Independent Valuer
The valuer of a Category III AIF's unlisted holdings — not an associate of manager, sponsor or trustee, with 3 years' experience, and IBBI-registered with a professional membership or a CRA group entity.
In plain language
Listed shares have a closing price. An unlisted stake in a small company does not, and whoever manages the fund also earns incentive fees on its NAV. Letting the manager set that value alone would be an obvious conflict.
The workbook's answer is the independent valuer. A Category III AIF must value its investments in unlisted securities and listed debt securities through an independent valuer, and must keep NAV calculation independent from the fund management function. Unlisted equities are valued initially at cost and thereafter at fair market value as determined by the independent valuer.
Independence here is defined, not assumed: the valuer cannot be an associate of the manager, sponsor or trustee, and must meet experience and qualification tests.
How it works
Eligibility (8.4)
- Not an associate of the manager, sponsor or trustee of the AIF.
- At least 3 years of experience in valuing unlisted securities.
- One of:
- registered with the Insolvency and Bankruptcy Board of India (IBBI) and a member of ICAI, ICSI or ICMAI, or of the CFA Institute; or
- a holding company or subsidiary of a Credit Rating Agency registered with SEBI; or
- any other criteria SEBI specifies.
Partnership or company valuers. The entity must be a Registered Valuer Entity with IBBI, and the persons it deputes to value AIF portfolios must hold ICAI, ICSI or ICMAI membership or a CFA charter.
What the valuer is used for
- Fair value of unlisted equity on each valuation day
- Valuation method for illiquid securities (the manager states it; it is approved by an independent registered valuer)
- Net realisable value of unlisted or unregulated futures and options
- Two independent valuers value unliquidated investments before investors are asked to approve a dissolution period
Guard-rails on the output. At each asset level, a deviation of more than 20% between two consecutive valuations, or more than 33% in a financial year, must be reported to investors with reasons. The manager must give the valuer appropriate, non-misleading inputs, and remains responsible for a true and fair valuation.
A worked example
Workbook Examples 1 and 2 (Chapter 8) — Fund INC. The fund holds unlisted shares of Company SME, valued at fair market value from the independent registered valuer:
30 June 2023: 1,50,000 shares × Rs 110 = Rs 1,65,00,000
31 July 2023: 75,000 shares × Rs 165 = Rs 1,23,75,000 (half the stake sold)
Applying the deviation rule to those two consecutive valuations (the workbook does not do this step):
Change in per-share value = (Rs 165 − Rs 110) ÷ Rs 110 = 50%
Threshold = 20% between two consecutive valuations
50% > 20% → the Investment Manager must inform investors, with reasons
Illustrative — choosing the valuer. Fund INC's manager shortlists four candidates:
| Candidate | Result |
|---|---|
| Valuation arm owned 30% by the fund's sponsor | Fails — associate of the sponsor |
| IBBI-registered valuer, ICAI member, 5 years valuing unlisted shares | Eligible |
| Subsidiary of a SEBI-registered credit rating agency, 4 years' experience | Eligible |
| IBBI-registered valuer, CFA charterholder, 2 years' experience | Fails — under 3 years |
Why NISM asks about it
Chapter 8 (Valuation) sets out eligibility at 8.4 and uses the independent valuer throughout the NAV examples; its sample question 6 — must the valuer be registered with SEBI? — is False. Chapter 5 (Regulatory Framework) requires independent valuation of unlisted and listed debt securities, sets the 20%/33% deviation disclosures, and requires two independent valuers before a dissolution period. Chapter 5's Compliance Test Report asks whether eligibility norms for the valuer were followed.
Common exam traps
- The valuer is registered with IBBI, not SEBI. The SEBI link is only for a CRA holding company or subsidiary.
- At least 3 years' experience in valuing unlisted securities.
- Not an associate of manager, sponsor or trustee — all three.
- 20% between consecutive valuations, 33% in a financial year — breaches are disclosed to investors with reasons.
- Two independent valuers, not one, before seeking consent for a dissolution period.
- Who appoints — the workbook is inconsistent. Section 8.4 says the Investment Manager shall appoint the independent valuer; section 8.1 describes the independent valuer as appointed by the Trustee or the Investment Manager. Section 8.4 is the regulatory statement.
- Listed equities are not sent to the valuer; they use the exchange closing price.
Check yourself
1.The independent valuer appointed by a Category III AIF manager must be:
- a)registered with SEBI, with at least one year of valuation experience
- b)registered with the Insolvency and Bankruptcy Board of India with membership of ICAI, ICSI, ICMAI or the CFA Institute, and at least three years of experience in valuing unlisted securities
- c)an associate of the manager, to ensure familiarity with the portfolio
- d)registered with the Reserve Bank of India as a credit rating agency
Show the answer
Answer: (b) registered with the Insolvency and Bankruptcy Board of India with membership of ICAI, ICSI, ICMAI or the CFA Institute, and at least three years of experience in valuing unlisted securities
The workbook's sample question asserts registration with SEBI and marks it False. The valuer must not be an associate of manager or sponsor or trustee, must have at least 3 years of experience in valuation of unlisted securities, and must be a valuer registered with the Insolvency and Bankruptcy Board of India (IBBI) and have membership of ICAI or ICSI or ICMAI or the CFA Institute — or alternatively be a holding company or subsidiary of a Credit Rating Agency registered with SEBI. Note that SEBI registration attaches to the CRA, not to the valuer.
2.Which of the following would LEAST likely be valued at Fair Market Value by a Category III AIF?
- a)Listed equities
- b)Unlisted equities
- c)Exposure in commodity derivative contracts
- d)Units of a mutual fund
Show the answer
Answer: (b) Unlisted equities
This is the workbook's own sample question. Listed equities take the closing price quoted on the relevant exchange; derivative contracts take the latest available settlement prices; and fund units are derived from the last prices published by the managers thereof — all market-derived figures. Unlisted equity securities, by contrast, are valued initially at cost and thereafter the independent valuer will value the unquoted investments at Fair Market Value — they begin at cost and even later rest on a valuer's determination rather than a market quotation.
3.A Category III AIF holds unlisted debentures for which there is no ascertainable market. How are they valued on a Valuation Day?
- a)At amortised cost, plus any interest accrued from the date of purchase
- b)At the closing price of the most comparable listed debenture
- c)Initially at cost and thereafter at Fair Market Value determined by an independent valuer
- d)At face value until maturity
Show the answer
Answer: (a) At amortised cost, plus any interest accrued from the date of purchase
The workbook's rule: ‘For unlisted securities for which there is no ascertainable market, valuation will be done at amortized cost of such security, plus interest (if any) accrued from the date of such purchase’. In the Fund INC example, the unlisted RCE Ltd. bonds are carried at amortised cost.
- Where an unlisted non-equity security does have an ascertainable market, the rule is ‘the closing price dealt on the market on which the securities are traded’ — on that market, not on a comparable security.
- Initially at cost, then Fair Market Value by the independent valuer is the rule for unlisted equity.
- Face value appears nowhere in the valuation rules.
Where this is taught
- Series XIX-B · Chapter 8: Valuationintroduced here
- Series XIX-C · Chapter 7: Alternative Investment Funds Ecosystemintroduced here
- Series XIX-E · Chapter 12: Valuationintroduced here
- Series XIX-D · Chapter 4: Alternative Investment Funds Ecosystemintroduced here
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
- Dissolution PeriodThe period after an AIF scheme's liquidation period, entered with 75%-by-value investor approval, to sell unliquidated investments — ending in mandatory in-specie distribution of whatever remains.
- Fund AdministratorThe service provider that keeps a Category III AIF's books, accounts for accruals, computes NAV and handles regulatory and tax reporting — an unregulated function in India that can be outsourced or done in-house.
- Registered Valuer EntityThe IBBI registration a partnership or company must hold to act as a Category III AIF's independent valuer, on top of its deputed staff holding ICAI, ICSI, ICMAI or CFA credentials.
- Valuation DayThe day, fixed in advance by a Category III AIF and disclosed in its offer documents, as on which its NAV is determined — at least monthly for open-ended funds and quarterly for close-ended ones.
- AIPACSEBI's Alternative Investment Policy Advisory Committee, headed by Shri Narayan Murthy — its recommendations shape AIF valuation guidelines and proposals on Category III tax and GST.
- Amortized CostA debt security's purchase cost adjusted for the purchase discount or premium over its maturity — how a Category III AIF values unlisted securities with no ascertainable market, plus accrued interest.
- Mandatory exit optionThe exit a close-ended AIF must offer dissenting investors after a material change: at least one month to dissent, buyout at no less than the average of two independent valuations, done within 3 months.
- Change of controlA change in who controls an AIF's sponsor or manager — majority board appointment or control of management for a company, or a 50% controlling interest otherwise — needing SEBI approval and an investor exit.
- Dematerialised unitsAIF unit capital held in electronic form with a depository: every scheme must now issue units in demat only, each carrying its own ISIN against which the NAV is uploaded.
- Book Value approachThe first of the three asset-based valuation methods: value the company at the historical carrying cost of its assets and liabilities, giving a book value per share treated as the floor price.
- Dissent periodThe window of not less than one month an AIF must give unit holders to record dissent to a material change, after which the manager must buy out the dissenters within three months.
- Liquidation SchemeA close-ended AIF scheme launched only to liquidate unsold investments of existing schemes whose tenure has expired. SEBI has barred new liquidation schemes after 25 April 2024.
- Price of Previous Transaction MethodAn IPEV valuation method that marks an AIF's whole holding in a company at the price of its latest follow-on investment; a first investment is carried at cost until a follow-on reprices it.
- Adjusted NAVThe value of an AIF measured as the cash investors would receive if every portfolio investment were realised at fair value on the valuation date, after taxes, fees, expenses, carry and other deductions.