Sebi proposes standard approach for valuation of AIF investments

The capital market regulator has also recommended appointment of independent valuers, specifically for unlisted entities

The Securities and Exchange Board of India (Sebi) has proposed a standard approach for valuing the investment portfolio of Alternate Investment Funds (AIFs) to bring convenience to investors.

In a consultation paper floated on Friday, the capital markets regulator has proposed that AIFs will be mandated to carry out valuation as per International Private Equity and Venture Capital Valuation Guidelines (IPEV guidelines).

These guidelines specify that the techniques can determine value on market approach based on financials or market prices, income approach based on discounted cash flows or replacement cost approach based on net asset valuation techniques.

Presently, the methodology or principles related to valuation of AIF investment portfolio is not disclosed in Private Placement Memorandums (PPMs) and thus not reported to Sebi.

AIFs will have to disclose the methodology, principle or standard of valuation to the investors. In case there is any change in the valuation methodology or changes in accounting policy of investee company, a disclosure will have to be given.

Sebi has also proposed that the manager of AIF will have to ensure the appointment of an independent valuer.

This independent valuer has to be registered with Insolvency and Bankruptcy Board of India (IBBI), should be a member of bodies like ICAI, CFA, should have at least 3 years of experience in valuation of unlisted securities, and should also not be associated as a manager, sponsor or trustee of the AIF.

“Category III AIFs may also invest in unlisted securities, it is felt appropriate that for the purpose of calculation of NAV (net asset value), the valuation of such unlisted securities may be undertaken by independent valuer,” said Sebi.

Presently, AIF regulations do not specify any responsibility on AIF managers when it comes to fair valuation.

In the consultation paper, Sebi has proposed that in case there is a deviation of more than 20 per cent between two consecutive valuations or 33 per cent deviation in a financial year, the manager will be required to inform the investors of the reasons and factors for the same.

Furthermore, under the proposed norms, the AIF manager will have to report valuation based on audited data as on March 31, to performance benchmarking agencies within the specified timeline of six months.

The consultation paper is based on the recommendations of the Alternative Investment Policy Advisory Committee (AIPAC). To ascertain the methodology and valuation practices, Sebi had sent a questionnaire to 150 managers of different categories of AIFs. The regulator has sought comments on the paper till January 23.

As of June 30, 2022, AIFs had an investment commitment of Rs 6.9 trillion and raised Rs 3.4 trillion.

More on the anvil

AIFs will be mandated to carry out valuation according to IPEV guidelines

They will have to disclose the methodology, principle or standard of valuation to investors

Currently AIF investment portfolio is not disclosed in PPMs and thus is not reported to Sebi

The markets regulator has sought comments on the consultation paper till January 23’ 2023