MULYANKAN - Valuers & Appraisers India, Valuation, Appraisal, Auctioning, Auction, Used Machinery, real Estate Advisory

What is the correct meaning of the term "Valuation"?

The term value refers to an estimated worth (of an object, item, utility or whatever) expressed in prevailing monetary terms by the expert, experienced and prudent valuer, who is not directly or indirectly interested in or connected to that specific asset which is being valued for a particular purpose.

Valuation is done for What and for Whom? When is it done? (Required, Needed)

Valuation of varied type of assets either tangible or even intangible is required to be undertaken for different purposes. The valuation exercise is ordered by individual owner, by companies or firms, by Government departments, organisations, institutes etc. etc. Valuation is an excellent tool in the hands of managing authorities to determine, from time to time or at a given specific time, the value of a specific asset owned by them. Again this value is determined in relation to particular / Specific purpose and is done in context of particular time period. Therefore the valuation exercise is described as an exercise which is time frame related and purpose oriented.

The reasons or needs for a valuation exercise are quite numerous. In this booklet a number of reasons leading to valuation are discussed and explained in detail.

Is Valuation different from Costing & Pricing?

Valuation is quite different from pricing or costing, because, value is an assessed worth of an asset (expressed in prevailing monetary terms) in context of a specific purpose and particular time period. This purpose determines the variety of factors that influence an asset’s value and since number of these factors stem directly from a given state of economy prevailing at "that time" the valuation becomes purpose oriented and time frame related exercise. Pricing or costing is qualitatively different. First of all, costing to a great extent is an exact science where most of the parameters such as material costs, transport costs, processing, labour, administrating, marketing, promotion etc. are fairly well defined and methods of calculating are generally well known and accepted. Whereas in valuation the determination of assets’ worth in relation to given need and at given period of time are exercises which only a prudent, experienced and well exposed expert valuer can undertake.

What is Fair Market Value?

In fair market value the market forces play a predominant role. In a market there are alternative options available to both buyers or sellers. In such a situation, if there are no overriding reasons to force any decision for a buyer to buy (from particular seller) or for a seller to sale (to a specific buyer at a given price) where buying / selling both acts are not influenced by any uncommon market conditions such as hyper inflation or undue, uncommon depression, then the value at which an exchange takes place is termed to be a ‘Fair Market Value’.

What is Time Related Value?

Conditions in a given market or general economic conditions are normally subject to variety of changes. At times, these changes are volatile. The flux of ups and downs is constant. But during a given period of time the changes go through a sort of pattern (either up or down). These patterns for that period of time are termed as ‘market trends’. But when changes become volatile they become unpredictable. The valuer, when he is called upon to determine the worth of a given asset at a given period time (such as the value of a farm land as on 30th April 1968 or some such date) has to know the market for land prices trend of that region, during that period of time – This is one simplified example of ‘Time Related Value’!

What is Purpose Oriented Value?

An asset such as building or other property is basically a useful object : Its utility to the owner / user depends to a great length on the circumstances of its use, its potential for use, its durable life etc. etc. These are well known facts of life. The tax levying authorities such as various local or Government bodies also use a yard stick of their own to determine the levy of various tax percentages as well as for determining exemptions from such tax payments.

The multiplicity and complexities of the tax rules, subject again to change (at every budget session), makes it imperative to view the value of assets from a specific purpose related point. For instances, buying of a real estate property (House, Flat, Building etc.) attracts a stamp duty. The Government looks upon this as a capital expenditure. So also, lending institutions like Banks call this capital expenses and accordingly lend against this with differing interest rates. Whereas buying a vehicle like a motor car is a different thing in the eyes of tax collectors as well as lending organisations. (Although at a price of, say, Rupees seven lakhs, one can purchase a car or buy a tenement in some locality). Now just because of price of your investment in a purchase it may look similar to us but in the eyes of lenders or tax authorities they are different. So, the valuer, when called upon to assess the worth of an asset, has to know the purpose.

What is meant by value added services? How does one add value to service?

An Appraiser - Valuer who has performed the required valuation exercise and determined the worth of specific assets, when he offers to perform more services, genesis of which is his basic valuation skills, then these become value added services. This simply means that a valuer, because of the expertise that he possesses as a valuer, is in a position to offer further service directly linked to his valuation expertise / exercise. Following examples will clarify this further.

If a machinery and equipment is valued for the purpose of disposing/ selling within the next three months, then the valuer assessing/ inspecting that machinery etc. evaluates it first on the basis of its likely marketability within this time. By the term ‘marketability’ the valuer defines a number of parameters such as the terms of sale, effort and expenses of selling (promoting sale) the available potential or constraints to sale etc. In fact, the valuer determines the total spectrum of questions involved in "When, where, to Whom and What". Based on his expert reading the valuer advises and guides his client to do the selling of his assets.

Similar service a valuer may perform in case of a real estate asset such as building, flat or residential tenement. In this case his marketing parameters will be totally different. So, the terms, time frames and other considerations about promoting the sale will differ. Still, if the valuer helps his clients to sell within the optimum time frame and at a value or value-plus as assessed by himself, then he will have performed a value-added service.

From these examples one thing is fairly clear that the prudent, expert valuer, in the first place, will not be able to determine the optimum marketable value if he is ignorant of the then prevailing market conditions. He has to know both! (i) The proper value of the assets he is inspecting (technical, mechanical, operational all these conditions in case of machinery etc.) and (ii) He must know the market, i.e. where and how these machines may be sold, at what price, the likely buyers and how to reach them etc.

Unless he has the grasp of all these things he will not be able to determine, in the first place, the marketable value of the assets he is inspecting.

From the above examples it becomes quite apparent as to the level of creativity which a valuer can bring to his profession and the amount of versatile sagacity which is really demanded of a real professional in this field.

What is Value Assessment ? Is it some different valuation?

An assessment is the most intelligent estimation. Valuation itself means estimation or assessment of worth of a particular asset for a particular purpose and for a given period of time.

What is an Asset?

The Dictionary meaning of the word "asset" is : an item of property, something advantageous or well worth having. An asset can be tangible or intangible. Commonly known tangible assets are land, building, plant, machinery, jewellery, farms, forests, etc. etc. The intangible assets are a goodwill in business, rights to a brand name or monogram or in modern times a technological know-how etc.

Can there be valuation of liability?

Valuation exercise is normally undertaken for asset values only. As far as the assessment of a liability is concerned, it involves an investigation of past (mistakes, expenses, damages etc.); it is the present that will only suffer by paying for it. But there is a term ‘Consequential Damage’ included in larger calculation of liability which is predicting future results from certain present acts, happenings etc. If one is called upon to assess this likely liability, it may be termed to be valuation of liability. But, normally the valuation exercise is concerned with valuation of assets only.

What is Non-Performing Asset?

Non-performing asset is the term very frequently used by lending institutions such as Banks, Lend-lease companies and others for the defaulters’ assets which were originally pledged to lenders at the time of grant of loans. The borrowers who continue to pay their interests and installments have also pledged some property machines etc. to lenders, but their assets are performing assets, in as much as, that they continue to honour the commitments to lenders. On the other hand, the borrowers whose loans have gone sore and have become defaulters, their assets are not performing. Lenders may solicit valuer’s services to ascertain what price or value these assets will fetch if sold in the open market. The valuer, if he has the facility for the required / necessary / value added services can assist, guide and help the lenders in selling / disposing these items called NPA’s.

By What process of learning, Training or Practice is a valuer able to decide value of Different ASSETS?

Every or any valuer is not authorised to certify all types of assets. Yes, but a firm or company doing valuation work which employs the variety of different professionals may undertake to certify any / every type of assets. Mainly, there are Civil and Mechanical / Electrical Engineering degree holders and Architects with minimum necessary work experience to their credit who work as valuers, because, the valuation work is done mostly in respect of these assets. For instance, a factory happens to be a configuration of land, building, plant, machinery and equipment. To evaluate the assets in this factory, civil engineers or architects have to certify the immovable assets such as land and building and the movable ones like machines and equipment will have to be assessed by mechanical / electrical engineers. In case there is a process or technological production to be assessed these are assessed by a specific expert in that field of technology.

But valuation ‘per-se’ is not an exact science. There are some institutes which impart instructions and offer training in basic theoretical knowledge of valuation practise. But the most important thing is that every valuer is supposed to be a person duly qualified in a particular field to be able to work as valuer for assets falling under those categories. But it is expected that the person has the versatile capacity and required sagacity to apply his experience to particular case with all its peculiarities etc. and determine the worth of a given asset specifically in the context of given purpose and prevailing time. This quality of versatile sagacity is unique which only a good valuer may possess and there is no teaching institute that imparts training or instructions in this profession in India. It is the life itself from which a candidate learns and develops his capabilities over years. Besides, the technical qualifications and required work experience the valuation expert also must possess sufficient knowledge of prevailing laws rules, regulations pertaining to taxation, levies and regulatory norms governing commercial or individual transactions.

How does a Person become a Valuer?

A person can become a valuer in the field of activity in which he has acquired the necessary experience. For instance, M.Sc. a agriculturist can be a valuer for plantation. For jewellery valuation, he has to be a jewellery shop keeper with a minimum turnover of Rs. 15,00,000/- per annum, for a minimum period of ten years. For machinery, plant and equipment, the intending valuer must be a degree holding mechanical / electrical engineer and for land, building he should be a civil engineer or architect.

As stated earlier these basic qualifications and required experience are not enough. The intending valuer must also acquire sufficient knowledge of various legal provisions, taxation rules, levies by different official bodies etc. Moreover, he must keep abreast of changing legislation, emerging economic trends and constantly shifting market forces. Considering this wide cross section, the horizon and altitude of perceptions a valuer is required to have in almost all areas of human activity, it is but desirable that one should start one’s career in valuation under some senior practitioner in the field. This apprenticeship of minimum 3 to 5 years will provide grounding plus the actual independent experience of his own for a minimum ten years period as a practising valuer is necessary to become what may be termed as full-fledged valuer.

Is it necessary for a valuer to possess any licence from Government etc. to be able to practice valuation (Like the Doctor)?

As explained earlier above, it is not a necessary requirement.

How does an insurance company fix values when they insure an Asset ?

A person desirous of insuring some asset / assets (called the insured party) and the insurance company underwriting the risks (loss, damage, theft, etc) to that / those asset/s (called the insurer) enter into a contract known as the policy. After nationalization of insurance business in India, the onus of deciding / determining the value of the assset/s so insured rests with the insured. But, the insurance company has the option (right) to find out whether the said insured assets was over-valued; and this the company undertakes to do only when settling a claim. It therefore becomes necessary for the insured to obtain a proper valuer’s report and submit the same along with the proposal. If the insurance company then accepts the proposal and underwrites the risk, then the original basic value as certified by valuer can not be questioned. Now when the insurance business in India is slated to be privatised again, this anomaly may be corrected by making it mandatory for both insurer and insured to agree to the worth of assets offered for cover and underwritten by the company. All advanced countries follow this as normal practise and it is necessary to adopt it here.

Do the Banks also need valuation Services?

All Banks have the need for valuation service. They have to assess the worth of assets pledged to them as securities against the credits/loans etc. granted by them to various parties. These assets could be machinery, equipment, buildings etc. or their moving stock in trade etc. Normally, this valuation exercise is undertaken at the time of disbursing a loan or assets are re-valued and taken as collateral security while extending further financial assistance for working capital etc. Banks also solicit valuers’ services when they wish to sell or dispose off assets acquired by them (mostly from defaulters) for assessing the lowest minimum realisable price for which the item can be sold in open markets.

When the disputed matters are subjudice, who decides the values of assets? Judges or Valuers?

When matters are subjudice i.e. when disputes are under the purview of judiciary, the parties concerned are inclined to engage the services of professional valuers to support their own claims on both sides. The presiding judicial authority in such event will cross examine valuers engaged by both the petitioner and defendants. Legal experts on both sides are involved in presentation and cross examination of the evidence relating to valuer’s assessments. The judiciary will frame its opinion based on valuer’s depositions, the substantiation offered by a valuer to support his assessments of values and within the framework of prevailing laws and rules.

Like the doctors, can a valuer be taken to consumer court if his work is found harmful or damaging?

Yes, of course ! Anyone who charges fees for rendering a particular service has the obligation to fulfil the act of service being rendered properly. However, it becomes obligatory on the part of a person who complains to consumer forum to establish, prima facie the fact and the act of negligence.

What tests the valuer uses to arrive at Assessed values?

A valuer is expected to do the necessary homework, spadework and undertake the required research to be able to properly assess the worth of a specified asset / assets for particular purpose at a given point of time. The other terms of reference given to him also have important bearing on his assessment. The valuer will express his opinion in the context of this study. He may report his findings, make studied observations, mention his assumptions to clients, so that his opinion stands substantiated and will never be a afterthought. A valuers opinion is nothing idiosyncratic but an objective analysis of given data and experienced observations and well founded assumptions.

Who decides the value to be paid to the owner for the property taken over by Government authorities?

Under the existing land acquisition act, a special land acquisition officer is appointed to record the state of existing conditions such as development and progress in that region where people’s land is being acquired. He has to study the other ‘sale instances’, that means, sale of property within that period, within that region, and by process of compatible comparison etc. then establish the Government’s rate for paying compensation to owners whose properties have been acquired. There are specific sections of this act, such as section 23 and 24 which prescribe and detail the factors which this officer has to take into consideration as also exclude those factors which are not to be considered. The officer follows these procedure and gives the award of compensation.

What happens when people refuse to give their property or go to court saying compensation offered is not adequate?

No one can refuse to part with his property when acquired under acquisition act for permanent public use. But the property owners have the right to move the courts for a just and fair compensation.

It is our experience, that in India, valuation is a mere formality. What is your Comment?

In majority of instances this allegation may prove to be true. Yet, today, challenging matters need the services of very competent professionals, where the professional is able to defend his opinion and has to prove his worth, the days of a valuer and valuation being a formality are definitely changing if not already ended.

In life, it is always the one who pays prevails, therefore, is it not natural for a valuer to accept his client’s values?

Although the valuation is not an exact science, the opinions expressed by the valuer in terms of values are (or have to be) based on (1) information made available to him, (2) his experience in the field. (3) his versatile and sagacious perception of complex factors influencing his assignment. Under such conditions it would be rather naive or plainly wrong for a client to insist that a valuer should certify the values they desire to express rather than certify values as per valuer’s findings. A good professional approach, on both sides, demands that the valuer’s certificate reflect the reality rather than somebody’s suggestions.

How are the valuers fees computed ? Since the Actual work may remain abstract?

It may not be fair to make such blanket observation, because, then the issue becomes subjective. It is a fact that a valuer’s work demands adequate experience and exposure. Many experienced professionals are offering their knowledge as valuers and especially many of them happen to be retired seniors. One of the important reasons for this situation is a basic lack of awareness amongst clients who solicit valuation services. This lack of awareness may create lack of available work for valuation professionals. The paucity of work prevents young hopefuls from entering this profession. Since the profession has not been all that remunerative it has, in turn, acquired a character of supporting income for senior professionals.

Today, with the fast economic development, the things are changing. The opening up of economy, arrival of new information technology are creating situations where valuation profession cannot remain a part-time senior retired people’s vocation any longer. Large corporate organisations, lending institutions, finance companies etc. who till yesterday were content to employ a retired senior for the limited scope of their valuation needs have already learnt that this old fashioned approach must be abandoned. Today they are vigilant and are seeking services of highly competent valuation experts. Thus, this once part time profession has now been turned into a rising, challenging and promising field where new, young enterprising spirit is being attracted.

How can auction be a valuer’s allied service?

When participants in the auction, the bidders as they are called, know the fact that the auctioneer is a valuer himself, their approach becomes qualitatively different. For them the person auctioning being a knowledgeable engineer / valuer the value of the item offered instantly becomes objectively more valuable. The premises and the hype which this auctioneer uses in his auction announcements have a solid basis of his knowledge as a valuer and to that extent his heralding is heard differently in an auction hall.

In this volatile atmosphere of global competitiveness, what measure of standard and regulatory steps the profession of Valuers-in-India is likely to adopt in order to offer real value to our struggling entrepreneurs?

This is a very complex and yet absolutely relevant question. It has wide ramifications for proper financial and commercial planning in the global economy. Those of us who are fully conscious of our responsibilities as professional valuers and the vital role played by valuation in modern finances by the valuation process, have already taken the first few steps towards this by forming an organisation called "PVAI".

What is ‘PVAI’ and what does it offer or promise towards the development of valuers profession in India?

‘PVAI’ is the abbreviation of our full name, viz. Practising Valuers Association (India). This association seeks to imbibe real professionalism amongst those valuers who wish to further the cause of valuation and succeed in their chosen profession. Amongst the many objectives set forth by the organisers of this association the following are primary :-

Informing and enlightening our clients regarding the role of scientific and proper periodic or occasional valuation. The need for transparency and the need to engage a properly qualified and experienced team of professionals to undertake the work-rather than to engage a convenient person who would do the bidding of concerned vested interests.

Dissemination of related information required in the overall process of each valuation project which will be made available to the professional and to the clients. A total perspective of the complexities and exigencies involved. In fact there is a basic need for developing a total trust between client and the professional.
The association hopes to raise the level of awareness amongst the concerned practitioners and businessmen and management at large about this aspect.

The association will also formulate (as far as possible in todays situation) standard methods of judging value or arriving at value in the varied and complex process of value assessment.

The association also wishes to lay the norms whereby the professional valuer will be able to justify properly by those norms his judgements of given values (rather than go by the so called individual opinions).

The association will also frame rules and norms of Practice whereby a proper governance of ethics could be upheld in this profession.

The association will also endeavour to persuade the Government authorities to frame the much needed rules, laws, etc. through legislation whereby a proper accreditation or licensing can be enforced in the overall field of valuation practice.

Thus the ‘PVAI’ is taking steps to modernize, streamline the profession of valuers in India.

The Web Site Address is "http://www.pvai.org".