SEBI Proposes Common Methodology For AIF Portfolio Valuation

The Securities and Exchange Board of India (SEBI) has floated a proposal seeking to adopt a standardised approach towards the valuation of investment portfolios of alternative investment funds (AIFs).

In a consultation paper published on January 6, the markets watchdog called for such a methodology to bring ease of convenience and to ensure fair disclosure of investment value to the investors.

“It (a standardised approach) will also ensure that the valuation principle/ methodologies/  standards are uniform across the AIF industry and performance of a particular AIF as well as that of the AIF industry is benchmarked based on valuation carried out on uniform principle/ methodology to reflect their performance in a fair manner,” the paper said. 

The paper will be open for public feedback till January 23, 2023.

Citing the rationale behind the move, SEBI said that the current norms prescribe disclosures related to valuation, without specifying any methodology. In the same breath, the markets watchdog, however, added that an industry body had called for adopting International Private Equity and Venture Capital Valuation guidelines to formulate any such approach. 

Besides, SEBI has also sought feedback on prescribing criteria for evaluating independent valuers of the AIFs. It has also proposed a slew of minimum eligibility requirements for such valuers.

The paper also proposes casting new responsibilities on the managers of AIF with regard to valuation of their portfolio and other allied disclosures. SEBI has proposed instituting measures to ensure valuations are properly reported to performance benchmarking agencies.

“Managers of AIFs shall be required to ensure that one of the terms in subscription agreement/ investment agreement with the investee company, stipulates a specific timeframe for providing its audited accounts to the AIF. This would enable (the) manager of AIF to report valuation based on audited data as on March 31, to performance benchmarking agencies within the specified timeline of 6 months,” the paper said. 

This could have a direct bearing on startups and could set a specific timeframe within which they would have to report their audited accounts to investing AIFs. 

SEBI Tightens Screws

The proposals come at a time when the market regulator has been on a spree to overhaul regulations. Many of its recent changes will impact homegrown startups. Recently, SEBI Chairperson Madhabi Puri Buch said that online mutual fund investments platforms such as Groww, Zerodha Coin, and Paytm Money could charge their customers for executing transactions.

In December, the markets watchdog also reportedly questioned old venture capital funds about their term extensions beyond their lifespan. Not just this, it was also recently reported that the regulatory body was mulling increasing the minimum ticket size for AIFs to INR 5 Cr from the current INR 1 Cr.

It has also been looking to crack the whip on fraudulent entities looking to lure gullible investors. Recently, SEBI announced that it was monitoring social media to identify groups that ‘camouflage themselves as registered mutual funds or misuse the names of mutual funds to lure the investors’.

Categorised across three broad categories, AIFs are private investment vehicles that pool funds from investors to deploy such investments in private equity, angel funds, and venture capital funds, among others. These are then used to infuse capital into startups.

According to SEBI, fund managers for AIFs raised a mammoth INR  6.41 Lakh Crore across categories till the end of June 2022.