Reporting fair value: Streamlined valuations to boost investors’ confidence

With the March 31 date having just passed, many India-based or India-focused private equity (PE), venture capital (VC), and alternative investment funds (AIFs) are required to disclose the value of their investments as part of the reporting process to investors. Various accounting standards such as US Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), or Indian Accounting Standards (Ind-AS) also require PE/VC/AIFs to compute the “fair value” of their investments. However, as there are several valuation methods to compute this, the funds may arrive at different fair values using different valuation methods. The various accounting standards fail to earmark the methodology of valuation to be adopted under different circumstances, leaving the choice of valuation method at the discretion of the valuer. However, these standards do hint that market-related inputs should be used to the maximum and subjective inputs should be used minimally.

To ensure consistency and advocate uniform practice adoption, the Alternative Investment Policy Advisory Committee (AIPAC) of the Securities and Exchange Board of India (Sebi) has endorsed the International Private Equity and Venture Capital Valuation Guidelines (IPEV Guidelines) for valuation. IPEV Guidelines set out recommendations intending to represent current best practice on the valuation of private capital investments, including privately held investments in private growth companies, early-stage ventures, management buyouts, credit investments, and investments in funds making such investments.

For quoted and well-traded investments, Sebi (Mutual Funds) Regulations recommend that the last quoted closing price on the stock exchange of well-traded shares can be considered for fair value computation. IPEV Guidelines also recommend similarly that the valuation technique for quoted and well-traded investments be valued at the price within the bid/ask spread or on the basis of the available market prices on the reporting date.

Source: Business-Standard