D. Murali

AND they took the thirty pieces of silver, the price of him that was valued, whom they of the children of Israel did value... Thus reads a line from the New Testament, just before Jesus stood before the governor, and the governor asked him, "Art thou the King of the Jews?" On value again, and of value, is a quote from Job, Old Testament: "Surely I would speak to the Almighty, and I desire to reason with God. But ye are forgers of lies, ye are all physicians of no value."

Ah, that's a different profession under attack, and so, I hurriedly return to the comfort that Henry David Thoreau offers with his philosophical view that there is no value in life except what you choose to place upon it and no happiness in any place except what you bring to it yourself.

If you thought that value is a tough proposition to measure, Mortimer J. Adler offers some clue — that men value things in three ways: "As useful, as pleasant or sources of pleasure, and as excellent, or as intrinsically admirable or honourable." Accountants don't approach value that way, and two accountants may not arrive at the same value for the same thing.

At times, however, the value may be trashed outright, as happened in the Vinod Kumar (VK) vs Sigmalon Equipment P Ltd (SEPL) case that came up before the Bombay High Court not long ago. The appeal before the court had been filed under Section 10F of the Companies Act, against an order of the Company Law Board (CLB), and the key question was whether the market value determined in respect of the shares held by VK could be said to be just and proper.

If you trace back the tale, as one can do with the text of the judgment on hand, you'd learn that VK, who held 40 per cent of Sigmalon's shares, approached the CLB with a petition under Sections 397 and 398, alleging O&M (for starters, that's not organisation and management CA students prefer to dread but oppression and mismanagement).

The CLB heard the plea and gave two options to VK: Either continue to be part of the company and retain the 40 per cent holdings, be a director with remuneration, though not participating in the day-to-day affairs and management of Sigmalon; or, sell the shares to the other group of shareholders at a price to be determined by an independent valuer. How simple it seems, though Philip W. Anderson would caution that the ability to reduce everything to simple fundamental laws does not imply the ability to start from those laws and reconstruct the universe.

Enter PwC

Resuming the Sigmalon story, the text of the judgment informs that VK chose the second option. And the CLB appointed `Price Water House (Coopers) Ltd' or PwC "to determine the fair price of the shares in accordance with the accepted principles for valuation of the said shares". In about nine months, PwC submitted its report. Thereafter, things became messy, with the CLB passing apparently conflicting orders, including one that the objections raised by VK should be heard by PwC, a point that came under much fire at the court later.

However, PwC did hear the objections and a revised report got filed with the CLB. In about a month VK came to the CLB with his objections again; to complicate matters further, Sigmalon too filed its objections to the revised valuation report of PwC. Considering all these, the CLB passed an order on May 5, 2003, but queerly again both the parties were up in arms and so cross appeals were filed before the Bombay High Court.

On whether the market value determined is just and proper, Justice S. U. Kamdar was of the view that since both the parties were aggrieved by the valuation report "the valuation ex-facie cannot be considered as just and proper", and proceeded to consider the details and hear the arguments.

Thus, it was Setalvad, who argued for Sigmalon, attacking but one aspect of the report. He said that valuation report was `erroneous and inaccurate' because it had included `plots A-9 and A-10' as assets. "Even if the said plots are to be included as the assets of the company, still the ratio of premium fixed by the valuer of 50 per cent each between the respondent company and MIDC is totally erroneous," said Setalvad, asking for adjustment in the value arrived after subtracting the value of the plots.

If that was a limited objection to PwC's report, a `wholehearted' criticism came from VK's counsel. He demanded the rejection of the valuation report in its entirety, alleging loss of independence on the part of PwC who was said to have merely acted as an agent of Sigmalon. A grave charge and to prove it, VK's side had some evidence too in the form of a `private and confidential' letter issued by PwC to Sigmalon.

Privation of `private and confidential'

In that letter that was to cause it much woe, PwC had written: "We are writing to you to set out our understanding of the nature and purpose of this valuation engagement, the approach and scope of examination will apply, our restrictions and our proposed fee arrangements. SEPL has agreed that in the time available we should restrict the extent of our verification work and rely solely on the information and data supplied by SEPL.

"Consequently, SEPL will accept full and sole responsibility for the reasonableness and reliability of this information and data and that our valuation will be subject to this limitation. In performing our valuation, we may rely on the audited financial statements for the five years ended March 31, 2000, and the projected earnings and balance sheet of SEPL for the period from April 1, 2000 to March 31, 2003, as prepared by the Management... "

Citing the letter, VK's counsel contended that the valuer having lost its independent character, the entire exercise of valuation by such a valuer was in futility, and that there was a distinct bias of the valuer against VK, but in favour of the company.

The court noted that VK's objections to the letter had been raised earlier both before the valuer and the CLB.

What did the judge have to say? He said that the independent valuer must have his own approach and method for valuing the assets of the company.

The letter in question indicated that the valuer appointed by the CLB had ignored the fact that he'd been appointed by the Board "in exercise of quasi-judicial power" and therefore had to act independently.

"He has purportedly proceeded on a footing that the respondent company has appointed them as a valuer for valuation of the assets. It is not only that but the letter indicates that parameters for valuation of the assets were not fixed by the valuer but by the company. The entire approach of the valuer I find is totally erroneous and lacks bona fide in the present case," is a snatch from the verdict of Justice Kamdar that's sufficiently enough critical to rob the accounting community of its slumber.

And there is more: "To build confidence in such an expert body, the independence of such an authority or expert must be preserved and kept intact. In my opinion... it is clear that the said valuer had lost independent character and has acted as an auditor appointed by the respondent company, which is totally illegal. Thus the report prepared by such an expert body is of not any worth and thus cannot be taken into consideration."

The CLB too came in for a rap for having upheld the report and also for later remanding the matter back to PwC. The CLB was duty bound to determine VK's objections and could not have abdicated that duty by sending the objections to the valuer for determination, said Justice Kamdar. "Plainly speaking, for me as a judge it is not possible to substitute the facts and figures pertaining to the valuation of the various assets of the company. Furthermore I am neither equipped nor an expert in determining the valuation of the various assets and principles on which the various depreciations and or reductions are required to be given on various assets of the company," he conceded, but he was appalled that the valuation report lacked the `basic principles of independence'.

I set aside and reject the said valuation report in its entirety, declared Justice Kamdar. Should the report be remanded to the CLB for re-determination of the valuation of various assets? No, that would be an exercise in futility, opined the judge, because already two opportunities had been given by the CLB to revise the valuation and neither party was satisfied.

More important was this observation: "Once I have come to the conclusion that valuers were not independent in their approach of preparation of the valuation report it is necessary that I should reject the said report in its entirety and should direct the CLB to appoint another chartered accountant for revaluation of the assets of the said company and determination of valuation of the said shares."

Lest history repeat itself, the judge added: "It is needless to state that the valuer will determine the valuation of the said assets as independent agency and on his own parameters and approach and would not seek any assistance either of the petitioner and/or of the respondent company... The said chartered accountant appointed by the CLB as valuer shall hear both the parties and thereafter arrive at his own valuation." Fees for the valuer was to be shared by VK and Sigmalon in the ratio 40:60.

A case that bears important lessons for the profession: Don't underestimate value and don't be free from independence.

AccountSpeak@TheHindu.co.in

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