Schedule - 08 - Investment Valuation Norms - Securities and Exchange Board of India (Mutual Funds) Regulations, 1996

EIGHTH SCHEDULE Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 1 [[Regulation 25(19), 47]] INVESTMENT VALUATION NORMS 2 [***] Principles of Fair Valuation Mutual fund shall value its investments in accordance with the following overarching principles so as to ensure fair treatment to all investors including existing investors as well as investors seeking to purchase or redeem units of mutual funds in all schemes at all points of time: (a) The valuation of investments shall be based on the principles of fair valuation i.e. valuation shall be reflective of the realizable value of the securities/assets. The valuation shall be done in good faith and in true and fair manner through appropriate valuation policies and procedures. (b) The policies and procedures approved by the Board of the asset management company shall identify the methodologies that will be used for valuing each type of securities/assets held by the mutual fund schemes. Investment in new type of securities/assets by the mutual fund scheme shall be made only after establishment of the valuation methodologies for such securities with the approval of the Board of the asset management company. (c) The assets held by the mutual funds shall be consistently valued according to the policies and procedures. The policies and procedures shall describe the process to deal with exceptional events where market quotations are no longer reliable for a particular security. (d) The asset management company shall provide for the periodic review of the valuation polices and procedures to ensure the appropriateness and accuracy of the methodologies used and its effective implementation in valuing the securities/assets. The Board of Trustee and the Board of asset management company shall be updated of these developments at appropriate intervals. The valuation policies and procedures shall be regularly reviewed (at least once in a Financial Year) by an independent auditor to seek to ensure their continued appropriateness. (e) The valuation policies and procedures approved by the Board of asset management company should seek to address conflict of interest. (f) Disclosure of the valuation policy and procedures (with regard to valuation of each category of securities/assets where the scheme will invest, situation where these methods will be used, process and methodology and impact of implementation of these methods, if any) approved by the Board of the asset management company shall be made in Statement of Additional Information, on the website of the asset management company /mutual fund and at any other place where the Board may specify to ensure transparency of valuation norms to be adopted by asset management company. (g) The responsibility of true and fairness of valuation and correct NAV shall be of the asset management company, irrespective of disclosure of the approved valuation policies and procedures i.e. if the established policies and procedures of valuation do not result in fair/ appropriate valuation, the asset management company shall deviate from the established policies and procedures in order to value the assets/ securities at fair value: Provided that any deviation from the disclosed valuation policy and procedures may be allowed with appropriate reporting to 17 [ the board of directors of the trustee company and the board of directors ] of the asset management company and appropriate disclosures to investors. (h) The asset management company shall have policies and procedures to detect and prevent incorrect valuation. (i) Documentation of rationale for valuation including inter scheme transfers shall be maintained and preserved by the asset management company as per regulation 50 of these regulations to enable audit trail. (j) In order to have fairness in the valuation of debt and money market securities, the asset management company shall take in to consideration prices of trades of same security or similar security reported at all available public platform. In addition to the above, a mutual fund may value its investments according to the following Valuation Guidelines. In case of any conflict between the Principles of Fair Valuation as detailed above and Valuation Guidelines issued by the Board hereunder or elsewhere, the Principles of Fair Valuation detailed above shall prevail. Valuation Guidelines NAV of a scheme as determined by dividing the net assets of the scheme by the number of outstanding units on the valuation date. 1. 12 [ Traded Securities (other than money market and debt securities) ] : (i) The securities shall be valued at the last quoted closing price on the stock exchange. (ii) When the securities are traded on more than one recognised stock exchange, the securities shall be valued at the last quoted closing price on the stock exchange where the security is principally traded. It would be left to the asset management company to select the appropriate stock exchange, but the reasons for the selection should be recorded in writing. There should, however, be no objection for all scrips being valued at the prices quoted on the stock exchange where a majority in value of the investments are principally traded. (iii) Once a stock exchange has been selected for valuation of a particular security, reasons for change of the exchange shall be recorded in writing by the asset management company. (iv) When on a particular valuation day, a security has not been traded on the selected stock exchange, the value at which it is traded on another stock exchange may be used. (v) When a security is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the selected stock exchange or any other stock exchange, as the case may be, on the earliest previous day may be used provided such date is not more than 1 [thirty] days prior to the valuation date. 2. 13 [ Non-Traded Securities (other than money market and debt securities) ] : (i) When a security is not traded on any stock exchange for a period of 3 [thirty] days prior to the valuation date, the scrip must be treated as a non-traded scrip. (ii) Non-traded securities shall be valued in-good faith by the asset management company on the basis of appropriate valuation methods based on the principles approved by the Board of the asset management company. 14 [****] Such decision of the Board must be documented in the Board minutes and the supporting data in respect of each security so valued must be preserved. The methods used to arrive at values in-good faith shall be periodically reviewed by the trustees and reported upon by the auditors as fair and reasonable in their report on the annual accounts of the fund. For the purpose of valuation of non-traded securities, the following principles should be adopted:- (a) equity instruments shall generally be valued on the basis of capitalization of earnings solely or in combination with the net asset value, using for the purposes of capitalization, the price or earning ratios of comparable traded securities and with an appropriate discount for lower liquidity; 15 [***] (b) 15 [***] (c) 15 [***] (cc) (d) in respect of convertible debentures and bonds, the non-convertible and convertible components shall be valued separately. The non-convertible component should be valued on the same basis as would be applicable to a debt instrument. The convertible component should be valued on the same basis as would be applicable to an equity instrument. If, after conversion the resultant equity instrument would be traded pari passu with an existing instrument which is traded, the value of the latter instrument can be adopted after an appropriate discount of the non-tradability of the instrument during the period preceding the conversion while valuing such instruments, the fact whether the conversion is optional should also be factored in; (e) in respect of warrants to subscribe for shares attached to instruments, the warrants can be valued at the value of the share which would be obtained on exercise of the warrant as reduced by the amount which would be payable on exercise of the warrant. A discount similar to the discount to be determined in respect of convertible debentures [as referred to in sub-paragraph (d) above] must be deducted to account for the period which must elapse before the warrant can be exercised; (f) 15 [***] 3. Until they are traded, the value of the rights shares should be calculated as: Vr = n/m x (Pex - Pof) Where Vr = Value of rights n = No. of rights offered m = No. of original shares held Pex = Ex-rights price Pof = Rights Offer Price Where the rights are not treated pari passu with the existing shares, suitable adjustment should be made to the value of rights. Where it is decided not to subscribe for the rights but to renounce them and renunciations are being traded, the rights can be valued at the renunciation value. 6 [3A.Value of Gold: (1) the gold held by a gold exchange traded fund scheme shall be valued at the AM fixing price of London Bullion Market Association (LBMA) in US dollars per troy ounce for gold having a fineness of 995.0 parts per thousand, subject to the following: (a) adjustment for conversion to metric measure as per standard conversion rates; (b) adjustment for conversion of US dollars into Indian rupees as per the RBI reference rate declared by the Foreign Exchange Dealers Association of India (FEDAI); and (c) Addition of- (i) transportation and other charges that may be normally incurred in bringing such gold from London to the place where it is actually stored on behalf of the mutual fund; and (ii) notional customs duty and other applicable taxes and levies that may be normally incurred to bring the gold from the London to the place where it is actually stored on behalf of the mutual fund; Provided that the adjustment under clause (c) above may be made on the basis of a notional premium that is usually charged for delivery of gold to the place where it is stored on behalf of the mutual fund; Provided further that where the gold held by a gold exchange traded fund scheme has a greater fineness, the relevant LBMA prices of AM fixing shall be taken as the reference price under this sub-paragraph. (2) If the gold acquired by the gold exchange traded fund scheme is not in the form of standard bars, it shall be assayed and converted into standard bars which comply with the good delivery norms of the LBMA and thereafter valued in terms of sub-paragraph (1).] 16 [ 3B. Value of Silver: The silver held by a silver exchange traded fund scheme shall be valued at the AM fixing price of London Bullion Market Association (LBMA) in US dollars per troy ounce for silver having a fineness of 999.0 parts per thousand, subject to the following: (a) adjustment for conversion to metric measure as per standard conversion rates; (b) adjustment for conversion of US dollars into Indian rupees as per the RBI reference rate declared by the Foreign Exchange Dealers Association of India (FEDAI); and (c) addition of- (i) transportation and other charges that may be normally incurred in bringing such silver from London to the place where it is actually stored on behalf of the mutual fund; and (ii) notional customs duty and other applicable taxes and levies that may be normally incurred to bring the silver from London to the place where it is actually stored on behalf of the mutual fund: Provided that the adjustment under clause (c) above may be made on the basis of a notional premium that is usually charged for delivery of silver to the place where it is stored on behalf of the mutual fund: Provided further that where the silver held by a silver exchange traded fund scheme has a greater fineness, the relevant LBMA prices of AM fixing shall be taken as the reference price under this sub-paragraph. ] 4. All expenses and incomes accrued upto the valuation date shall be considered for computation of net asset value. For this purpose, while major expenses like management fees and other periodic expenses should be accrued on a day-to-day basis, other minor expenses and income need not be so accrued, provided the non-accrual does not affect the NAV calculations by more than 1%. 5. Any changes in securities and in the number of units be recorded in the books not later than the first valuation date following the date of transaction. If this is not possible given the frequency of the Net Asset Value disclosure, the recording may be delayed upto a period of seven days following the date of the transaction, provided that as a result of the non-recording, the Net Asset Value calculations shall not be affected by more than 7 [1%]. 8 [ 9 [6. In case the Net Asset Value of a scheme differs by more than 1%, due to non-recording of the transactions, the investors or scheme/s as the case may be, shall be paid the difference in amount as follows :- (i) If the investors are allotted units at a price higher than Net Asset Value or are given a price lower than Net Asset Value at the time of sale of their units, they shall be paid the difference in amount by the scheme. (ii) If the investors are charged lower Net Asset Value at the time of purchase of their units or are given higher Net Asset Value at the time of sale of their units, asset management company shall pay the difference in amount to the scheme. The asset management company may recover the difference from the investors.] 10 [7.] Thinly traded securities as defined in the guidelines shall be valued in the manner as specified in the guidelines issued by the Board. 11 [8.] The aggregate value of illiquid securities as defined in the guidelines shall not exceed 15 per cent of the total assets of the scheme and any illiquid securities held above 15 per cent of the total assets shall be valued in the manner as specified in the guidelines issued by Board.] *************** NOTES:- 1 Substituted for the word and number regulation 47 by the SEBI (Mutual Funds) (Amendment) Regulations, 2012 w.e.f. 21-2-2012. 2 Words Mutual fund shall value its investments according to the following valuation norms omitted by the SEBI (Mutual Funds) (Amendment) Regulations, 2012 w.e.f. 21-2-2012. 3 Substituted for sixty by the SEBI (Mutual Funds) (Amendment) Regulations, 2001 w.e.f. 23-1-2001. 4 Inserted by the SEBI (Mutual Funds) (Amendment) Regulations, 2012, w.e.f. 21-2-2012. 5 Item (c) and (cc) substituted for the existing item (c) by the SEBI (Mutual Funds) (Amendment) Regulations, 1998 w.e.f. 12-1-1998.. 6 Inserted by the SEBI (Mutual Funds) (Fourth Amendment) Regulations, 2006 w.e.f. 20-12-2006. 7 Substituted for 2% by the SEBI (Mutual Funds) (Amendment) Regulations, 2002 w.e.f. 30-7-2002. 8 Substituted by the SEBI (Mutual Funds) (Amendment) Regulations, 2002 w.e.f. 30-7-2002, for, Thinly traded securities as clarified in the guidelines shall be valued in the manner as specified in the guidelines issued by the Board. 9 Clause (6) and (7) inserted by the (SEBI) (MF) Amendment Regulations, 2001. 10 Clause (6) and (7) renumbered as clause (7) and (8) by the SEBI (Mutual Funds) (Fourth Amendment) Regulations, 2002 w.e.f. 9-9-2002. 11 Clause (6) and (7) renumbered as clause (7) and (8) by the SEBI (Mutual Funds) (Fourth Amendment) Regulations, 2002 w.e.f. 9-9-2002. 12. Substituted vide Notification No. SEBI/LAD-NRO/GN/2019/37 dated 23-09-2019 w.e.f. 15-10-2019 before it was read as Traded Securities 13. Substituted vide Notification No. SEBI/LAD-NRO/GN/2019/37 dated 23-09-2019 w.e.f. 15-10-2019 before it was read as Non-traded Securities 14. Omitted vide Notification No. SEBI/LAD-NRO/GN/2019/37 dated 23-09-2019 w.e.f. 15-10-2019 before it was read as 4 [For example, non traded debt and money market securities of short term maturities, as may be specified by the Board from time to time, may be valued on amortization basis provided that such valuation shall be reflective of the fair value of the securities and all investors are treated fairly.] 15. Omitted vide Notification No. SEBI/LAD-NRO/GN/2019/37 dated 23-09-2019 w.e.f. 15-10-2019 before it was read as (b) debt instruments shall generally be valued on a yield to maturity basis, the capitalization factor being determined for comparable traded securities and with an appropriate discount for lower liquidity; 5 [(c) while investments in call money, bills purchased under rediscounting scheme and short-term deposits with banks shall be valued at cost plus accrual; other money market instruments shall be valued at the yield at which they are currently traded. For this purpose, non-traded instruments that is instruments not traded for a period of seven days will be valued at cost plus interest accrued till the beginning of the day plus the difference between the redemption value and cost spread uniformly over the remaining maturity period of the instruments; (cc) Government securities will be valued at yield to maturity based on the prevailing market rate;] (f) where instruments have been bought on repo basis, the instrument must be valued at the resale price after deduction of applicable interest upto date of resale. Where an instrument has been sold on a repo basis, adjustment must be made for the difference between the repurchase price (after deduction of applicable interest upto date of repurchase) and the value of the instrument. If the repurchase price exceeds the value, the depreciation must be provided for and if the repurchase price is lower than the value, credit must be taken for the appreciation. 16. Inserted vide Notification No. SEBI/LAD-NRO/GN/2021/56 dated 09-11-2021 w.e.f. 09-12-2021 17. Substituted vide Notification No. SEBI/LAD-NRO/GN/2023/134 dated 26-06-2023 w.e.f. 01-01-2024 before it was read as, Board of Trustees and the Board