Executive Summary:
This SEBI circular outlines a standardised approach to valuing the investment portfolios of Alternative Investment Funds (AIFs). It details the manner of valuation, responsibilities of AIF managers, eligibility criteria for independent valuers, and reporting requirements to performance benchmarking agencies. The provisions of this circular come into effect on November 1, 2023. AIF managers must submit compliance reports on the SEBI Intermediary Portal.
Key Points / Main Content:
* **Valuation of AIF Investments:**
* Securities already covered under SEBI Mutual Funds Regulations must be valued as per those regulations.
* Other securities should be valued according to guidelines endorsed by an AIF industry association representing at least 33% of SEBI-registered AIFs.
* Managers must disclose the valuation methodology in the PPM for each asset class.
* **Responsibilities of AIF Managers:**
* Managers and key personnel must ensure independent valuers compute valuations as specified by SEBI.
* Managers are responsible for true and fair valuation and must deviate from established policies if necessary to achieve fair value, documenting the rationale.
* Managers must inform investors of deviations exceeding 20% between two consecutive valuations or 33% in a financial year, including reasons.
* Changes in valuation methodology are considered material and must adhere to the process outlined in SEBI circulars CIR/IMD/DF/14/2014 and CIR/IMD/DF/16/2014.
* Managers must disclose changes in valuation methodology, accounting practices, and their impact in the PPM submitted annually to SEBI and investors.
* **Eligibility Criteria for Independent Valuers:**
* The valuer must not be an associate of the AIF's manager, sponsor, or trustee.
* The valuer must have at least three years of experience in valuing unlisted securities.
* The valuer must meet specific criteria, such as registration with the Insolvency and Bankruptcy Board of India and membership of specified institutes, or being a holding company/subsidiary of a SEBI-registered Credit Rating Agency.
* **Reporting to Performance Benchmarking Agencies:**
* AIF managers must include a timeframe in investment agreements requiring investee companies to provide audited accounts to the AIF, enabling valuation based on audited data by March 31 within six months.
* Valuation based on audited data must be reported to performance benchmarking agencies only after the AIF's books are audited.
* **Compliance and Reporting:**
* AIF managers must submit a compliance report on the SEBI Intermediary Portal.
* Trustees/sponsors must ensure compliance with this circular is included in the Compliance Test Report.
Impact Analysis:
* **Alternative Investment Fund (AIF) Managers:**
* *Impact:* Must adhere to the standardized valuation approach, ensure accurate and fair valuation of investments, and disclose changes in valuation methodologies. They are responsible for appointing eligible independent valuers and reporting compliance.
* *Action Required:* Implement the specified valuation procedures, appoint eligible independent valuers, update PPMs with valuation methodologies, establish processes for reporting deviations, and submit compliance reports to SEBI.
* **Investors in Alternative Investment Funds:**
* *Impact:* Will benefit from a more standardized and transparent valuation process, enhancing investor protection and providing greater clarity on the valuation of AIF investments.
* *Action Required:* Review updated PPMs for changes in valuation methodologies and accounting practices.
* **Independent Valuers:**
* *Impact:* Must meet the specified eligibility criteria to be appointed by AIFs and must conduct valuations as specified by SEBI regulations.
* *Action Required:* Ensure they meet the eligibility criteria outlined in the circular.
* **AIF Industry Associations:**
* *Impact:* Need to endorse appropriate valuation guidelines, considering recommendations from SEBI's Alternative Investment Policy Advisory Committee.
* *Action Required:* Endorse valuation guidelines that align with SEBI's requirements.
* **Trustees/Sponsors of AIFs:**
* *Impact:* Responsible for ensuring that the Compliance Test Report includes compliance with the provisions of this circular.
* *Action Required:* Update the Compliance Test Report to include compliance with the new valuation requirements.
Key Entities Referenced
Alternative Investment Funds: A type of investment fund that typically invests in less liquid assets and employs more complex investment strategies.
SEBI Alternative Investment Funds Regulations, 2012: Regulations established by SEBI governing the operation and management of Alternative Investment Funds in India.
SEBI Mutual Funds Regulations, 1996: Regulations established by SEBI governing the operation and management of Mutual Funds in India.
Alternative Investment Policy Advisory Committee: A committee advising SEBI on matters related to Alternative Investment Funds.
Securities and Exchange Board of India: The regulatory authority for the securities market in India.
Insolvency and Bankruptcy Board of India: The regulatory body for overseeing insolvency proceedings and professionals in India.
Institute of Chartered Accountants of India: A professional accounting body in India.
Institute of Company Secretaries of India: A professional body for company secretaries in India.
CIRCULAR
SEBI/HO/AFD/PoD/CIR/2023/97 June 21, 2023
To,
All Alternative Investment Funds
Sir / Madam,
Sub: Standardised approach to valuation of investment portfolio of Alternative
Investment Funds (AIFs)
1. SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”), have been
amended and notified on June 15, 2023. Copy of the notification is available at link.
A. Manner of valuation of AIF’s investments
2. In terms of Regulation 23(1), AIFs are inter-alia required to carry out valuation of their
investments in the manner specified by SEBI from time to time.
3. In this regard, following is specified:
3.1. Valuation of securities for which valuation norms have already been prescribed
under SEBI (Mutual Funds) Regulations, 1996 (‘MF Regulations’), shall be
carried out as per the norms prescribed under MF Regulations.
3.2. Valuation of securities which are not covered in para 3.1 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.
3.3. The manager shall also disclose in PPM, the details of the valuation methodology
and approach adopted under the stipulated guidelines for each asset class of the
scheme of the AIF.
B. Responsibility of manager of AIF with regard to valuation of investments of AIF
4. In terms of Regulation 23(5) of AIF Regulations, the Manager and the key management
personnel of manager shall ensure that the independent valuer computes and carries
Page 1 of 4out valuation of the investments of the scheme of the AIF in the manner as specified by
the Board from time to time.
5. Further, in terms of Regulation 23(6) of AIF Regulations, Manager shall be responsible
for true and fair valuation of the investments of the scheme of the AIF. In terms of
proviso to aforesaid Regulation, in case the established policies and procedures of
valuation do not result in fair and appropriate valuation, the Manager shall deviate from
the established policies and procedures in order to value the assets or securities at a
fair value and document the rationale for such deviation.
6. In this regard, following is specified:
6.1. At each asset level, in case there is a deviation of more than 20% between two
consecutive valuations or a deviation of more than 33% in a financial year, the
manager shall inform the investors the reasons/factors for the same, both generic
and specific, including but not limited to changes in accounting practices/policies,
assumptions/projections, valuation methodology and approach, etc. and reasons
thereof.
6.2. Any change in the methodology and approach for valuation of investments of
scheme of AIF, shall be construed as material change significantly influencing the
decision of the investor to continue to be invested in the scheme of the AIF and
the AIF shall adhere to process to be complied with in such cases as mentioned
in SEBI circular No. CIR/IMD/DF/14/2014 dated June 19, 2014 and SEBI Circular
No. CIR/IMD/DF/16/2014 dated July 18, 2014.
6.3. The manager shall disclose the following as part of changes in PPM to be
submitted annually to SEBI and investors:
6.3.1. Details of changes in the valuation methodology and approach, if any, for
valuation of each asset class of the scheme of the AIF;
6.3.2. Details of changes in accounting practices/policies, if any, of the investee
company and the scheme of the AIF; and
6.3.3. Details of impact of the aforesaid changes in terms of valuation of the
investments of the scheme of the AIF.
C. Eligibility criteria for Independent Valuer
7. In terms of Regulation 23(4), the Manager shall ensure that the AIF appoints an
independent valuer, which satisfies the criteria specified by SEBI from time to time, for
valuing investment portfolio of AIFs.
Page 2 of 48. In this regard, the following is specified:
8.1. The independent valuer shall not be an associate of manager or sponsor or
trustee of the AIF.
8.2. The independent valuer shall have at least three years of experience in valuation
of unlisted securities.
8.3. The independent valuer shall fulfil one of the following criteria:
8.3.1. The independent valuer is a valuer registered with Insolvency and Bankruptcy
Board of India and has membership of Institute of Chartered Accountants of
India or Institute of Company Secretaries of India or Institute of Cost
Accountants of India or CFA Institute; or
8.3.2. The independent valuer is a holding company or subsidiary of a Credit Rating
Agency registered with SEBI; or
8.3.3. Any other criteria as may be specified by SEBI from time to time.
D. Reporting of valuation of investments of AIF to performance benchmarking
agencies
9. To ensure timely and appropriate reporting of valuation of investment portfolio to
performance benchmarking agencies, the following is specified:
9.1. 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 six months.
9.2. Manager of AIF shall ensure that valuation based on audited data of investee
company is reported to performance benchmarking agencies only after the audit
of books of accounts of the AIF in terms of Regulation 20(14) of AIF Regulations,
within the stipulated timelines.
10. The manager of AIF shall submit report on compliance with the provisions of this circular
on SEBI Intermediary Portal (www.siportal.sebi.gov.in) in the format as specified
therein.
11. The trustee/sponsor of AIF, as the case may be, shall ensure that the ‘Compliance Test
Report’ prepared by the manager in terms of SEBI Circular No. CIR/IMD/DF/14/2014
dated June 19, 2014, includes compliance with the provisions of this circular.
Page 3 of 412. The provisions of this circular shall come into force with effect from November 01, 2023.
13. This circular is issued with the approval of the competent authority.
14. This circular is issued in exercise of powers conferred under Section 11(1) of the
Securities and Exchange Board of India Act, 1992 to protect the interests of investors
in securities and to promote the development of, and to regulate the securities market.
15. 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.: +91-22-26449222
ssbhati@sebi.gov.in
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