22 Standardizing Valuation: SEBI's Comprehensive Framework for AIF Investment Portfolios

Key Takeaways:

- AIFs must follow prescribed valuation norms for securities covered under SEBI (Mutual Funds) Regulations.

- For other securities, valuation guidelines endorsed by eligible AIF industry associations must be followed.

- Managers are responsible for ensuring fair valuation and appointing independent valuers who meet specified criteria.

- Significant deviations in valuations must be disclosed to investors, along with the rationale.

- AIFs must report audited valuation data to performance benchmarking agencies within stipulated timelines.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has introduced a standardized approach to valuation of investment portfolios for Alternative Investment Funds (AIFs). This move aims to enhance transparency, consistency, and investor protection in the rapidly growing AIF industry.

Under the new regulations, AIFs must follow specific valuation norms for securities already covered under the SEBI (Mutual Funds) Regulations, 1996. For securities not covered under these regulations, AIFs must adhere to valuation guidelines endorsed by eligible AIF industry associations. These associations must represent at least 33% of the registered AIFs and take into account recommendations from SEBI's Alternative Investment Policy Advisory Committee.

The responsibility for fair and accurate valuation lies squarely with the AIF managers and their key management personnel. They must ensure that independent valuers, appointed by the AIFs, compute and carry out valuations in accordance with the prescribed guidelines. These independent valuers must meet stringent eligibility criteria, including relevant experience, professional qualifications, and independence from the AIF's manager, sponsor, or trustee.

In cases where the established valuation policies and procedures do not result in fair and appropriate valuations, the AIF manager is empowered to deviate from these policies to value the assets at a fair value. However, the rationale for such deviations must be documented and disclosed to investors.

To ensure transparency and accountability, AIFs are required to disclose significant deviations in valuations to their investors. If the deviation between two consecutive valuations exceeds 20% or if the deviation in a financial year exceeds 33%, the AIF must inform investors about the reasons and factors contributing to the deviation, including changes in accounting practices, assumptions, valuation methodologies, and approaches.

Furthermore, AIFs must report valuation data based on audited accounts to performance benchmarking agencies within specified timelines. This data will be used to create industry performance benchmarks for various categories of AIFs, enabling investors to assess the performance of individual AIFs against industry standards.

FAQs:

Q1: What is the purpose of SEBI's standardized valuation approach for AIFs?A1: The purpose is to enhance transparency, consistency, and investor protection in the AIF industry by establishing a standardized approach to valuation of investment portfolios.

Q2: How are securities covered under SEBI (Mutual Funds) Regulations valued?

A2: AIFs must follow the valuation norms prescribed under the SEBI (Mutual Funds) Regulations, 1996, for securities covered under these regulations.

Q3: What is the process for valuing securities not covered under SEBI (Mutual Funds) Regulations?

A3: For such securities, AIFs must follow valuation guidelines endorsed by eligible AIF industry associations representing at least 33% of registered AIFs and taking into account recommendations from SEBI's Alternative Investment Policy Advisory Committee.

Q4: Who is responsible for ensuring fair and accurate valuation of AIF investments?

A4: The AIF managers and their key management personnel are responsible for ensuring fair and accurate valuation of AIF investments. They must appoint independent valuers who meet specified eligibility criteria.

Q5: What are the reporting requirements for AIFs regarding valuation data?

A5: AIFs must report audited valuation data to performance benchmarking agencies within stipulated timelines. This data will be used to create industry performance benchmarks for various categories of AIFs.

Key Precedents:

- SEBI (Mutual Funds) Regulations, 1996:

AIFs must follow the valuation norms prescribed under these regulations for securities covered under them.

- SEBI Circular No. SEBI/HO/AFD/PoD/CIR/2023/97 dated June 21, 2023:

This circular introduced the standardized approach to valuation of investment portfolios for AIFs, outlining the guidelines, responsibilities, and reporting requirements.

SEBI's introduction of a standardized valuation approach for AIFs' investment portfolios aims to enhance transparency, consistency, and investor protection in the rapidly growing AIF industry. By establishing clear guidelines, responsibilities, and reporting requirements, SEBI seeks to promote fair and accurate valuation practices, enabling investors to make informed decisions and assess the performance of AIFs against industry benchmarks.

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Here's AIF Master Circular's verbatim Chapter 22

Chapter 22 - Standardised approach to valuation of investment portfolio of Alternative Investment Funds (AIFs)57

22.1. Manner of valuation of AIF’s investments

In terms of Regulation 23(1), AIFs are inter-alia required to carry out valuation of their investments in the manner specified by SEBI from time to time. In this regard, following is specified:

22.1.1. Valuation of securities for which valuation norms have already been prescribed under SEBI (Mutual Funds) Regulations,1996 (‘MF Regulations’), shall be carried out as per the norms prescribed under MF Regulations.

22.1.2. Valuation of securities which are not covered in para 22.1.1 above, shall be carried out as per valuation guidelines endorsed by any AIF industry association, which in terms of membership represents at least 33% of the number of SEBI registered AIFs. The eligible AIF industry association shall endorse appropriate valuation guidelines after taking into account recommendations of Alternative Investment Policy Advisory Committee of SEBI.

22.1.3. The manager shall also disclose in PPM, the details of the valuation methodology and approach adopted under the stipulated guidelines for each asset class of the scheme of the AIF.

22.2. Responsibility of manager of AIF with regard to valuation of investments of AIF

In terms of Regulation 23(5) of AIF Regulations, the Manager and the key management personnel of manager shall ensure that the independent valuer computes and carries out valuation of the investments of the scheme of the AIF in the manner as specified by the Board from time to time.

Further, in terms of Regulation 23(6) of AIF Regulations, Manager shall be responsible for true and fair valuation of the investments of the scheme of the AIF. In terms of proviso to aforesaid Regulation, in case the established policies and procedures of valuation do not result in fair and appropriate valuation, the Manager shall deviate from the established policies and procedures in order to value the assets or securities at a fair value and document the rationale for such deviation.

In this regard, following is specified:

22.2.1. At each asset level, in case there is a deviation of more than 20% between two consecutive valuations or a deviation of more than 33% in a financial year, the manager shall inform the investors the reasons/factors for the same, both generic and specific, including but not limited to changes in accounting practices/policies, assumptions/projections, valuation methodology and approach, etc. and reasons thereof.

22.2.2. Any change in the methodology and approach for valuation of investments of scheme of AIF, shall be construed as material change significantly influencing the decision of the investor to continue to be invested in the scheme of the AIF and the AIF shall adhere to process to be complied with in such cases as mentioned in provisions specified at para 2.5.4 and 2.5.5 above.

22.2.3. The manager shall disclose the following as part of changes in PPM to be submitted annually to SEBI and investors:

(i) Details of changes in the valuation methodology and approach, if any, for valuation of each asset class of the scheme of the AIF;

(ii) Details of changes in accounting practices/policies, if any, of the investee company and the scheme of the AIF; and

(iii) Details of impact of the aforesaid changes in terms of valuation of the investments of the scheme of the AIF.

22.3. Eligibility criteria for Independent Valuer

In terms of Regulation 23(4), the Manager shall ensure that the AIF appoints an independent valuer, which satisfies the criteria specified by SEBI from time to time, for valuing investment portfolio of AIFs. In this regard, the following is specified:

22.3.1. The independent valuer shall not be an associate of manager or sponsor or trustee of the AIF.

22.3.2. The independent valuer shall have at least three years of experience in valuation of unlisted securities.

22.3.3. The independent valuer shall fulfil one of the following criteria:

(i) The independent valuer is a valuer registered with Insolvency and Bankruptcy Board of India and has membership of Institute of Chartered Accountants of India or Institute of Company Secretaries of India or Institute of Cost Accountants of India or CFA Institute; or

(ii) The independent valuer is a holding company or subsidiary of a Credit Rating Agency registered with SEBI; or

(iii) Any other criteria as may be specified by SEBI from time to time.

22.4. Reporting of valuation of investments of AIF to performance benchmarking agencies

To ensure timely and appropriate reporting of valuation of investment portfolio to performance benchmarking agencies, the following is specified:

22.4.1. Manager of AIF shall ensure that a specific timeframe for providing audited accounts by the investee company to the AIF is included as one of the terms in subscription agreement / investment agreement with the investee company, so as to enable AIFs to report valuation based on audited data of investee companies as on March 31 to performance benchmarking agencies within the specified timeline of six months.

22.4.2. Manager of AIF shall ensure that valuation based on audited data of investee company is reported to performance benchmarking agencies only after the audit of books of accounts of the AIF in terms of Regulation 20(14) of AIF Regulations, within the stipulated timelines.

22.5. The manager of AIF shall submit report on compliance with the provisions of this circular on SEBI Intermediary Portal (www.siportal.sebi.gov.in) in the format as specified therein and/or as part of quarterly regulatory reporting to SEBI, as the case may be.

22.6. The provisions of this circular came into force with effect from November 01, 2023.

Note:-

{57}SEBI circular no. SEBI/HO/AFD/PoD/CIR/2023/97 dated June 21, 2023