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Distorted disclosures

Sachin Sandhir, MD & country head, Royal Institution of Chartered Surveyors (RICS) India discusses the need for consistent valuation standards and professional valuers.

An accelerating number of cases reporting corporate governance issues, bad debts and frauds call for some introspection on what is happening and why and more importantly what needs to be done to limit such incidents.

Let’s consider a recent case where a bank branch lost Rs4.16 crore due to the wrong evaluation of mortgaged property and negligence of the bank authorities. The bank gave a loan based on the property value of Rs6.27 crore valued in 2000. When the loan defaulted, as part of investigation, the property was re-valued and found to be worth no more than Rs2.24 crore. We may identify/conclude three reasons for this unfortunate incident.

 

Firstly, there was a lapse on part of the bank that deviated from its set of rules. The bank waived off the need for a fresh valuation before releasing the loan because the earlier valuation was done by a government approved valuer.

Secondly, it highlights how the term ‘Government Approved Valuer’ can be misunderstood to represent the highest levels of accuracy. It may not always be true.

A certain section of people merely registered or empanelled with the government for the purpose of wealth tax, whose skills are limited to that enactment only, tend to misguide by claiming that they are ‘Government Approved Valuers’.

Thirdly, this brings to light that when times were good, how everyone in the maddening race for growth overlooked the basic hygiene factors. In the greed for fast expansion of its loan portfolio, the bank undermined accurate valuation or the fact that valuation is ascertained by market dynamics and thus cannot be taken as a onetime activity.

In another case a bank auctioned a mortgaged property at 20% of the valuation. Investigation later revealed an alleged conspiracy involving bank officials, evaluators and the customer as the property mortgaged was agricultural land used as security against a commercial loan.

While a larger chunk of such cases are a result of laxity on part of key stakeholders and inadequate regulatory mechanism for which measures are being sought, a substantial part of the problem can be resolved with supplementary aids such as uniform valuation standards and professionally qualified valuers who conform to such standards.

Valuation standards
Moving away from this particular case, it is a known fact that property valuation methods in India are as varied as the property laws in different states. In absence of any prescribed standard, guidelines or reporting formats, valuers have a lot of flexibility in tweaking the assumptions, calculations and approaches.

In the past, the Securities and Exchange Board of India has also confirmed that disclosures made by real estate developers prove there are no standards of valuation. In some cases, futuristic assumptions have been made which lead to inflated valuation.

Internationally recognised and IFRS compliant RICS’ property valuation standards could not have come at a better time, which apart from making available uniform standards, bring to India a body of international valuation experts to train and assess professionals to be at par with international quality standards.

Professional valuers
Valuation is a soft science involving a lot of judgment by taking different assumptions. There are tremendous risks associated with it and meticulous application therefore requires specialised skills. Currently, property valuation is done by different groups of professionals from different institutes or associations with varying background and skills.

While corporate valuation is understandably done by chartered accountants, cost accountants and merchant bankers, property valuation is largely considered only as a part of discipline of engineering and architecture and thus a degree in civil engineering or architecture is sufficient to become a valuer.

However, in reality valuation transcends to other disciplines like law, economics, accountancy, town planning and environmental science. Also, the valuer must keep abreast of changing legislation, emerging economic trends and market dynamics, which is a rare combination today with the limitation of relevant educational courses.

Leading educational institutions are putting efforts to inculcate professional and academic touch to the concept of valuation. Currently, Periyar Maniammai University and Annamalai University in Tamil Nadu and Sardar Patel University in Gujarat offer post diploma courses in valuation with focus on real estate.

Other institutions including – The Bengal Engineering and Science University at Shibpur near Kolkata, Shivaji University at Kolhapur in Maharashtra and Mysore University – are planning to offer relevant courses in near future.

Conclusion
Valuation is an ingredient of good governance and crucial for the corporate world as the ability to manage value forms an essential part in building sound businesses.

Some initiatives are being taken by the government and industry bodies but financial and educational institutions, and business enterprises need to come together, if India is to meet its challenge of moving to IFRS by 2011. It is critical for the progress of economy, companies and professionals.

The author can be reached at ssandhir@rics.org

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