Pursuant to receiving public comments on its consultation paper titled ‘Review of certain aspects of the framework for valuation of investment portfolio of AIFs’ dated May 23, 2024 and taking note of recommendations of the Alternative Investment Policy Advisory Committee (AIPAC), the Securities and Exchange Board of India (SEBI) introduced modifications to the valuation framework for investment portfolios of Alternative Investment Funds (AIFs) vide circular dated September 19, 2024 (SEBI Circular).
In terms of the SEBI Circular, valuation of unlisted, non-traded, or thinly traded securities is to be undertaken in accordance with the valuation guidelines endorsed by the relevant AIF industry association after considering AIPAC recommendations. Currently, the International Private Equity and Venture Capital Valuation (IPEV) guidelines have been endorsed by AIF industry association. Valuation of all other types of securities (other than the aforesaid securities) can be undertaken as per norms provided under the SEBI (Mutual Funds) Regulations, 1996 (MF Regulations).
SEBI seeks to harmonize valuation of thinly traded and non-traded securities across SEBI registered entities effective March 31, 2025.
Under the SEBI Circular, any changes in the valuation approach and methodology (i.e. migration to the IPEV guidelines or the valuation norms prescribed under the MF Regulations, as the case may be) undertaken to standardize valuation methodology across their investment portfolios in compliance with Chapter 22 of the master circular on AIFs dated May 7, 2024 would not be construed as material changes. Accordingly, AIFs would not be required to provide an exit option for dissenting unitholders who may want to opt out of schemes of the AIF following the implementation of these changes. However, unitholders are required to be kept informed regarding the change in valuation methodology by the AIF.
Companies / partnership firms acting as independent valuers are required to be registered with the Insolvency and Bankruptcy Board of India (IBBI) as valuers. Authorized person(s) deputed by such registered entities to undertake valuation of an AIF’s investment portfolio must be members of the Institute of Chartered Accountants of India (ICAI) or Institute of Company Secretaries of India (ICSI) or Institute of Cost Accountants of India (ICMAI) or have a Chartered Financial Analyst (CFA) charter from the Chartered Financial Analyst (CFA) Institute.
Timeline for reporting valuation of scheme-wise investments by AIFs to performance benchmarking agencies based on audited financials of investee companies has been extended from the erstwhile six months to seven months (i.e. this data is required to be reported by managers of AIFs to respective agencies by October 31 every year). Managers of AIFs are required to ensure that appropriate timeline for providing audited financial data is incorporated in the subscription agreement / investment agreement executed with investee companies to enable timely reporting of valuation by AIFs.
Conclusion
These amendments address long-standing challenges being faced by players in the AIF industry with respect to valuation methodologies and approach for AIF investments.