SEBI has issued Standardized approach to valuation of investment portfolio of Alternative Investment Fund. AIFs are required to adhere to specific valuation norms based on the type of securities they hold. For securities covered under the SEBI (Mutual Funds) Regulations, 1996, the valuation process should align with the norms specified for mutual funds. This ensures consistency and uniformity in valuation practices.
For securities not covered under the aforementioned norms, AIFs should follow the valuation guidelines endorsed by an AIF industry association representing at least 33% of SEBI registered AIFs. These guidelines are developed in consultation with the Alternative Investment Policy Advisory Committee of SEBI, which ensures expert input in the valuation process. AIF managers must disclose the details of the valuation methodology and approach for each asset class in the Private Placement Memorandum (PPM) to provide transparency to investors.
Responsibilities of AIF Managers
Managers must engage an independent valuer to compute and carry out the valuation of the scheme’s investments. The Board specifies the valuation methodology, and managers are responsible for its accurate implementation.
If the established valuation policies and procedures do not result in fair and appropriate valuation, managers are allowed to deviate from them. However, such deviations must be justified and documented, with a clear rationale for valuing assets or securities at fair value.
Disclosure of Valuation Deviations and Changes
To maintain transparency, AIF managers must inform investors about significant deviations in valuation. If there is a deviation of more than 20% between consecutive valuations or a deviation of more than 33% in a financial year at the asset level, the manager must disclose the reasons behind these deviations. This disclosure should include both generic and specific factors, such as changes in accounting practices, assumptions, projections, valuation methodology, and approach.
Any changes in the valuation methodology and approach for investment valuation must be considered material changes, significantly influencing investor decisions. Managers must follow the process specified by SEBI for such cases and provide details of these changes, including their impact on the investment valuation, in the annual PPM.
Criteria for Independent Valuers
AIFs must appoint independent valuers who meet specific criteria set by SEBI. The valuer should not be associated with the AIF’s manager, sponsor, or trustee. Additionally, the valuer must have at least three years of experience in valuing unlisted securities. They should be registered with the Insolvency and Bankruptcy Board of India and have membership in either the Institute of Chartered Accountants of India, Institute of Company Secretaries of India, or Institute of Cost Accountants of India. Alternatively, the valuer can be a holding company or subsidiary of a SEBI-registered Credit Rating Agency.
Reporting to Performance Benchmarking Agencies
To ensure accurate reporting to performance benchmarking agencies, AIF managers must establish specific timeframes for receiving audited accounts from investee companies. These accounts should be used for valuation reporting to benchmarking agencies within six months of the financial year-end. Valuation based on audited data of investee companies should only be reported after the audit of the AIF’s books of accounts, as per Regulation 20(14) of AIF Regulations.
