Non-traded security
Also written Non-traded scrip
A security (other than money market and debt) not traded on any stock exchange for thirty days before the valuation date, which the AMC must then value in good faith rather than at a market price.
In plain language
A scheme's NAV is only as honest as the prices put on its holdings. For most shares that is easy: take the last quoted closing price on the exchange. The problem is a share that has stopped trading. There is no fresh price, and an old one may be badly out of date.
SEBI's valuation guidelines draw the line at thirty days. If a security has not traded on any stock exchange for a period of thirty days before the valuation date, it is treated as a non-traded scrip. From then on, the market is no longer asked for a price. The AMC has to work one out in good faith, using methods approved by its Board, and the trustees and auditors check that the result is fair.
Until the thirty days are up, the rule is different: the last traded price can still be used.
How it works
Before thirty days (traded securities, rule 1): value at the last closing price on the selected exchange. If it did not trade there that day, use the price on another exchange. If it traded nowhere that day, use the price on the earliest previous day, provided that date is not more than thirty days before the valuation date.
After thirty days (non-traded securities, rule 2), the AMC values in good faith:
| Instrument | Principle in the guidelines |
|---|---|
| Equity | Capitalisation of earnings, alone or combined with net asset value, using the P/E ratios of comparable traded securities, with an appropriate discount for lower liquidity |
| Convertible debentures and bonds | Value the non-convertible part like debt and the convertible part like equity; if the resulting equity would rank pari passu with a traded instrument, use that price less a discount for non-tradability |
| Warrants | Value of the share obtainable on exercise, less the exercise amount, less a discount for the period before exercise |
Governance. The Board's decision must be recorded in its minutes and the supporting data for each security preserved. The trustees periodically review the methods, and the auditors report on them as fair and reasonable in their report on the fund's annual accounts.
Debt is separate. These rules exclude money market and debt securities. For non-traded or thinly traded debt, AMCs use the valuation matrix from at least two valuation agencies; AMFI has appointed CRISIL and ICRA. Real estate schemes value unlisted equity under separate SEBI norms.
A worked example
Illustrative. The company, dates, earnings, P/E and discount are hypothetical; the 30-day test and the method are the workbook's.
A scheme holds 50,000 shares of Konkan Castings Ltd. The shares last traded on 10 May at Rs 240.
Valuation date 25 May — 15 days since the last trade, within the thirty-day window:
Value = 50,000 × 240 = Rs 1,20,00,000
Valuation date 20 June — 41 days since the last trade. The security is now non-traded, and Rs 240 may no longer be used. The AMC applies its Board-approved method:
Earnings per share = Rs 20
P/E of comparable traded companies = 12
Capitalised value = 20 × 12 = Rs 240
Discount for lower liquidity (15%) = Rs 36
Good-faith value per share = Rs 204
Holding value = 50,000 × 204 = Rs 1,02,00,000
The illiquidity discount alone takes Rs 18,00,000 off the holding. That lower value flows straight into the NAV — which is the point: an investor redeeming on 20 June is not paid for liquidity the scheme does not have.
Why NISM asks about it
Chapter 7 (Net Asset Value, Total Expense Ratio and Pricing of Units), section 7.1, sets out the valuation guidelines: the thirty-day test, good-faith valuation, the equity, convertible and warrant principles, and the Board, trustee and auditor roles. Chapter 3 (section 3.4.7) covers valuation agencies for non-traded and thinly traded debt. Expect a direct question on how many days without trading make a scrip non-traded, and on who approves and who reviews the valuation method.
Common exam traps
- Thirty days, on any stock exchange. Not traded on the selected exchange alone is not enough — it must be untraded everywhere.
- Within thirty days, use the earliest previous day's price; beyond thirty days, good-faith valuation replaces it.
- The AMC's Board approves the principles, the trustees review the methods periodically, and the auditors report them as fair and reasonable.
- Equity is valued on capitalised earnings with a discount for lower liquidity — not at book value alone and not at the last traded price.
- These rules are for securities other than money market and debt. Non-traded debt goes to the valuation agencies (CRISIL and ICRA, appointed by AMFI).
- Where the Principles of Fair Valuation and the valuation guidelines conflict, the workbook says the principles prevail.
Where this is taught
Free preparation for NISM Series V-ARelated 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.
- Net assetsThe unitholders' funds in a scheme: the market value of everything it owns, plus income accrued and receivables, minus what it owes to others — the figure NAV divides by the number of units.
- Fair valueThe theoretical futures price — spot plus the cost of carrying the commodity to expiry — at which a buyer is indifferent between buying today and buying forward.
- 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.
- Fair valuation principlesSEBI's ten principles requiring a mutual fund to value its holdings at realisable value, in good faith, under Board-approved and disclosed policies, so every investor entering or leaving gets a fair price.
- Valuation agencyAn independent agency whose valuation matrix mutual funds must use to price non-traded and thinly traded debt; there have to be at least two, and AMFI has appointed CRISIL and ICRA.