/pdf / INDAS113.pdf
23. Section 198 (3) (e)and 198 (5) (d)
24. Section 2 (43) proviso
25. Under the head current investments and non-current investments, i.e. Aggregate
 amount of quoted investments and market value thereof.
26. Appraisers may debate how the definitions differ, but the similarities are more
apparent than the differences. Both definitions rely on the notion of a transfer
price, and each assumes the transaction is completed in an orderly fashion. An
authority on real estate appraisal terminology in the United States says that
market value is synonymous with fair market value (Byrl N. Boyce, ed., Real
Estate Appraisal Terminology [Cambridge, Mass.: Ballinger Publishing Company,
1982], p. 98). A Canadian business appraiser draws a slight distinction between
the two terms: "Fair in fair market value means that the market (and the price)
must have some consistency and cannot be affected by a transient boom or
sudden pause; that is, the word fair qualifies the market on which the valuation is
based." (Richard M. Wise, "The CA's Role in Valuations: An Inside-Out
Perspective," CA Magazine [September 28, 1984], pp. 28–40)
27. Shannon P. Pratt, The Opinion of the College on Defining Standards of Value,
Valuation, vol. 34, no. 2 (June 1989)
28. https://www.orchardpartnersinc.com/KnowledgeCenter/Topics
/FairValueVersusFairMarketValue.aspx
29. M/s Medplus Health Services Pvt. Ltd., v. ITO 2016 SCC Online ITAT 204
[Coram: P. Madhavi Devi, JM] decided on 08.03.2016.
30. Bharat Hari Singhania v. CWT [1994] 207 ITR 1/73 taxman 3 (SC); Mrs. Prem
Shamsher Singh v. Commissioner of Wealth Tax [1994] 210 ITR 233/75 Taxman
580 (Delhi); Chandra Kishore Jha v. Mahavir Prasad. [1999] 8 SCC 266 (SC)
31. See analysis on this decision, https://www.pwc.in / assets/pdfs / news - alert-
tax/2017 /pwc_news_ alert_19_july_ 2017_ final_ rules_
for_the_valuation_of_unquoted_equity_shares.pdf