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The Securities and Exchange Board of India has proposed Alternative Investment Funds (AIFs) to use a standardised approach to value their investment portfolios. AIF managers have the freedom to use any approach for portfolio valuation because AIF regulations before this direction only focus on the disclosures to investors regarding the value of investments and do not set any standards. This blog will discuss the new circular on a standardised approach to the valuation of the investment portfolio of Alternative Investment Funds (AIFs).
The SEBI said in its discussion paper, “A standardised approach with regard to valuation methodology/principles/standard for valuing investment portfolio is one of the steps to ensure fair disclosure of value of investment portfolio to the investors,”.
The performance of a particular AIF and that of the AIF industry will be benchmarked based on the valuation carried out on uniform principles and methodologies to reflect their performance fairly. This will also ensure consistency in the AIF 1 industry’s valuation principles, methodologies, and standards. The regulator also suggested a few requirements for appointing an independent valuer.
The term “alternative investment fund” describes a group of pooled investment funds that invest in hedge funds, venture capital, private equity, and other sorts of investments. A company or a (LLP) Limited Liability Partnership can set up an Alternative Investment Fund.
An independent valuer is a person who possesses membership in the Institute of Chartered Accountants (CA) of India, Institute of Company Secretaries (CS) of India, Institute of Cost Accountants of India, or CFA Institute and is a valuer registered with the Insolvency and Bankruptcy Board of India appointed for the valuation of investment portfolios of AIFs.
Category I and II AIFs invest predominantly in unlisted securities where the market price is unavailable and the requirement for an independent valuer has been mandated. It is believed that defining objective standards for a third-party appraiser is crucial, particularly when assessing an investment portfolio of unlisted securities, which calls for a specialised skill set.
A standardised approach with regard to valuation methodology, principles and standards for valuing an investment portfolio is one of the steps to ensure fair disclosure of the investment portfolio’s value to the investors. This circular is issued mainly for the fair and consistent performance of the AIF industry.
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