The Securities and Exchange Board of India (Sebi) on Thursday has proposed that the valuation of unlisted securities held by Alternative Investment Funds (AIFs) be carried out as per the guidelines issued by the eligible industry association, and not as per Mutual Fund Regulations.
The AIF industry association has endorsed the International Private Equity and Venture Capital Valuation Guidelines (IPEV Guidelines) for the proposed change. However, valuation of securities other than unlisted securities, non-traded, thinly-traded and those below investment grade, will continue to be done as per Mutual Fund (MF) regulations.
“There are fundamental differences between MFs and AIFs on holding and valuing their investment portfolio…it is felt that the ask of the AIF industry to the extent of exempting unlisted securities from the applicability of calculation norms under MF Regulations and opting for a methodology under IPEV guidelines, merits consideration,” Sebi said in a consultation paper, inviting public comments by June 13.
This change in valuation methodology was proposed to not be considered a ‘material change’ under AIF Regulations as the change is according to “Sebi’s regulatory mandate” and “the AIFs/investors have no discretion or option to act otherwise.” Thus, the AIF is not required to provide an exit option to dissenting investors, Sebi said.
Consequently, any change in valuation methodology under the broad frameworks of IPEV Guidelines or MF Regulations will not be considered as ‘material change’. But it added that both old and new valuation methodologies should be disclosed to the investors to ensure transparency.
Further, Sebi has proposed to ease the timeline for AIFs to report valuation of investments to performance benchmarking agencies by one month, giving them time after the funds’ investee companies complete their audit. Thus, AIFs will be required to submit the audited data on cash flows and valuation of their scheme-wise investments within seven months from March 31 to October 31 of each year.
Lastly, Sebi proposed to slightly tweak the eligibility criteria of an independent valuer, allowing a partnership entity or company to be a registered valuer as well. Sebi has suggested that an entity should be a registered valuer with the Insolvency and Bankruptcy Board of India (IBBI), which requires three or all partners/directors of the company, whichever is lower, to be registered valuers.
Another eligibility criteria would be that the deputed/authorised person of such registered valuer entity, who undertakes the valuation of investment portfolio of AIFs, shall have a membership 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 CFA Institute.