Sebi: Sebi seeks details on startup valuation from PE, VC funds

Mumbai: The capital market regulator is looking closely at how private equity firms (PEs) and venture capital funds (VCFs) value the startups and unicorns they fund.

A substantiated valuation gives a positive image of a fund’s portfolio to investors and paves the way for the fund manager to attract more money from new and returning investors in the next fundraising round.

Probably prompted by investor complaints and recent reports of opaque bookkeeping by a few unicorns, the Securities & Exchange Board of India (Sebi) in a Sept. 6 communication asked a slew of funds to disclose their practices. valuation and to share details such as the qualification of the valuator, whether the valuator engaged is a partner of the fund or its manager or sponsor, and whether there has been a significant change in the valuation methodology during of the past three years among others, two people with knowledge of the matter told ET.

“Sebi clearly wants to understand the credibility of the valuation exercise undertaken by the funds,” said Richie Sancheti, founder of law firm Richie Sancheti Associates. According to Tejesh Chitlangi, Senior Partner, IC Universal Legal, “As the regulator tries to get a sense of the performance of AIFs (alternative investment funds), they may also wish to understand the valuation practices prevalent in the industry. as the same may vary from fund to fund in the absence of any regulatory requirement.


Consistency in the evaluation process

This may be a precursor to upcoming valuation policies, improved disclosure standards, etc. that Sebi can prescribe to the AIF industry to ensure consistency in the way valuations are made and increase transparency for the benefit of investors. and VCFs- are closed-end funds with a large exposure to unlisted equities. Closed-end funds may announce the net asset value twice a year, or even once a year if investors agree.

Although private companies and unlisted securities fall outside its jurisdiction, Sebi regulates pooled vehicles like PEs, VCFs, mutual funds, and portfolio management systems.


According to the Sebi Directive, funds must also share the following information: the date of the last valuation, the cost of the cumulative investments made, the last valuation of the investment portfolio, whether the valuation exercise is based on audited data audited or unaudited beneficiary undertakings, whether the valuation is carried out by an independent or internal valuator, whether an additional valuation exercise has been carried out during a financial year, details of the valuation methodology and whether there has had deviations from said methodology, and whether the scheme has a review committee.

“The real saving for the manager is only based on cash distributions under a structured waterfall construction. The current exercise seems to be to ensure that a fund projects an accurate state of health to the investors on an ongoing basis,” Sancheti said. .

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