Executive Summary:
This SEBI circular modifies the framework for the valuation of Alternative Investment Funds (AIFs) investment portfolios, following representations from the AIF industry. It clarifies valuation norms, particularly for securities not covered under existing Mutual Fund Regulations. A key change extends the deadline for reporting valuation based on audited data to performance benchmarking agencies to October 31st of each year. The provisions of this circular are effective immediately.
Key Points / Main Content:
* **Valuation Norms:**
* Valuation of securities (excluding unlisted, non-traded, and thinly traded securities) follows SEBI Mutual Funds Regulations.
* Valuation of securities not covered above should align with guidelines endorsed by an AIF industry association (representing at least 33% of SEBI-registered AIFs), considering AIPAC recommendations.
* Valuation norms for thinly traded and non-traded securities are expected to be harmonized across SEBI-regulated entities by March 31, 2025.
* **Material Change Definition:**
* Changes to comply with Clause 22.1 of Master Circular for AIFs are not considered "Material Change".
* Changes within valuation guidelines/norms are not considered "Material Change," but both old and new valuations must be disclosed to investors.
* **Independent Valuer Eligibility:**
* Independent valuers (partnerships or companies) must be Registered Valuer Entities with IBBI.
* Authorized persons undertaking valuations must have membership of ICAI, ICSI, ICMAI, or a CFA Charter.
* **Reporting Timeline Extension:**
* The deadline for AIFs to report valuation based on audited data of investee companies (as of March 31st) to performance benchmarking agencies is extended to October 31st each year.
* **Compliance and Enforcement:**
* Trustees/Sponsors of AIFs must ensure the Compliance Test Report includes compliance with this circular's provisions.
* This circular is effective immediately.
Impact Analysis:
* **Alternative Investment Funds (AIFs):**
* *Impact:* AIFs must adhere to the modified valuation framework. The revised guidelines impact valuation methodologies and reporting timelines.
* *Action Required:* Update valuation procedures, ensure compliance with the new norms, and adjust reporting schedules to meet the extended October 31st deadline.
* **AIF Managers:**
* *Impact:* Managers need to ensure investee company agreements include timelines for providing audited accounts.
* *Action Required:* Incorporate specific timeframes in subscription/investment agreements for investee companies to provide audited accounts, enabling timely reporting.
* **Investors in AIFs:**
* *Impact:* Benefit from enhanced transparency due to the disclosure requirement related to changes in valuation methodologies.
* *Action Required:* Review disclosures related to changes in valuation methodologies/approaches.
* **Independent Valuers:**
* *Impact:* Need to meet the specified eligibility criteria (Registered Valuer Entity with IBBI and qualified personnel).
* *Action Required:* Ensure compliance with eligibility criteria related to registration and personnel qualifications.
* **AIF Industry Associations:**
* *Impact:* Associations need to endorse appropriate valuation guidelines considering AIPAC recommendations.
* *Action Required:* Endorse suitable valuation guidelines, considering the recommendations from the Alternative Investment Policy Advisory Committee of SEBI.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): The regulatory body issuing the circular and responsible for regulating the securities markets in India.
Alternative Investment Funds (AIFs): The entities to whom the circular is addressed and whose investment portfolio valuation framework is being modified.
SEBI Alternative Investment Funds Regulations, 2012: The primary regulations governing Alternative Investment Funds in India.
Master Circular for AIFs: A comprehensive circular providing guidance to AIFs on various aspects, including valuation of investment portfolios.
Alternative Investment Policy Advisory Committee of SEBI (AIPAC): A committee advising SEBI on matters related to alternative investment policies.
International Private Equity and Venture Capital Valuation (IPEV) Guidelines: Valuation guidelines endorsed by AIF industry associations for the valuation of investment portfolios of AIFs.
SEBI Mutual Funds Regulations, 1996: Regulations governing the valuation norms for securities under mutual funds.
Insolvency and Bankruptcy Board of India (IBBI): Regulatory body for registered valuers entity
CIRCULAR
SEBI/HO/AFD/PoD-1/P/CIR/2024/123 September 19, 2024
To,
All Alternative Investment Funds
Dear Sir/Madam,
Subject: Modification in framework for valuation of investment portfolio of AIFs
1. SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’) were
amended and notified on June 15, 2023 and SEBI circular no.
SEBI/HO/AFD/PoD/CIR/2023/97 dated June 21, 2023 [subsumed subsequently in
Chapter 22 of Master Circular for AIFs dated May 07, 2024 (“Master Circular”)] was
issued to provide guidance to AIFs towards a consistent and standardized approach
for valuation of their investment portfolios.
2. In terms of Clause 22.1.2 of the Master Circular, valuation of securities which are not
covered in para 22.1.1 of the Master Circular, shall be carried out as per valuation
guidelines (taking into account recommendations of AIPAC of SEBI), endorsed by any
AIF industry association, which in terms of membership represents at least 33% of
the number of SEBI registered AIFs.
3. In this context, an eligible AIF industry association meeting the aforesaid criteria,
endorsed the International Private Equity and Venture Capital Valuation (IPEV)
Guidelines for valuation of investment portfolio of AIFs in terms of Clause 22.1.2 of
the Master Circular.
4. Subsequently, SEBI received representations from the AIF industry highlighting
issues with regard to certain aspects of the valuation framework for AIFs. In this
regard, based on the public comments on consultation paper on “review of certain
aspects of the framework for valuation of investment portfolio of AIFs”,
recommendations of AIPAC and internal deliberations, the following has been
decided:
4.1. Clause 22.1.1 of the Master Circular stands modified as under:
22.1.1 Valuation of securities, other than unlisted securities and listed
securities which are non-traded and thinly traded, for which valuation
norms have been prescribed under SEBI (Mutual Funds) Regulations,
Page 1 of 31996 (‘MF Regulations’), shall be carried out as per the norms
prescribed under MF Regulations.
4.2. The valuation norms for securities which are not covered in Para 22.1.1 of the
master circular have been provided in Clause 22.1.2 of the master circular. For
the sake of clarity, the same is reproduced as under:
22.1.2 Valuation of securities which are not covered in para 22.1.1 above,
shall be carried out as per valuation guidelines endorsed by any AIF
industry association, which in terms of membership represents at least
33% of the number of SEBI registered AIFs. The eligible AIF industry
association shall endorse appropriate valuation guidelines after taking
into account recommendations of Alternative Investment Policy
Advisory Committee of SEBI.
4.3. With respect to thinly traded and non-traded securities, it is envisaged to
harmonize the valuation norms across entities within SEBI’s regulatory purview
in a time bound manner so as to facilitate applicability of the same for valuation
of investment portfolios of AIFs on or after March 31, 2025.
4.4. Clause 22.2.2 of the Master Circular stands modified as under:
22.2.2 Change in valuation methodology/approach to comply with Clause
22.1 of Master circular for AIFs on 'Standardised approach to valuation
of investment portfolio of AIFs', shall not be construed as 'Material
Change'.
22.2.3 Change in methodology/approach within the valuation guidelines /
valuation norms prescribed for AIFs, shall not be construed as a
'Material Change'. However, upon such change, 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.
4.5. The following new sub-clause is inserted in clause 22.3 of the Master Circular:
22.3.4 The eligibility criteria for independent valuer for a partnership entity or
company shall be as follows –
(i) Such entity or company shall be a ‘Registered Valuer Entity’
registered with IBBI; and,
Page 2 of 3(ii) 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 a CFA
Charter from the CFA Institute.
4.6. The specified timeline as prescribed in Clause 22.4.1 of the master circular, for
reporting valuation based on audited data of investee companies as on March 31
every year, to performance benchmarking agencies, has been extended from “six
months” to “seven months”. Accordingly, Clause 22.4.1 of the master circular
stands modified as under:
22.4.1 Manager of AIF shall ensure that a specific timeframe for providing
audited accounts by the investee company to the AIF is included as
one of the terms in subscription agreement / investment agreement
with the investee company, so as to enable AIFs to report valuation
based on audited data of investee companies as on March 31 to
performance benchmarking agencies within the specified timeline of
seven months i.e by October 31 of each year.
5. The trustee/sponsor of AIF, as the case may be, shall ensure that the ‘Compliance
Test Report’ prepared by the manager in terms of Chapter 15 of the master circular
for AIFs, includes compliance with the provisions of this circular.
6. The provisions of this circular shall come into force with immediate effect.
7. This circular is issued in exercise of powers conferred under Section 11(1) of the
Securities and Exchange Board of India Act, 1992 read with Regulation 23 and
Regulation 36 of AIF Regulations, 2012 to protect the interests of investors in
securities and to promote the development of, and to regulate the securities markets.
8. The circular is available on SEBI website at www.sebi.gov.in under the categories
“Legal framework -Circulars" and "Info for - Alternative Investment Funds”.
Yours faithfully,
Sanjay Singh Bhati
Deputy General Manager
Tel.No: 022 26449222
ssbhati@sebi.gov.in
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