AIF Registration

SEBI Modifies Framework for AIFs’ Investment Portfolio Valuation

SEBI’s approach to valuing Alternative Investment Funds (AIFs) investment portfolios has been updated. The market regulator announced new guidelines that will value securities similar to the mutual fund regulations (SEBI (Mutual Funds) Regulations, 1996), except unlisted, non-traded, and thinly traded shares. Securities that are not listed, non-traded, or sparsely traded will now be valued in compliance with mutual fund regulations under this framework.

SEBI made this modification by following feedback from the AIF industry, which pointed out problems with specific elements of the AIF valuation framework. The circular will go into effect right away. Now, independent valuers must be members of registered organisations such as the CFA Charter, ICSI, or ICAI. Although they must be reported to investors, modifications to valuation techniques are not considered significant.

Framework for the Valuation of AIFs Investment Portfolio

The Securities and Exchange Board of India (SEBI) modified its framework for valuing Alternative Investment Funds’ (AIFs’) investment portfolio in response to recommendations from the sector.

According to the market regulator, modifying the valuation technique or approaches will not be regarded as a major change; however, investors must be informed to maintain transparency.

In addition, the regulator provided AIF association-endorsed valuation standards for assets on which the previous criteria left room for uncertainty.

The International Private Equity and Venture Capital Valuation Guidelines (IPEV) were approved by the AIF association IVCA the previous year. Furthermore, the AIF industry has expressed concerns regarding the timeliness of regulations requiring value based on audited data. On Thursday, Sebi extended the deadline for submitting valuations based on audited data of investee companies to performance benchmarking agencies from six months to seven months from March 31 of each year.

“It is intended to harmonise the valuation norms across entities within Sebi’s regulatory purview concerning thinly traded and non-traded securities in a time-bound manner to facilitate the applicability of the same for the valuation of investment portfolios of AIFs on or after March 31, 2025,” Sebi said in the circular.

Step into the future of investing with AIF registration, align with SEBI’s updated valuation framework and turn your investment vision into reality.

Key Modification of the Framework

Know the key modification of the framework made by SEBI:

Clause 22.1.1 Modification

It focuses on securities valuation per the SEBI (Mutual Funds) Regulations, 1996, except for unlisted, non-traded, and thinly traded stocks.

Clause 22.1.2 Clarification

Securities not covered by Clause 22.1.1 shall be valued by standards approved by an AIF industry body representing a minimum of thirty-three percent of AIFs registered with SEBI. The Alternative Investment Policy Advisory Committee of SEBI’s recommendations must be considered in these guidelines.

The goal is to have uniform valuation standards for non-traded and thinly traded securities across all organisations under SEBI’s jurisdiction by March 31, 2025. This will improve uniformity in AIF investment portfolio valuation.

Clause 22.2.2

• Modification

No modification to the valuation technique or methodology will be deemed a “Material Change” if it is necessary to adhere to Clause 22.1, which deals with the valuation of various securities. This suggests that the lengthy disclosure and approval procedures needed for significant modifications are unnecessary for such adjustments.

Clause 22.2.3

• Addition

Any modification to the valuation process that stays within the rules will not be considered a “Material Change.” Investors must know the old and new value figures to preserve openness. If a change in the valuation procedure is deemed non-material, this guarantees that investors are notified of the implications.

Clause 22.3.4

The qualifying requirements for independent valuers engaged in the valuation of AIF portfolios are outlined in a new subclause as follows:

Entity or Company: The Insolvency and Bankruptcy Board of India (IBBI) requires that the entity be a “Registered Valuer Entity.”

Appointed/Authorised Individual(s): Must be a member of one of the following organisations:

• ICAI (Institute of Chartered Accountants of India)
• ICSI (Institute of Company Secretaries of India)
• ICMAI (Institute of Cost Accountants of India)
• CFA Charter from the CFA Institute.

Limiting the ability to perform appraisals to certified persons from authorised entities improves the reliability and calibre of values.

Clause 22.4.1

AIFs now have seven months instead of six months to report their valuations based on audited data to performance benchmarking organisations.

• Modification Requirement

For AIFs to submit their valuation reports by October 31 of each year, managers of AIFs must ensure that investee companies deliver their audited accounts by March 31. The subscription/investment agreement with investee companies should include this clause. This additional month gives AIFs more time to gather and disclose their audited valuation data appropriately.

• Compliance Test Report

As mentioned in Chapter 15 of the master circular, the AIF trustee/sponsor is required to ensure that the “Compliance Test Report” additionally attests to compliance with these new provisions. This guarantees that the AIFs’ entire compliance architecture includes the new criteria.

Who Can Invest in an AIF?

If an investor fits the following eligibility requirements, they may invest in AIFs as a means of diversifying their portfolio:

• These funds are open for investment by foreign nationals, NRIs, and resident Indians.
• While the minimum investment amount for directors, staff, and fund managers is Rs. 25 lakhs, the minimum investment limit for investors is Rs. 1 crore.
• AIFs have a three-year minimum lock-in duration.
• All schemes have a cap of 1000 investors, except angel funds, where the cap is lifted to 49 investors.

Know the Benefits of Investing in AIFs

The following are a few advantages of purchasing AIFs:

• High Return Potential: Compared to other investment options, AIFs often provide a higher potential return. Because of the enormous amount pooled, fund managers have ample space to plan adaptable techniques for optimising returns.
• Low Volatility: Stock markets have no direct bearing on AIFs. These funds have lower volatility, especially when compared to conventional equities investments. Therefore, it can be appropriate for risk-conservative investors who seek stability.
• Diversification: These funds provide much-needed diversification to an investment portfolio and serve as a buffer during volatile markets or financial crises.

It’s recommended to consult the experts for AIF management services and get an alternative investment fund strategy that may transform your portfolio.

Conclusion

AIFs may need to modify their valuation procedures to comply with the revised framework. This could entail making software investments, adding more employees, or updating corporate policies. However, enhanced valuation procedures are more advantageous than expensive in the long run.

Transform your investment game by visiting our website https://enterslice.com/ and diving into SEBI’s new AIF portfolio valuation framework and seizing the advantage for your portfolio.

FAQ’s