Markets regulator, Securities and Exchange Board of India (SEBI) has released a consultation paper proposing major changes to the valuation framework for Alternative Investment Funds (AIFs). The paper invites public comments by June 13, 2024, and addresses the main issues raised by the industry.

Valuation Norms Applicability

Currently, AIFs must use SEBI (Mutual Funds) Regulations, 1996 for certain securities. AIFs argue these norms are unsuitable for private instruments, which require fundamental valuations based on cash flows. SEBI proposes that traded securities continue to follow mutual fund norms, while unlisted securities should use guidelines from an eligible AIF industry association, specifically the International Private Equity and Venture Capital Valuation (IPEV) Guidelines.

Material Changes in Valuation

Presently, any change in valuation methodology is deemed material, requiring AIFs to offer an exit option to dissenting investors. SEBI proposes that changes to comply with IPEV guidelines or mutual fund norms should not be considered material. Modifications within IPEV guidelines should also not require an exit option if transparency is maintained through disclosure.

Independent Valuer Eligibility

SEBI's current framework requires independent valuers to be registered with the Insolvency and Bankruptcy Board of India (IBBI) and members of professional bodies like ICAI, ICSI, ICMAI, or CFA Institute. SEBI now proposes that while valuing firms must be IBBI-registered, only the individuals conducting valuations need the relevant professional memberships.

Reporting Valuation Timeline

AIFs currently report audited valuation data within six months of the fiscal year-end. The industry finds this timeline challenging due to delays from investee companies. SEBI proposes extending the deadline by one month, to October 31.

You can read the consultation paper here.