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In order to curb the flexibility in the valuation techniques, and avoid variances and non-uniformity due to adoption of different valuation methodologies which may provide AIF (Alternate Investment Funds) to distort the valuation  and provide a wide range of values and space for the AIF's to interplay with the valuation which may lead to manipulated results, the SEBI has provided the amendment in the regulations to make it more specific and standardized. Also, in the previous scenario there was no proper channel or modalities for the proper reporting of the valuation and further no disclosure was there in the Private Placement Memorandum (PPM). 

Effective Date & Applicability:
SEBI issued “The Standardized approach to valuation of investment portfolio of Alternative Investment Funds (AIFs)” circular on 21st June, 2023 however the provisions of the same shall come into force with effect from November 01, 2023. Hence, the applicability of this provisions shall commence w.e.f. November 01, 2023 i.e. all the Alternative Investments Funds shall be required to obtain the valuation in regards or reference to the circular as per SEBI and through a Registered Valuer.

​​Manner of Valuation of AIFs Investments: In terms of the Regulation 23(1), AIFs are inter-alia required to carry out the valuation of investments in the manner specified by the SEBI from time to time. The manager shall also disclose in Private Placement Memorandum (PPM), the details of the valuation methodology and approach adopted under the stipulated guidelines for each asset class of the scheme of the AIF.

​A. Norms for Valuation of securities : 

Valuation of securities for which valuation norms have already been prescribed under SEBI (Mutual Funds) Regulations, 1996 (‘Mutual Fund Regulations’), shall be carried out as per the norms prescribed under the said Regulations. SEBI has specified the manner of valuation according to which, the securities whose valuation norms have already been prescribed under Eighth Schedule of SEBI (Mutual Funds) Regulations, 1996, shall be valued as per the norms prescribed therein.

Valuation Guidelines for which valuation norms have already been prescribed under SEBI (Mutual Funds) Regulations,1996:

• Traded and non-traded securities: Traded securities other than money market and debt securities are required to be valued at the last quoted closing price on the stock exchange while the non-traded securities are to be valued “in good faith” by the Asset Management Company (AMC) on the basis of appropriate valuation methods based on the principles approved by the Board of the AMC. These principles require the equity instruments to be valued on the basis of capitalization of earnings solely or in combination with the net asset value, using for the purposes of capitalization, the price or earnings ratios of comparable traded securities and with an appropriate discount for lower liquidity. Accordingly, both DCF (Income Approach) and NAV (Asset Approach) may be applied for the purpose of valuation.
• Convertible securities: For convertible debentures and bonds, the non-convertible portion should be valued on the same basis as would be applicable to a debt instrument while for the convertible portion, the valuation should be done in the same way equity instruments are valued. Accordingly, the equity portion should be valued based on the basis of underlying security of equity valuation in the ratio of conversion value.
• Rights shares: Until rights shares are traded they should be valued as no. of rights offered divided by the no. of original shares held multiplied by the difference between Ex-rights price and rights offer price. For Example if 10 rights were offered while already holding 100 shares at a rights offer price of say, Rs. 30 and the Ex-rights price is determined to be Rs. 35 then the value of rights shall be = 10/100*( 35-30 ) which is equal to 0.5.
  However, in case a decision is made not to subscribe to the right shares but to renounce them and these renunciations are traded, the renunciation value shall be taken into account.​​

​Valuation of Other Securities
Valuation of securities which are not covered in the “Securities whose valuation norms have already been prescribed under Eighth Schedule of SEBI (Mutual Funds) Regulations, 1996”, 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.

B. Responsibility of Manager of AIFs with regard to Valuation of investments of AIF
According to Regulation 23(5) of AIF Regulations, the Manager and the key management personnel of manager shall ensure that the independent valuer computes and carries out valuation of the investments of the scheme of the AIF in the manner as specified by the Board from time to time.
Further, according to 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.

Deviations And Changes Requiring Disclosure

• 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.
• 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. The  manager  shall  disclose  the  following  as  part of changes in  PPM  to  be submitted annually to SEBI and investors:
  

1. Details  of  changes  in  the valuation methodology  and  approach,  if  any,  for valuation of each asset class of the scheme of the AIF;
   
2. Details  of  changes  in accounting  practices/policies,  if  any,  of  the  investee company and the scheme of the AIF; and
   
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

• The  independent  valuer  shall  not  be  an  associate  of  manager  or  sponsor  or trustee of the AIF i.e. the valuer should be independent from the AIF.
  
• The independent valuer shall have at least three years of experience in valuation of unlisted securities.
  
• The independent valuer shall fulfil one of the following criteria:
  

1. The independent valuer is a valuer registered with Insolvency and Bankruptcy Board of India (IBBI Registered Valuer) 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
   
2. The independent valuer is a holding company or subsidiary of a Credit Rating Agency registered with SEBI; or
   
3.  Any other criteria as may be specified by SEBI from time to time.

Our entity R&A Valuation LLP is an IBBI Registered Valuer entity, also Abhinav Rajvanshi is independent 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.  

D. Reporting of valuation of investments to performance benchmarking agencies
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. 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. 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.

As stated the valuation report or valuation data shall be based on the Audited Financials/Accounts of companies in which investments have been made by the AIF (Alternate Investment Fund) or investee companies for the year ended date. Further the valuation reports shall be submitted to the benchmarking agencies within 6 months. 

​The Standardised Approach to valuation of investment portfolio of alternative investment funds (AIFs) with regards to valuation of investments is one of the steps to ensure the true and fair disclosure of value of investment portfolio. Also, it ensures that the valuation principles/practices/methodology are in uniformity across the AIF industry.

​As a culmination of that exercise, SEBI in its board meeting held on 30 March 2023 (SEBI Board Meeting) has announced several decisions in relation to fund management and operations of, inter alia, Alternative Investment Funds (AIFs) by approving amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations). These decisions have been released to the public through the press release PR No. 6/2023 (Press Release) and the amendment regulations should follow shortly. The relevant contents of the Press Release, pertaining to AIFs have been summarised below.

Standardised approach to valuation of investment portfolio of Alternative Investment Funds (AIFs)

As per SEBI Circular  SEBI/HO/AFD/PoD/CIR/2023/97 dated June 21, 2023 a standardized approach for the valuation of Alternative Investment Funds (AIF's) was prescribed. The relevant act i.e. SEBI (Alternate 
Investment Funds) Regulations, 2012 (“AIF Regulations”), have been amended and notified on June 15, 2023. The said notification prescribed changes in (1) Manner of valuation of AIF's (Alternate Investment Funds) (2) Responsibility of manager of AIF with regard to valuation of investments of AIF (3) Eligibility criteria for Independent Valuer (4) Reporting of valuation of investments of AIF to performance benchmarking agencies.

​So far, the valuation of Alternative Investment Funds (AIFs) was carried out in accordance with Regulation 23 of the Securities and Exchange Board of India Regulations, 2012 (“AIF Regulations”). However, vide circular no. SEBI/HO/AFD/PoD/CIR/2023/97 issued on 21st June 2023, SEBI (Alternative Investment Funds) Regulations, 2012 have been amended. 

The Need for Amendment:

• Regulation 23 of the SEBI (Alternative Investment Funds) Regulations, 2012; prior to the current amendment, provided the flexibility to these AIFs in adoption of the valuation techniques /methodology in respect of the valuation of investment portfolios and the AIF managers were merely required to provide a description of the valuation procedure/methodology for valuation of the assets.
  
• The modalities relating to valuation of investment portfolio of the AIFs were not disclosed in the Private Placement Memorandum (PPMs) at the time of submission to SEBI and also were not reported to SEBI subsequently.