To address the inconsistency and potential manipulation in the valuation of investment portfolios of Alternative Investment Funds (AIFs), SEBI has implemented amendments to standardize valuation techniques. Previously, varying methodologies allowed AIFs to present a broad range of values, leading to non-uniformity and potential distortion. The amendments aim to eliminate these discrepancies and ensure transparency.
Effective Date and Applicability
SEBI issued the "Standardized Approach to Valuation of Investment Portfolio of Alternative Investment Funds (AIFs)" circular on June 21, 2023. These provisions will take effect from November 1, 2023. From this date, all AIFs must adhere to SEBI's valuation guidelines and obtain valuations from a Registered Valuer.
Valuation Methods
Norms for Valuation of Securities
For securities with existing valuation norms under the SEBI (Mutual Funds) Regulations, 1996, the prescribed methods will continue to apply. Traded securities should be valued at their last quoted closing price, while non-traded securities should be valued based on methods approved by the Asset Management Company (AMC). This includes using capitalization of earnings or net asset value approaches.
Valuation of Other Securities
For securities not covered under existing norms, valuation should follow guidelines endorsed by an AIF industry association representing at least 33% of SEBI-registered AIFs. These guidelines should consider recommendations from SEBI's Alternative Investment Policy Advisory Committee.
Manager's Responsibilities
Under Regulation 23(5) of the AIF Regulations, managers must ensure an independent valuer performs the valuation as specified by SEBI. According to Regulation 23(6), managers are responsible for fair and true valuation, documenting any necessary deviations from established policies to ensure fairness.
Reporting Requirements
Any significant valuation deviations must be disclosed to investors, explaining the reasons and factors behind the changes. Managers must report any changes in valuation methodology or accounting practices annually to SEBI and investors.
Eligibility Criteria for Independent Valuers
Independent valuers must not be associated with the manager, sponsor, or trustee of the AIF and should have at least three years of experience in valuing unlisted securities. They must be registered with the Insolvency and Bankruptcy Board of India (IBBI) and hold memberships in relevant professional bodies, or be part of a SEBI-registered Credit Rating Agency.
Reporting to Benchmarking Agencies
Managers must ensure audited accounts of investee companies are provided within agreed timeframes to facilitate accurate reporting to performance benchmarking agencies by March 31 each year. Reports based on these audited accounts must be submitted within six months.
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