A. SEBI UPDATES:
1) Key amendments to SEBI (AIF) Regulations, 2012:
SEBI Press Release dated March 29, 2023
a) Valuation of investment portfolios of an AIF: In order to have consistent and standardised approach for valuation of investment portfolios of AIFs, SEBI has approved proposals to specify:
- The necessary framework required by an AIF to carry out the valuation of their investment portfolio;
- The eligibility criteria of the independent valuer for valuing the investment portfolio of AIFs;
- That valuation of investment portfolio of Category III AIFs in unlisted securities and listed debt securities shall also be carried out by an independent valuer; and
- Responsibility cast on managers of AIFs for true and fair valuation.
b) Dematerialisation of units of an AIF: SEBI has mandated that (i) all new schemes going forward and existing schemes of AIFs with corpus more than INR 500 Crore shall dematerialise their units by October 31, 2023 (ii) existing schemes of AIFs with corpus less than INR 500 Crore shall dematerialise their units by April 30, 2024.
c) Mandatory Certification requirements: replace existing minimum experience requirement as an eligibility criterion for the key investment team of the Manager of the AIF with a comprehensive certification requirement.
d) Transactions involving conflict of interest: SEBI approves a proposal to mandate obtaining approval of 75% of investors by value, for buying or selling of investments potentially involving conflict of interest (transactions by an AIF, from or to, associates of AIF, or schemes of AIFs managed or sponsored by the manager or sponsor or their associates, or an investor who has commitment to the extent of more than 50% of the corpus of the scheme of AIF)
e) Liquidity issues of an AIF:
- SEBI has approved a proposal to allow AIFs to sell investments which are not sold due to lack of liquidity during the winding up process to a new scheme of the same AIF i.e., Liquidation Scheme or distribute such unliquidated investments in- specie, in the prescribed manner and subject to approval of 75% investors by value.
- In the absence of investor consent for aforesaid options during liquidation period, the unliquidated investments shall be mandatorily distributed in-specie to investors;
- In case an investor is not willing to take in-specie distribution, such investment shall be written off.
2) SEBI has issued a Circular dated wApril 10, 2023 providing guidelines with respect to excusing an investor from an investment by the AIF.
3) SEBI has issued a Circular dated 10 April 2023 which provides for guidelines on (a) Direct plan for schemes of AIFs and (b) Trail model for distribution commission in AIFs.
- Schemes of AIF to have the option of a ‘Direct Plan’ for investors without any distribution/ placement fee.
- AIF to ensure that Investors who approach the AIF through a SEBI registered intermediary [which is separately charging advisory or portfolio management fees)] are on-boarded via Direct Plan only.
B. INCOME TAX UPDATES:
- Notification of CII for FY23-24: The CBDT has notified the cost inflation index (CII) to be used for the purpose of indexation while computing long term capital gains, as 348 for financial year 2023-24
- Exclusions for applicability of section 56(2)(viib) of the Income-tax Act, 1961:
Section 56(2)(viib) of the Income tax act, 1961 (‘the Act’) provides for taxing excess of the aggregate consideration received by specified companies from the resident investors over the fair market value of shares, if such consideration received exceeded the face value of the shares. Through the Finance Act, 2023, this section has been amended to include the consideration received from non-resident investors as well.
ITA has specified the categories of investors where provisions of section 56(2)(viib) shall not apply. - Proposed amendments in draft Rule 11UA for valuation of unquoted equity shares for section 56(2)(viib):
Following valuation methods have been proposed by the CBDT for valuation on unquoted equity shares for section 56(2)(viib):
- FMV as per the book value of assets i.e (A-L) * [PV/PE] – same as prescribed for resident investors under existing rules
- FMV as per DCF method determined by a merchant banker
- FMV based on the price of equity share corresponding to the consideration received by a venture capital undertaking from VCF, venture capital company or a specified fund
- FMV based on price of equity share corresponding to the consideration received by a company from a Notified entity (under the IT Act)
- FMV determined by a merchant banker, using any of the following methods – (Not applicable for resident investors): Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, Replacement Cost Method.
Safe harbor provisions (10% variation) and the valuation report shall be issued not more than 90 days prior to the date of issue of shares.