 "SEBI")
Alternative Investment Funds (AIFs) are awaiting clarity from the markets regulator, the Securities and Exchange Board of India (Sebi), on the valuation mandate to address gaps in audit timelines, operational challenges, and issues in benchmarking.
Last week, Indian Private Equity and Venture Capital Association (IVCA) — the industry body for AIFs — became a signatory to the International Private Equity and Venture Capital Valuation Guidelines (IPEV). However, it is yet to issue ‘guidance notes’ specifying guidelines for asset classes and strategies unique to India.
In June, Sebi had issued a circular mandating the valuation of assets held by AIFs. The circular directs AIFs to report valuation based on audited data of investee companies as on March 31. This report is to be furnished to performance benchmarking agencies within a specified timeline of six months.
However, this report is to be submitted only after the audit of the AIFs’ own accounts.
“Audited financials of the portfolio companies is a blocker as the Income Tax Act requires companies to complete the audit by June 15. There is a mismatch between Sebi regulation and Income Tax norms. We can’t have two audit reports for the same period,” said Siddarth Pai, Founding Partner, 3one4 Capital.
“We are seeking clarity on whether audited financials are mandatory or if there can be an alternative way to achieve the same. It becomes tough to get portfolio companies to complete their audit within the Sebi-specified timeline, especially for early stage startups,” added Pai, who is also the Co-Chair, Regulations Affairs Committee, IVCA.
The industry has further highlighted practical difficulties in valuation of startups, as they are not based on audits but on future prospects.
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For the valuation of listed securities, the market regulator had directed AIFs to follow the guidelines for mutual funds. However, for other classes of securities and assets, Indian Private Equity and Venture Capital Association (IVCA) was asked to issue guidelines.
IPEV provides a set of recommendations followed globally for valuing the assets of investment funds, including all category AIFs, early stage ventures, PEs, venture debt and private credit. AIF managers have been adopting IPEV guidelines voluntarily in their Private Placement Memorandum (PPM) — the offering document.
“For debt securities, many AIFs depend on external valuation agencies for fair valuation of the securities. It is a tough task, as it depends on observable market inputs. However, as there are no market inputs for illiquid securities held by private credit AIFs to corroborate it, the valuation exercise may not yield fair results,” said another official from a debt-focused AIF.
In the last one month, IVCA has written to Sebi seeking clarifications on operational challenges. The industry body may seek extension depending on when they receive clarity.
A few AIFs said that a three- to six-month extension was desired. However, an IVCA official said that Sebi had provided enough time and if the challenges are addressed well in time, there may not be an extension.
“Unlisted companies, unlike their listed counterparts, are not obligated to disclose their financial results for extended periods. These delays, often beyond the control of AIF, may constrain the AIF to carry out valuation within the stipulated timeframe by Sebi. Any decision to segregate such assets into side pockets could potentially affect the overall returns and value,” said Neha Malviya Kulkarni, chief growth officer, SuperNAV.
The Sebi circular also mandates AIF managers to disclose details of valuation methodology and report any change in the methodology or approach. This change would be reported as a material change. AIFs said that as the methodology and approach is decided externally and not by the fund manager, it could lead to some exits.
