Regulatory Updates – Half-yearly Report – September 30, 2023

(A) SEBI UPDATES

1)  Key amendments to SEBI (AIF) Regulations, 2012:

• Key investment team requirement (effective date to be notified by SEBI):
• Key investment team of the Manager should have at least one key personnel with relevant certification as may be specified by SEBI. Such certification to be renewed before expiry of the validity of such certificate.
• Compliance officer:
• Manager to appoint compliance officer who shall be responsible for monitoring compliance with the provisions of AIF Regulations and other notifications, rules. Etc. issued by SEBI (Eligibility criteria to be specified by SEBI).
• The Compliance Officer to immediately and independently report to SEBI any non-compliance observed by him, as soon as possible but not later than 7 working days from the date of observing such non-compliance.
• Valuation (effective 1 November 2023):
• Valuation to be undertaken by an independent valuer in the manner specified by SEBI from time to time and the valuer to satisfy conditions laid down by SEBI, to be ensured by Manager.
• Manager shall be responsible for true and fair valuation of the investments. If the established policies and procedures of valuation do not result in fair and appropriate valuation, the Manager shall deviate from the same to value the assets or securities at a fair value and document the rationale for such deviation, which shall be reported to the trustee /BoD/ designated partners and investors.
• Introduction of a Liquidation Scheme:
• Close ended scheme launched by an AIF only for the purpose of liquidating the unliquidated investments purchased from its scheme, whose tenure has expired.
• Scheme to be launched subject to filing of PPM, through a merchant banker, for a tenure to be determined in accordance with the conditions as may be specified by SEBI (without any extension).
• Scheme not to accept fresh commitment or make fresh investment.
• Any investments which remain unsold by the end of the tenure of the scheme due to lack of liquidity to be dealt with in the manner as may be specified by SEBI.

2)  SEBI Circulars:

(a) Issuance of units of AIF in dematerialized form

All schemes of AIFs, other than a scheme whose initial tenure (without extension) ends on or before 30 April 2024, to dematerialize their units as per the below time frame:

• Terms of transfer of the de-materialized units of an AIF continue to be governed by the fund documents including the PPM.
• Manager is required to submit an E-report on compliance with the provisions on the SEBI Intermediary Portal in the specified format.

(b)  Reduction in validity period of approval granted by SEBI to Alternative Investment Funds (AIFs) and Venture Capital Funds (VCFs) for overseas investment.

• Earlier Venture Capital Funds (‘VCFs ‘) and Alternative Investments Funds (‘AIFs’) had a time limit of 6 months from the date of approval from SEBI for making the allocated investments in offshore venture capital undertakings.
• In case the applicant AIF/VCF does not utilize the allocated limits within 6 months, SEBI may allocate such unutilized limit to other applicant AIFs/VCFs.
• Now, SEBI vide circular dated August 4, 2023, (Click here for circular) has reduced the validity period of approval granted to AIFs and VCFs for making allocated overseas investments from 6 months to 4 months.
• This has been done so that the allocated limit is utilized efficiently and, if unutilized, the same is again available to other applicant AIFs/VCFs in a shorter time span.

(c)  Valuation norms prescribed by SEBI – Effective 1 November 2023

SEBI has prescribed the valuation norms for valuation of investments of an AIF / its scheme for the below mentioned points:

• Manner of valuation of AIF’s investments.
• Manager responsibility in relation to valuation of Investments.
• Eligibility criteria for independent valuer.
• Reporting of valuation of investments to performance benchmarking agencies (‘PBA’).
• The Securities and Exchange Board of India (‘SEBI’) has vide the circular dated 14 September 2023 and in consultation with the AIF industry associations, revised the format for quarterly reporting form of AIF. (Regulation 28 of SEBI (AIF) Regulations, 2012 read with Clause 15.1 of SEBI Master Circular for AIFs dated July 31, 2023)

(B) Income Tax Updates

Rule 11UA of the Income-tax Rules

• Shares issued to resident investors:
• The notification retains both the NAV and DCF method of valuation provided by the erstwhile sub rule.
• In addition, the following options for valuation of shares are now available at the option of the assessee:

Issue of shares by a venture capital (VC) undertaking:

FMV = Issue price at which funds are raised from VC company / VC fund / specified fund, up to 90 days before / after the issue of shares being valued

Issue of shares by companies which have raised funds from notified persons:

FMV = Issue price at which funds are raised from such notified persons, up to 90 days before/ after the issue of shares being valued

Note: Issue of shares by a VC undertaking to a VC company / VC fund / specified fund, and by a company to a notified person is not taxed under section 56(2)(viib). The issue price for such fund raise, unregulated by this section, may now be taken as the FMV for further issue.

• Shares issued to non-resident investors:
• Finance Act, 2023, amended section 56(2)(viib) to bring issue of shares to non-resident investors into the ambit of the section.
• In line with the same intent, the notification now introduces the following valuation methodologies for shares issued to non-resident investors:

1. Valuation methods available in the case of issue to resident investors – NAV, DCF, Issue price of funds raised from VC company / VC fund / specified fund / notified companies
2. Comparable Company Multiple Method

• Probability Weighted Expected Return Method

1. Option Pricing Method
2. Milestone Analysis Method
3. Replacement Cost Methods

• 10% Tolerance Band

No tax under the section shall be levied where the issue price of shares is up to 110% of FMV, provided the assessee has opted for the following methodologies: