SEBI seeks details on valuations from Indian investors

On 6 September, the Securities and Exchange Board of India (SEBI) sent a communication to various venture capitalist and private equity firms to get a clearer understanding of how the private markets have been agreeing upon startup valuations.

As reported by Economic Times, this communication might have been prompted by recent investor complaints about the opaque nature of accounting practices at a few unicorns. Additionally, the under-performance of a few well-publicised startups in the public markets may have prompted the need to understand private valuations.

In its communication, SEBI, among other requests, asked the firms to disclose their valuation practices, including the qualifications of any valuation agent, what their position in their firm or as a consultant is, and whether they have seen significant changes in their valuation methodology within the last three years.

Venture capital and private equity funds are registered as alternate investment funds (AIFs) with market regulator SEBI and have primarily practised within a largely unregulated framework when it comes to startup investments and valuations. This communication from SEBI may be a precursor for the authorities to create further regulations for AIFs investing in startups.

Last year, SEBI instituted a rule stating AIFs must have independent trustees who have no connection with sponsors or fund managers. Additionally, a few months ago, SEBI officials had proposed a rule that the schemes of VCs and PE funds should be ring-fenced to prevent stresses and liabilities from one pool of money spilling into the performance of other pools.