Sebi Releases Standard AIF Valuation Methodology and Modalities for Liquidation Plans
Investors would gain from the decision by the market regulator Sebi, which on Thursday announced a standard method for assessing the investment portfolio of Alternative Investment Funds (AIFs) as well as procedures for initiating liquidation schemes. Additionally, according to three different circulars from the Securities and Exchange Board of India (Sebi), all schemes of AIFs must be issued in dematerialized (demat) form.
By October 31, 2023, all existing AIFs with a corpus of more than Rs 500 crore and any new AIFs must dematerialize their units; beyond that date, units would only be issued in demat form. By April 30 of the following year, other AIFs having a corpus of less than or equal to Rs 500 crore must dematerialize their units.
According to Sebi, portfolio valuation of securities would be done in accordance with standards established by the AIF industry group under the standardized approach to valuation. The AIF Regulations now concentrate on investor disclosures and do not specify any rules for the methodology to be used.
The specifics of the valuation technique and approach used in accordance with the established standards for each asset class of the scheme of the AIF must be disclosed by the management in a private placement memorandum (PPM), according to Sebi.
Regarding the manager of an AIF’s accountability for the valuation of the AIF’s investments, Sebi stated that the manager must make sure that an impartial valuer computes and completes the valuation of the AIF scheme’s investments in accordance with the regulator’s requirements.
Additionally, AIF managers would be in charge of the accurate and fair valuation of the AIF’s investments and would be required to alert investors about variances of more than 20% between two valuations that are done back-to-back or more than 33% over the course of a financial year.
Additionally, they would have to explain these variances to the investors. AIF managers will have to make sure that the portfolio firms abide by the investment agreement in order for the AIF to get their audited accounts within a certain time frame.
Additionally, they must make sure that, after the audit of the books of accounts, the portfolio company’s value based on audited data is disclosed to the performance benchmarking agencies.
According to Sebi, AIF must hire a qualified independent valuer with at least three years of expertise in valuing unlisted securities who is registered with the Insolvency and Bankruptcy Board of India (IBBI). A membership in a professional organization, such as the Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), or Institute of Cost Accountants of India, is one need for such an independent valuer.
Additionally, the managers would need to make sure that one of the conditions in the subscription agreement with the investee firm specifies a deadline for sending the AIF its audited financial statements. This makes it possible for the management of the AIF to provide valuation reports to performance benchmarking organizations within the allotted 6-month period that are based on audited data as of March 31.
Regarding the liquidation plan, Sebi said that AIFs are permitted to roll over unliquidated assets from one AIF scheme to a new scheme of the same AIF or disperse such investments specifically, provided they do so with the approval of 75% of the investors by value in each instance.
The unliquidated investments must be given specifically to the investors if the necessary investors’ approval is not acquired. If a shareholder refuses to accept in-specie payout, the AIF must write down the investment. The trustee, manager, and other key managers of the AIF are in charge of making sure the liquidation process is followed.
According to Sebi, the framework for valuing an investment portfolio will go into effect on November 1; however, the framework for liquidation has already taken effect.
