SEBI has issued a consultation paper dated May 23, 2024 ("Consultation Paper") seeking comments from the public on proposals relating to the norms for the valuation of investment portfolios of AIFs and other related aspects such as (i) when a change in valuation methodology and approach should be considered 'material change', (ii) the eligibility criteria of independent valuers to be appointed by AIFs, and (iii) the timeline for reporting valuation of investment portfolio by AIFs to Performance Benchmarking Agencies.
Proposal 1
Currently valuation of securities for which valuation norms are prescribed under the SEBI (Mutual Funds) Regulations, 1996 ('MF Regulations') are required to be carried out as per the norms prescribed under the MF Regulations. Valuation of all other securities are carried out as per valuation guidelines endorsed by the International Private Equity and Venture Capital Valuation Guidelines (IPEV Guidelines).
The AIF industry has submitted to SEBI that the valuation norms under the MF Regulations are not suitable for private instruments held by AIFs for a number of reasons (detailed in the Consultation Paper), one of which is the fundamental difference in holding period strategy between investments by a MF and an AIF. A MF holds its investments primarily as "AFS" or "Available for Sale" while an AIF typically holds its investments as "HTM" or "Hold Till Maturity". Thus, the AIF industry sought that, for securities such as unlisted securities, non-traded, thinly traded and those below investment grade, valuation norms under MF regulations should not apply and these securities should be valued as per the IPEV Guidelines.
SEBI has acceded to the AIF Industry request and the Consultation Paper proposes that valuation of listed securities shall be carried out as per the norms prescribed under MF Regulations and valuation of unlisted securities shall be carried out as per the valuation guidelines endorsed by the IPEV Guidelines.
Proposal 2
Almost a year ago, vide a notification dated June 15, 2023, and a circular dated June 21, 2023, SEBI had instituted a standardised approach for the valuation of investment portfolios of AIFs. It was also provided that any change by an AIF in the methodology and approach for valuation of its investments would be construed as a material change, which would call for dissenting unit holders to be provided an exit option. The AIF Industry has conveyed to SEBI that prior to issuance of the aforementioned circular dated June 15, 2023, many AIFs have followed different valuation methodologies and approaches for valuation of their investments. Subsequent to issuance of the aforesaid circular, AIFs are required to align/adopt their valuation methodology to IPEV guidelines or valuation norms under MF Regulations, as the case may be. Therefore, such a change in valuation methodology/approach should not be construed as a 'material change' so that AIFs are not required to provide an exit option to dissenting investors.
Therefore, the Consultation paper proposes that a change by an AIF:
- in its valuation methodology/approach to institute a standardised approach for valuation of its investment portfolio shall not be construed as a 'material change';
- within the valuation guidelines / valuation norms prescribed for AIFs, shall not be construed as a 'material change'. However, in such cases, the valuation of the investment carried out based on valuation methodologies/approaches, both old and new, shall be disclosed to the investors to ensure transparency.
Proposal 3
Currently, the valuation framework for AIFs requires an independent valuer to fulfil one of the following criteria:
- a valuer registered with Insolvency and Bankruptcy Board of India ('IBBI') and has membership of 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; or
- to be a holding company or subsidiary of a Credit Rating Agency registered with SEBI.
SEBI has received requests from industry participants all valuers (individuals and entities) registered with IBBI may be considered eligible to carry out valuations. Industry participants also sought clarity whether, in the case of a valuer set up as an entity, (i) such valuer entity is required to be an IBBI registered valuer entity and (ii) all of its directors/partners/employees are required to have membership of ICAI / ICSI / ICMAI / CFA Institute.
Therefore, the Consultation paper proposes that the eligibility criteria to be an independent valuer for a partnership entity or a company shall be as follows:
- such entity or company shall be a registered valuer entity registered with IBBI; and
- the deputed/authorized person(s) of such registered valuer entity, who undertake(s) the valuation of investment portfolio of AIFs, shall have a membership of ICAI or ICSI or ICMAI or CFA Institute.
Proposal 4
SEBI circular dated February 05, 2020 titled 'Disclosure Standards for AIFs' specifies, inter alia, that AIFs shall provide audited data on cash flows and valuation of their scheme-wise investments to performance benchmarking agencies within 6 months from the end of FY. However AIFs face a number of constraints in meeting this deadline. Therefore, the Consultation paper proposes that the deadline for AIFs to provide audited data on cash flows and valuation of their scheme-wise investments to Performance Benchmarking Agencies be extended by a month to October 31 of each year.
ELP Comments
All of the proposals contained in this Consultation Paper are laudable and will be welcomed by the AIF industry.
The Consultation Paper can be found here
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