Standardised approach to valuation of investment portfolio of AIFs
Chapter 18 - Standardised approach to valuation of investment portfolio of AIFs
18.1. Manner of valuation of AIF’s investments
AIFs are required to value their investments in the manner prescribed by SEBI.
The valuation must be carried out in accordance with the valuation requirements specified by SEBI from time to time.
Therefore, AIFs cannot determine the value of their investments using an arbitrary method. They must follow the valuation framework prescribed by SEBI.
18.1.1.
For securities that are not unlisted securities, and are also not non-traded or thinly traded listed securities:
The valuation must follow the valuation norms prescribed under the SEBI (Mutual Funds) Regulations, 1996.
In simple terms, where the Mutual Fund Regulations already provide valuation rules for a particular security, the AIF must use those same valuation norms.
Example:
An AIF holds a security for which valuation norms are already prescribed under the MF Regulations.
The AIF must value that security according to the MF Regulations, rather than using its own separate valuation method.
18.1.2.
If a security is not covered by the valuation norms mentioned in Para 18.1.1, its valuation must follow the valuation guidelines endorsed by an eligible AIF industry association.
The industry association must represent at least 33% of the total number of SEBI-registered AIFs, based on its membership.
The eligible industry association must formulate and endorse appropriate valuation guidelines.
While preparing these guidelines, the association must take into account the recommendations of the Alternative Investment Policy Advisory Committee (AIPAC) of SEBI.
Example:
An AIF holds a security that is not covered by the valuation norms under the MF Regulations.
The AIF cannot simply decide its own valuation method.
It must follow the valuation guidelines endorsed by an eligible AIF industry association meeting the 33% representation requirement.
Valuation as per IPEV Guidelines
An eligible AIF industry association satisfying the required 33% representation criterion has endorsed the International Private Equity and Venture Capital Valuation (IPEV) Guidelines.
These IPEV Guidelines are used for the valuation of the investment portfolio of AIFs where the securities are not covered by the valuation norms referred to in Para 18.1.1.
Therefore, AIFs can follow the IPEV Guidelines for valuing investments covered under Para 18.1.2.
Example:
An AIF holds an investment for which the MF Regulations do not prescribe a valuation method.
The AIF can value that investment using the IPEV Guidelines, as they have been endorsed by an eligible AIF industry association.
18.1.4.
SEBI intends to standardise the valuation method for thinly traded and non-traded securities across different entities regulated by SEBI.
The aim is to create a common valuation approach so that the same standards can be used consistently for valuing AIF investment portfolios.
SEBI intends to implement this harmonisation within a defined timeframe.
Example:
An AIF holds a security that is thinly traded and therefore does not have a reliable market price.
Instead of different SEBI-regulated entities using different methods to value such securities, SEBI intends to establish harmonised valuation norms.
18.1.4.
The Manager must disclose in the PPM the valuation methodology and approach used for valuing the AIF's investments.
The disclosure must be provided separately for each asset class held by the scheme.
The methodology must be based on the applicable valuation guidelines being followed by the AIF.
Example:
An AIF invests in:
Equity securities.
Debt securities.
Unlisted securities.
The PPM must explain the valuation methodology and approach used for each of these asset classes.
18.2. Responsibility of manager of AIF with regard to valuation of investments of AIF
The Manager and Key Management Personnel (KMP) of the Manager are responsible for ensuring that an independent valuer carries out the valuation of the AIF scheme's investments.
The independent valuer must carry out the valuation in accordance with the valuation requirements specified by SEBI.
So, the Manager and its KMP cannot simply rely on an internal valuation. They must ensure that the investment portfolio is valued by an independent valuer using the prescribed methodology.
Example:
An AIF holds investments worth ₹100 crore.
The Manager appoints an independent valuer to determine their value.
The Manager and its KMP must ensure that the valuer:
Independently computes the value of the investments.
Follows the valuation methodology prescribed by SEBI.
Manager's Responsibility for Fair Valuation of Investments
The Manager is responsible for ensuring that the investments of the AIF scheme are valued fairly and accurately.
The Manager must follow the established valuation policies and procedures of the AIF.
However, if following those established methods would not result in a fair and appropriate value, the Manager may deviate from them.
In such a case:
The investment must be valued at its fair value.
The Manager must document the reasons for deviating from the usual valuation policy.
Example:
An AIF normally values a particular type of investment using its established valuation methodology.
Due to unusual circumstances, applying that methodology would produce a value that does not fairly represent the investment's actual value.
The Manager may use a different appropriate method to arrive at a fair value.
The Manager must document why the normal valuation method was not appropriate and why the alternative method was used.
In this regard, following is specified:
18.2.1.
The Manager must monitor the valuation of each individual asset of the AIF.
If there is a significant change in the value of an asset, the Manager must inform the investors about the reasons for the change.
Disclosure is required when:
The valuation changes by more than 20% between two consecutive valuations; or
The valuation changes by more than 33% during a financial year.
The Manager must explain both general and specific reasons for the change.
The reasons may include:
Changes in accounting practices or policies.
Changes in assumptions or projections.
Changes in valuation methodology or approach.
Any other relevant factors and the reasons for such changes.
18.2.2.
If an AIF changes its valuation methodology or approach to comply with the valuation requirements under Para 18.1, that change will not be treated as a Material Change.
Therefore, the AIF does not need to treat such a valuation-methodology change as a material change merely because the valuation approach has been updated to comply with SEBI's requirements.
18.2.3.
A change in the valuation methodology or approach within the valuation guidelines or norms prescribed for AIFs will not be treated as a Material Change.
However, when the methodology or approach is changed, the AIF must provide investors with the valuation under:
The old methodology/approach.
The new methodology/approach.
This allows investors to understand how the change in methodology affects the value of their investment.
Example:
An investment was valued at ₹10 crore using the old valuation approach.
Under the new valuation approach, the same investment is valued at ₹12 crore.
The AIF must disclose both:
Old methodology valuation: ₹10 crore
New methodology valuation: ₹12 crore
The change itself is not a Material Change, but the dual valuation disclosure is required for transparency.
18.2.4.
The Manager must disclose certain valuation and accounting changes as part of the annual changes to the PPM submitted to:
SEBI; and
The investors.
The disclosure must cover the following:
(a) Changes in valuation methodology
Details of any changes in the valuation methodology or approach used for each asset class of the AIF scheme.
(b) Changes in accounting practices/policies
Details of any changes in the accounting practices or policies of:
The investee company; and
The AIF scheme.
(c) Impact on valuation
Details of how the above changes have affected the valuation of the AIF's investments.
Example:
An AIF changes the valuation methodology for its unlisted equity investments.
The investee company also changes its accounting policy.
The Manager must disclose:
What changed in the valuation methodology.
What changed in the accounting policy.
The resulting impact on the value of the AIF's investments.
18.3. Eligibility criteria for Independent Valuer
The Manager must ensure that the AIF appoints an independent valuer to value the investment portfolio of the AIF.
The valuer must satisfy the eligibility criteria prescribed by SEBI.
The purpose is to ensure that the valuation of the AIF's investments is carried out by a person who is independent and meets SEBI's prescribed requirements.
Example:
An AIF holds investments in several unlisted companies.
The Manager must ensure that an eligible independent valuer is appointed to determine the value of those investments.
The Manager cannot appoint just any valuer; the valuer must meet the criteria specified by SEBI.
18.3.1.
The independent valuer must be truly independent from the AIF's key parties.
Therefore, the valuer cannot be an associate of:
The Manager.
The Sponsor.
The Trustee of the AIF.
This requirement helps avoid conflicts of interest in the valuation process.
Example:
An AIF's Manager appoints a valuation firm to value the AIF's investments.
If that valuation firm is an associate of the Manager, it cannot be appointed as the independent valuer.
The Manager must instead appoint a valuer that is independent of the Manager, Sponsor and Trustee.
18.3.2.
The independent valuer appointed by the AIF must have at least 3 years of experience in valuing unlisted securities.
This ensures that the person conducting the valuation has sufficient practical experience, particularly because unlisted securities often do not have readily available market prices.
Example:
An AIF wants to appoint Mr. A as its independent valuer.
Mr. A has 5 years of experience in valuing unlisted securities.
He satisfies the minimum 3-year experience requirement.
If another valuer has only 2 years of experience in valuing unlisted securities, that person would not satisfy this requirement.
18.3.3.
The independent valuer must satisfy at least one of the following:
(a). IBBI-registered valuer + Professional membership
The valuer must be registered with the Insolvency and Bankruptcy Board of India (IBBI); and
Must be a member of at least one of these:
Institute of Chartered Accountants of India (ICAI);
Institute of Company Secretaries of India (ICSI);
Institute of Cost Accountants of India; or
CFA Institute.
(b). Connection with a SEBI-registered Credit Rating Agency
The independent valuer can be a holding company or subsidiary of a Credit Rating Agency registered with SEBI.
(c). Other criteria prescribed by SEBI
The valuer may also qualify if it satisfies any other eligibility criteria that SEBI may prescribe in the future.
Example:
A valuation firm can qualify if:
It is an IBBI-registered valuer.
Its relevant professional membership requirement is satisfied.
Alternatively, a valuation entity that is a holding company or subsidiary of a SEBI-registered Credit Rating Agency can also qualify.
18.3.4.
If the independent valuer is a partnership entity or company, it must satisfy the following requirements:
(a). Registered Valuer Entity
The partnership entity/company itself must be registered with IBBI as a Registered Valuer Entity.
(b). Person actually carrying out the valuatio
The person deputed or authorised by that entity to actually perform the AIF valuation must hold membership of at least one of:
ICAI.
ICSI.
ICMAI.
CFA Institute.
