Fair Value explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Two numbers drive every commercial decision in a CIRP. Regulation 27 fixes who determines them and by when; Regulation 35 fixes how they are computed and what happens when the two valuers disagree.
The appointment — Regulation 27
The resolution professional shall, within 7 days of appointment but not later than the 47th day from the insolvency commencement date, appoint two registered valuers to determine the fair value and the liquidation value of the corporate debtor.
The two limits work together. Where the professional is appointed early, the seven days bite; where the appointment is delayed by a contested confirmation, the 47th day becomes the operative deadline. Either way the valuation must be under way well inside the first half of the 180-day period, because the information memorandum and the request for resolution plans depend on it.
The two definitions
| Value | Definition |
|---|---|
| Fair value — Regulation 2(hb) | The estimated realizable value of the assets if they were exchanged on the insolvency commencement date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, where the parties acted knowledgeably, prudently and without compulsion |
| Liquidation value — Regulation 2(k) | The estimated realizable value of the assets if the corporate debtor were to be liquidated on the insolvency commencement date |
Read the definitions against each other. Fair value assumes proper marketing, a willing seller and no compulsion. Liquidation value assumes the opposite — a forced sale, on a timetable, of a business being taken apart.
The difference between them is the value the CIRP is trying to preserve. It is also why dissenting financial creditors are entitled to liquidation value: that is what they would have received had the process failed, and it sets the floor below which a plan cannot push them.
Note that both are measured on the insolvency commencement date. Neither is a current valuation, and neither moves because the process took longer than expected.
How the values are determined — Regulation 35
- The two registered valuers submit to the resolution professional an estimate of fair value and liquidation value, computed in accordance with internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the corporate debtor.
- The computation of the valuation report and the supporting documentation must be in the format notified by the IBBI.
- If, in the opinion of the resolution professional, the two estimates of a value are significantly different, the professional may appoint another registered valuer.
- The average of the two closest estimates of a value is then taken as the fair value or the liquidation value.
The 25% test
Significantly different means a difference of 25% in liquidation value within an asset class, calculated as:
(L1 − L2) / L1, where L1 is the higher liquidation value and L2 the lower.
Three features of the formula are worth noting. It is measured on liquidation value, not fair value. It is applied within an asset class, so a large divergence on plant and machinery is not diluted by agreement on land. And it is expressed as a percentage of the higher figure, which makes the test slightly harder to trigger than a percentage of the lower would be.
Why the average of the two closest
Where a third valuer is appointed there are three estimates, and the rule takes the average of the two closest rather than the average of all three or the median. The effect is to discard the outlier. Two independent valuers arriving at similar figures corroborate each other; the third estimate's function is to show which of the original two was the outlier, not to be averaged in with it.
Physical verification is not optional
Regulation 35 requires the estimates to be made after physical verification of the inventory and fixed assets. A desktop valuation from the debtor's fixed asset register does not satisfy it — and in a distressed company the register is frequently the least reliable document in the building, with assets long since disposed of, impaired or moved.
Practical points
- Diarise both limits — 7 days from appointment and the 47th day from commencement.
- Require the reports in the IBBI-notified format, with the supporting documentation.
- Apply the 25% test asset class by asset class before concluding that the estimates agree.
- Keep fair value and liquidation value confidential; committee members receive them against an undertaking not to use them for undue gain or loss.
Common mistakes
- Measuring either value as at the date of the report rather than the insolvency commencement date.
- Applying the 25% test to the totals rather than within each asset class.
- Averaging all three estimates once a third valuer is appointed.
- Accepting a valuation done without physical verification.