Valuation practices under regulatory lens as Sebi flags concerns

SEBI Official Sounds Alarm on Valuation Practices, Calls for CFO Collaboration

Ananth Narayan, a whole-time member of the Securities and Exchange Board of India (SEBI), issued a stark warning regarding valuation practices at the recent ETCFO conference. Addressing India's chief financial officers (CFOs), Narayan urged them to play a crucial role in forging a more transparent and accountable regulatory framework.

"Let me flag one area that needs your attention—valuations," Narayan emphasized in his keynote address. He highlighted concerns mirroring those previously seen with credit ratings, citing several key issues:

• Conflicts of Interest: Valuers, often hired and compensated by the entities whose assets they assess, create an inherent conflict.
• Valuation Shopping: The practice of seeking multiple valuations until a desired outcome is achieved poses a significant risk.
• Lack of Transparency: Wide discrepancies in valuations due to differing assumptions are common, with minimal disclosure and accountability, especially when valuations fluctuate dramatically.

Drawing parallels with Credit Rating Agencies (CRAs), Narayan suggested that valuers should similarly disclose their assumptions, sensitivity ranges, and track records, and be held accountable for significant deviations. This call for increased scrutiny comes at a time of unprecedented growth in India's capital markets, with FY25 witnessing record equity capital raised by listed companies (₹4.3 trillion), massive mutual fund inflows (over ₹6 trillion into equity-oriented funds), and significant Alternative Investment Fund (AIF) commitments (₹13.5 trillion).

While acknowledging the impressive growth—from 4.2 crore unique investors in March 2020 to 13 crore today—Narayan cautioned against complacency. He highlighted two critical types of regulatory failures:

• Type I Errors: Governance failures, technological breakdowns, fraud, and manipulation.
• Type II Errors: Excessive regulation hindering innovation and growth.

Narayan challenged CFOs to embrace their evolving roles as "value architects," underscoring the solemnity of signing off on financial statements as a promise of a true and fair representation of the company's financial health. He referenced past instances of fraud, questionable accounting practices, and insider trading as evidence of the need for enhanced transparency and stronger regulatory collaboration.

"Regulation cannot be a one-way street," Narayan stressed. "We need you—CFOs (and auditors)—to be active partners in co-creating fair, balanced rules." He encouraged active participation in SEBI's public consultations and regulatory forums. To foster greater trust, he suggested two practical steps: reducing the time lag between annual results and full reports and strengthening year-round engagement with audit committees and auditors.