SEBI moots relaxation in valuation norms for alternative investment fund

Capital markets regulator SEBI on Thursday proposed providing relaxation on the framework pertaining to valuation of investment portfolio of alternative investment fund (AIF).

These relaxations are related to computing valuation of investment portfolio of AIFs, change in valuation methodology regarding ‘material change’, eligibility criteria of independent valuers to be appointed by AIFs and timeline for reporting valuation of investment portfolio by AIFs to performance benchmarking agencies, SEBI said in its consultation paper.

The Securities and Exchange Board of India (SEBI) has sought comments from the public till June 13 on the proposals.

In its consultation paper, SEBI suggested that valuation of securities such as unlisted securities, non-traded, thinly-traded and those below investment grade, valuation norms under mutual fund (MF) regulations should not apply and these securities should be valued as per the International Private Equity and Venture Capital Valuation Guidelines.

For valuation of securities, other than unlisted securities, it has been proposed that valuation norms should be carried out as per the norms prescribed under MF regulations.

It further said that the valuation norms under the MF regulations cannot be applied to private instruments held by AIFs, since the mutual fund valuation process is a rule-based framework that follows a series of processes around pricing for investments in open-ended vehicles.

AIFs mostly hold private investments where one needs to delve into and present a fundamental valuation based on cash flows pertinent to the underwriting thesis, which mutual fund guidelines do not cover.

In addition, SEBI has suggested that a change in valuation methodology or approach should not be construed as a ‘material change’, which can significantly influence the decision of the investor to continue to be invested in the scheme of the AIF. Consequently, AIFs should not be required to follow the process of providing an exit option to dissenting investors.

On eligibility criteria for independent valuer for a partnership entity or company, SEBI proposed that such an entity or company should be a registered valuer entity registered with Insolvency and Bankruptcy Board of India Board (IBBI) and the authorised person of such registered valuer entity, who undertakes the valuation of investment portfolio of AIFs, should have a membership of ICAI or ICSI.

“AIFs shall provide audited data on cash flows and valuation of their scheme-wise investments, after the audit of books of accounts of the AIF …of AIF Regulations, to Performance Benchmarking Agencies within 7 months from March 31, i.e., by October 31 of each year,” SEBI suggested. 

“Granting additional one month to provided audited data of investee companies needs reconsideration for investee companies which are undergoing litigations, corporate restructuring and specifically in case of foreign companies who are not obligated to audit their books as per local laws. In fact, the entire valuation of unlisted entities may be considered to be shifted as an annual exercise considering the complication, time and cost involved in the valuation process and arranging reports from performance benchmarking agencies, which is ultimately borne by the investor,” said Leelavathi Naidu, Partner, IC Universal Legal.

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