VALUATION OF PLANT &

MACHINERY

“SOME ODD SITUATIONS”

BY

OM PARKASH VERMA
REGISTERED VALUER U/S 34AB OF WEALTH TAX ACT
(IMMOVABLE PROPERTIES; PLANT & MACHINERY),
REGISTERED VALUER OF IBBI
(LAND & BUILDING; PLANT & MACHINERY),
CHARTERED ENGINEER
 TABLE OF CONTENTS

 Background of Valuers of Plant &

Machinery
 Usual Methodology of Valuation
 Odd Situations
 Other Unusual Observations
 Limitations
 Dealing with Odds
 Suggestions
BACKGROUND OF VALUERS OF PLANT &
MACHINERY:

 Often P/M valuers possess an undergraduate or Post-

graduate Degree in Mechanical, Electrical, Electronics,
Textiles branches of Engineering, but are asked to
evaluate machinery of various fields of industry including
their specialisation in Engg.
 An Engineer can not be expert in every field of machinery
and equipment but still the he/she as a Valuer endeavours
to expedite valuation of all types of machinery and
equipment, by basic knowledge of engineering and using
the accepted methodologies, namely the three approaches
to the valuation – Market, Income or Cost approach
 USUAL METHODOLOGY OF VALUATION

 Market or income approach is usually not applied since sale

instances or data for income approach are hardly available. Cost
approach is invariably prevalent in valuation, wherein DRC is
considered as the fair value.
 Estimate of DRC is dependent upon the Replacement cost new,
condition of machine, depreciation and obsolescence so Valuers
integrate information drawn from:
 Verification of machinery, Bills, documents and information
collected from owners, operators.
 Fresh quotations, cost index factors, foreign exchange
fluctuations, enquiries from equipment vendors, market
research about demand and supply, technological changes,
obsolescence etc.
 Analysis of Data to form a conclusion of estimated value.
 Odd Situations:
Borrower provides all assistance and information at the time of funding
but when loan account turns to NPA, following situations may be
encountered:
1. Unit is running but Borrower states that Bills of machines are not
available
2. Unit is locked by Bank or Borrower is not cooperative and:
- No Bills, no name plates on machines available. Machines are of new
technology, and are not easily identifiable
- Places where machines are installed are dark, such as cotton yarn
spinning mills and no lighting arrangement is made.
- Machines are inaccessible due to Vasp, insects, wild grass, water
logging or placed at higher level but staircases are rusted and unsafe.
- Machinery is equipped with CNC / Robotic / PLC controls but valuer
can not ensure whether the same are functional.
- Machines may be in dismantled condition or parts are missing
 OTHER UNUSUAL OBSERVATIONS
1. Bills provided may appear fake or over
invoiced. Funding by lender may have been
already done.
2. Machines are new or used but outdated, such
as machinery to manufacture Picture tubes for
CRT TV or PCs, Routers etc compatible with
older discontinued versions of Windows.
3. Specialised imported machinery for which
comparable replacement cost is not available.
 LIMITATIONS
 Seeking fresh quotations for the machinery under
valuation is ideal for determining replacement cost. But
those in the profession are aware that the client (banks,
NBFC and FI’s) impose short turnaround time (TAT) of
two to seven days. So getting fresh quotations during the
TAT is not practically possible due to (i) time lag, and (ii)
reluctance of suppliers to provide quotations to entity
other than actual users.
 It is often observed that suppliers usually quote higher
price initially in anticipation that customer will seek
discount.
 Often machines are imported. Currently, import shipment
data is available for free or for paid subscription from
various websites.
 LIMITATIONS
 But following proposal in Finance Bill 2022 to bar
disclosure of import / export data will make
Replacement cost estimation difficult in future.
 Clause 94 of Finance Bill, 2022 seeks to insert new
section 135AA in the Customs Act, so as to make
punishable the publishing of information relating to the
value or classification or quantity of goods entered for
export from India, or import into India, or the details of
the exporter or importer of such goods, unless required
so to do under any law for the time being in force except
that provision shall not apply to any publication made by
or on behalf of the Central Government.
 DEALING WITH ODDS

 To maintain high standard of services, to act in

public interest and for the good of the
profession, Valuer should:-
 Prior to site visit, ask client purpose of valuation
and whether onsite assistance will be available.
This will help valuer prepare in advance for
machines of new technology too.
 In case of closed industry, list of machinery in
previous valuation report would be helpful but in
its absence, Valuer needs to inspect the
machines carefully regarding specifications,
make, any missing items etc.
 DEALING WITH ODDS
 Seek proper lighting arrangements, if the units are
said to be closed. One can avoid verification of
equipment which is not accessible due to wild grass,
vasp, unsafe stairs and write the same in report.
Approximate Value of such items may be provided
with comments if the same can be adequately visible
from safe distance
 If bills of machines are not produced, Valuer has to
place himself in the position of a buyer to get
estimated replacement cost of similar new machine
through oral enquiries or emails to suppliers.
 DEALING WITH ODDS
 In absence of production of bills of machines, valuer
must state in disclosures that ownership or unpaid
liabilities or charge, if any, against the said machines
are not known.
 Instances of fake or over invoicing of bills, if
observed, must be brought out to the knowledge of
client – Lenders, mostly - before submission of
report. In some instances, lenders may refuse to accept
report, when over invoicing is pointed out. But the
same has to be substantiated with evidence in case the
lender is ready to accept the report.
Contd…
 DEALING WITH ODDS
 Some rapidly growing industry are in infancy, like the manufacture
of Polysilicon, Solar cells and modules. Its machinery was sold by
US and German companies till a few years back at exorbitant price,
but after Chinese and some other manufacturers have entered into
this business, the machinery price has undergone heavy reduction.
So one need to be cautious in estimation of replacement cost, as
cost index factor may not be useful. Cost index may not be useful
for IT / Ites either.
 Situations where minor or major items are found missing or where
machinery is in dismantled condition would be diverse and
different in each case. There can not be any thumb rule to such
valuation. Valuer’s past experience and skills play the all important
role in estimation of value. Discussing with senior valuers and with
used machinery dealers based on the photographs taken during site
visit will also help the valuer. Contd…
 SUGGESTIONS
 Estimation of depreciation of machinery is an important
issue. All are aware that some machinery loses value fast
during initial years while some others depreciate slowly.
 Machines deployed in automobile, steel making, cement,
textiles, plastic conversion, utilities etc fall in the first
category where depreciation is high initially and goes on
decreasing during subsequent years.
 Some others like stainless steel cream separators in dairy
industry lose value at much slower rate – for example,
cream separators of Alfa Laval manufactured in 1980-
1990 are performing satisfactorily till now.
 It would be prudent if we adopt Depreciation by Declining
balance method for the former and SLM for the latter, to
get a reasonable estimation of market value.
 SUGGESTIONS
 Valuers must ensure that, in spite of commitments of
turnaround time, non- technical personnel must not be
entrusted with verification of machinery as their feedback
and resultant inferences will most often lead to over or under
valuation besides incomplete information, hindering Valuer’s
ability to confront questions from clients.
 Over-invoicing of machinery is a big cause of NPA and needs
to be checked as lender can never recover its advances in
auction sale in cases where over invoicing is overlooked at
the time of funding.
 To contain the menace of Over-invoicing and fake suppliers,
AIVA can suggest to Bankers to seek pre-funding wetting of
machinery suppliers and reasonableness of quoted prices.
This will provide safety of public funds to lenders and more
business opportunity to Valuers.
PERSONAL DETAILS
 Date of Birth: 15.12.1952

 Home Address:
C -17, Aryanagar Apartments;
91, I. P. Extension
Delhi 110 092, India

 Phone: +91 9873 801 870; 9873 801 874

Landline: +91 11 4302 5070

 Email: [email protected]
Thank you