The Securities and Exchange Board of India (SEBI) issued a consultation paper on May 23, 2024 which made the following proposals and recommendations:
Valuation norms for computation of valuation of unlisted securities held by AIFs
The consultation paper suggests that the present methodology for valuation of an AIF’s investment portfolio is required to be appropriately amended as under:
- Valuation of securities (other than unlisted securities) to be undertaken in accordance with the norms as provided in terms of the SEBI (Mutual Funds) Regulations, 1996 (MF Regulations); and
- Valuation of unlisted securities to be undertaken in accordance with the valuation guidelines endorsed by the relevant AIF industry association after considering Alternative Investment Policy Advisory Committee (AIPAC) recommendations. Currently, the International Private Equity and Venture Capital Valuation (IPEV) guidelines have been endorsed by AIF industry association.
Change in valuation approach and methodology not material change
The consultation paper attempts to allow flexibility to AIF managers and valuers, by recommending that any changes in the valuation approach, methodology and techniques undertaken to ensure compliance with chapter 22 of master circular on AIFs dated May 7, 2024 would not be construed as material changes and 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. This means that AIFs migrating to the IPEV guidelines or the valuation norms prescribed under the MF Regulations, as the case may be, with an aim to standardize valuation methodology across their investment portfolios would not be considered to be a material change undertaken by AIFs (as these changes are spurred by regulation). However, unit holders are required to be kept informed regarding the change in valuation methodology by the AIF.
Eligibility criteria for independent valuers
The consultation paper recommends that all companies/partnership firms acting as independent valuers must be registered with the Insolvency and Bankruptcy Board of India (IBBI) as a valuer.
Further, as per the consultation paper, it has been proposed that the authorized persons or persons deputed by such registered entities to undertake valuation of an AIF’s investment portfolio must be members of the Chartered Financial Analyst (CFA) Institute, Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), or Institute of Cost Accountants of India (ICMAI)
Reporting of valuation of investments by AIFs
The consultation paper recommends providing AIFs one additional month in order to submit audited data in respect of cash flows and valuation of scheme-wise investments to performance benchmarking agencies (i.e. this data is required to be reported by October 31 every year and not September 30, as it was earlier).
Conclusion
While several proposals made in the consultation paper appear to be addressing practical industry level concerns being raised by stakeholders, it will need to be seen if any or all of these recommendations are approved at SEBI’s next board meeting.