SUMMARY
SEBI has asked PE and VC firms to disclose funds’ valuation methodology for startups and the qualifications and position of the valuation agent
SEBI also sought details of changes made by these AIFs in their valuation practices over the past three years
This comes at a time when funding inflow within the startup ecosystem is low and companies are facing a financial crunch
Amid market volatility and falling funding and valuation numbers, the Securities and Exchange Board of India (SEBI) has reportedly asked private equity (PE) and venture capital (VC) funds to share the calculation process for startup valuations.
According to an ET report, SEBI has sought these details after it received complaints of startups going for lofty valuations via non-transparent accounting practices. Further, several highly valued startups underperformed on the stock market, and wiping out significant retail investors’ wealth has also contributed to this cause.
Since VC and PEs fall under the alternative investment funds (AIF) Category I & II funds, they are regulated by the SEBI. Thus, the details that SEBI has asked PE and VC firms to disclose included the valuation methodology practised by the funds along with the qualifications and position of the valuation agent.
To check the credibility of the valuation vehicle, SEBI has also asked for details of changes made by these AIFs in their valuation practices over the past three years.
SEBI’s Watchful Eye On PE & VC Funds
It is noteworthy that AIFs are quite less regulated than open market funds such as mutual and brokerage funds which publish a monthly compliance report. Further, with several high (and ultra-high) net-worth individuals increasingly taking the investment route in startups, SEBI has been mulling bringing an increased compliance onus on these AIFs.
Recently, SEBI has paid some surprise visits to over 20 PE and hedge funds to see if they were compliant with the securities laws. The market watchdog has been exercising its powers suo moto as the market is ripe for new regulations and a little scanning.
For instance, SEBI has received several complaints against investment vehicles alleging opacity and non-accountability. Thus, since early 2021, it has introduced a slew of changes such as updating the definitions of venture capital undertakings and bringing in a new one for fund managers. It also made certain rules preventing funds from spilling from one pool to another and the appointment of independent trustees on the board of the VCs and PE.
Further, SEBI is also working with the competition commission of India (CCI) to keep an eye on funds making incomplete disclosures.
Besides regulations, SEBI has also eased certain compliance requirements for the funds. For instance, it is mulling extending the lifecycle of funds as issues of liquidity and bear markets plague the ecosystem. It also recently removed the ‘Indian connection’ clause for an investee company and simplified round-tripping structures.
