MIRAE ASSET GLOBAL INVESTMENTS (INDIA) PVT. LTD. INVESTMENT VALUATION MANUAL

Transcription

1 MIRAE ASSET GLOBAL INVESTMENTS (INDIA) PVT. LTD. INVESTMENT VALUATION MANUAL JANUARY

2 MIRAE ASSET GLOBAL INVESTMENTS (INDIA) PVT. LTD. INVESTMENT VALUATION MANUAL INDEX INTRODUCTION SECTION I: VALUATION NORMS FOR TRADED SECURITIES INTRODUCTION 1. EQUITY AND EQUITY RELATED SECURITIES 1.1 EQUITY 1.2 FOREIGN EQUITY 1.3 VALUATION OF ADR / GDR 1.4 STOCK AND INDEX DERIVATIVES 2. VALUATION OF GOVERNMENT SECURITIES 2.1 VALUATION OF CENTRAL GOVERNMENT SECURITIES 2.2 VALUATION OF STATE GOVERNMENT SECURITIES 3. DEBT SECURITIES OTHER THAN GOVERNMENT SECURITIES 3.1 VALUATION OF TRADED DEBT AND MONEY MARKET INSTRUMENTS WITH RESIDUAL MATURITY OF UPTO 60 DAYS. 3.2 VALUATION OF TRADED DEBT AND MONEY MARKET INSTRUMENTS WITH RESIDUAL MATURITY > 60 DAYS. 4. VALUATION OF OTHER INSTRUMENTS 4.1 VALUATION OF RIGHTS ENTITLEMENTS 4.2 VALUATION OF SUSPENDED SECURITY 4.3 VALUATION OF INTEREST RATE SWAP (IRS) 4.4 VALUATION OF UNITS OF MUTUAL FUND 4.5 VALUATION OF GOLD IN CASE OF EXCHANGE TRADED GOLD FUND 4.6 VALUATION OF EXCHANGE TRADED FUND (ETF) 2

3 SECTION II: VALUATION NORMS FOR NON-TRADED SECURITIES 1. EQUITY AND EQUITY RELATED SECURITIES 1.1 APPLICATION MONEY FOR PRIMARY MARKET ISSUE 1.2 NON-TRADED / THINLY TRADED EQUITY 1.3 VALUATION OF UNLISTED EQUITY 1.4 VALUATION OF NON -TRADED WARRANTS 1.5 VALUATION OF PREFERENCE SHARES 1.6 VALUATION OF SHARES ON DE-MERGER 1.7 VALUATION OF ILLIQUID SECURITY IN EXCESS OF 15% OF TOTAL ASSETS OF THE SCHEME 1.8 VALUATION OF NON-TRADED / UNLISTED / THINLY TRADED RIGHTS ENTITLEMENTS 1.9 VALUATION OF PARTLY PAID-UP EQUITY SHARES 2. VALUATION OF GOVERNMENT SECURITIES 3. VALUATION OF NON TRADED SECURITIES OTHER THAN GOVERNMENT SECURITIES 3.1 VALUATION OF NON-TRADED DEBT AND MONEY MARKET INSTRUMENTS WITH RESIDUAL MATURITY OF UPTO 60 DAYS. 3.2 VALUATION OF NON-TRADED DEBT AND MONEY MARKET INSTRUMENTS WITH RESIDUAL MATURITY > 60 DAYS. 3.3 GUIDELINES FOR VALUATION OF INTER SCHEME TRADES OF DEBT AND MONEY MARKET SECURITIES. 3.4 VALUATION OF GOVERNMENT SECURITIES AND TREASURY BILLS (RESIDUAL MATURITY MORE THAN 60 DAYS) 3.5 PROVISIONING IN CASE OF DEEP DISCOUNT BONDS 3.6 VALUATION OF CONVERTIBLE DEBENTURES 3.7 FLOATING RATE SECURITIZED DEBT (FRN PTCs) 4 VALUATION OF REPO INSTRUMENTS 4.1 REVERSE REPURCHASE TRANSACTION 4.2 REPURCHASE TRANSACTION 5 VALUATION SUMMARY 3

4 SECTION III: RELEVANT CIRCULARS REGARDING VALUATION 1. SEBI Circular No: MFD/CIR/011/091/2000 dated February 1, 2000 Re: Guidelines for Participation by Mutual Funds in Trading in Derivative Products 2. Circular No. CIR/ 8 / 92 / 2000 dated September 18, 2000 Guidelines for valuation of securities for Mutual Funds 3. Circular No. MFD/CIR/14 /088 / 2001 dated March 28, 2001 Guidelines for valuation of securities 4. Circular No. MFD/CIR No.14/442/2002 dated February 20, 2002 Traded Securities. 5. Circular No. MFD/CIR/03/526/2002 dated May 9, 2002 Investment in Unlisted Equity Shares 6. Circular No. MFD/CIR.No 23 / 066 /2003 dated March 7, Circular No.SEBI/IMD/CIR No. 9/141601/08 dated October 18, Circular No. SEBI / IMD / CIR No. 2/166256/ 2009 June 12, Circular No SEBI/IMD/CIR No.16/ /2010 dated 02/02/2010 on Valuation of Debt Securities 10. SEBI (MUTUAL FUNDS) (AMENDMENT) REGULATIONS, 2012 on 21st February, AMFI Circulars/Notes on Valuation 4

5 Mirae Asset Global Investments (India) Pvt. Ltd. INVESTMENT VALUATION MANUAL INTRODUCTION: The Securities and Exchange Board of India (SEBI) has outlined investment valuation norms and accounting policies under SEBI (Mutual Funds) Regulations, 1996 as amended from time to time. The Investment Valuation Norms are defined in the Eighth Schedule of the regulations (regulation 47) and circulars issued by SEBI from time to time. In accordance with the SEBI Circular MFD/CIR No.010/024/2000 dated January 17, 2000 every AMC should formulated valuation committee to review investment valuation practices. Valuation committee of AMC generally consists of Head of Operations, Chief Investment Officer, Managing Director, Chief Compliance Office and by invitation, Fund Managers. This committee reviews the investment policies on regular basis. Chief Compliance Officer records the decisions and discussions of the meeting. Any change in the existing valuation policies/methods should be recommended by the Valuation Committee and approved by the Board of AMC and Trustee Company of Mirae Asset Mutual Fund. The objective of this manual is to specify methodology and the manner in which instruments and investments should be valued by AMC. The objective is also to elaborate on the SEBI valuation norms. Section I covers the Investment Valuation Norms for traded securities. This involves selection of a particular exchange to value the stocks of the Mutual Fund and laying down procedures to follow while determining the traded price. Since all investments of the Mutual Fund are to be marked to market on a regular basis, the valuation of unlisted, thinly traded and non-traded securities becomes an important issue. Valuations of such investments have to reflect a true market value. The valuation methods must be objective, fair, transparent, simple and must employ publicly available information. SEBI has prescribed methods of valuation like the P/E method for shares, YTM method for debt instruments etc. The same has been explained in Section II in detail. 5

6 INTRODUCTION: SECTION I VALUATION NORMS FOR TRADED SECURITIES 1. EQUITY AND EQUITY RELATED SECURITIES: 1.1 EQUITY SEBI Regulations has prescribed following methodology for valuation of Equity and Equity related securities: Traded Securities are to be valued at the last quoted closing price on the primary Stock Exchange. Where security is not traded on the primary stock exchange, the last quoted closing price of another Stock Exchange may be used. If a security is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the primary 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 thirty days prior to the valuation date. (Ref: SEBI (Mutual Fund) Regulations, 1996 Schedule VII and amendments through SEBI Circular No. MFD/CIR No.14/442/2002 dated February 20, 2002.) The steps involved in valuation of traded securities are: (i) Selection of appropriate Stock Exchange by Asset Management Company (AMC) and valuing the security at the closing price on the date of valuation. (ii) Valuing security at the closing price of another Stock Exchange, if it is not traded on the valuation date on the Stock Exchange as selected at (i) above. (iii) Valuing security at the earliest previous day s quotes of selected stock exchange or any other stock exchange as the case may be (being not more than thirty days prior to valuation date). Clearly, for reasons of speed and regular flow of data in electronic form, the choice of stock exchange for trading is limited to the two premier exchanges of India - the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Both these exchanges have electronic trading, greater transparency, quicker and more efficient settlements, which enable better cash management, and are popular with other major institutions. 6

7 Process to be followed at Mirae Asset Mutual Fund for valuation of traded equity and equity related securities: For valuation purposes The National Stock Exchange (NSE) has been selected as appropriate stock exchange for equity and equity related securities held by all the schemes. Wherever equity and equity related securities are not listed on The National Stock Exchange (NSE) or are not traded on a certain day at The National Stock Exchange (NSE), the closing price at the Bombay Stock Exchange (BSE) should be considered, followed by any other regional exchanges. In case of securities which have been allotted under preferential / private allotment and are not listed or traded on the selected stock exchanges, the scrip is valued at last quoted price on the Stock Exchange where it is traded (provided the last quoted price is not more than thirty days prior to the valuation date.) To summarize, if a security is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the other stock exchange, on the earliest previous day is used, provided such day is not more than thirty days prior to the valuation date. For this purpose priority of stock exchange set is, NSE followed by BSE and then by any other stock exchange. Similar methodology is to be used for valuation of preference shares. If the equity securities are not traded on any stock exchange for a period of thirty days prior to the valuation date, the scrip must be treated as `non-traded' scrip and should be valued as non-traded security as per the norms given separately by us in Section II and also in case of equity securities not listed on any stock exchange, the scrip is to be valued as per the norms given separately in Section II. i. Selection of stock exchange for valuation: Board of AMC for all its equity and equity related securities has selected NSE as appropriate stock exchange for the valuation of securities. Appropriate stock exchange that would be considered for valuation is also specified in the scheme offer document. 7

8 ii. Change in the selected Stock Exchange: In case selected stock exchange for valuation of any or all securities is to be changed, reasons for change have to be recorded in writing by the valuation committee and approved by the Board of AMC. Traded securities also include Thinly Traded securities and Suspended securities. i) Thinly traded Equity/Equity Related Securities: Thinly traded equity/ equity related security is defined in SEBI (Mutual Fund) Regulations as follows: When trading in an equity/equity related security (such as convertible debentures, equity warrants, etc.) in a month is both less than Rs. 5 lacs and the total volume is less than 50,000 shares, it shall be considered as thinly traded security and valued accordingly. Ref: SEBI Circular No. MFD/CIR/14 /088 / 2001 dated March 28, It is evident that any security to qualify as thinly traded security it should satisfy both the aforesaid conditions. Process to be followed at Mirae Asset Mutual Fund for determining whether security is thinly traded In order to determine whether a security is thinly traded or not, the volumes traded in Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) for the last month are considered. On the continues basis service vendors viz. Bilav software Pvt. Ltd. send soft copy containing scrip-wise volume on BSE and NSE. This data is used to determine whether any of the equity security held in the portfolio is thinly traded. Please refer to Section II for valuation of thinly traded equity / equity related securities. ii) Thinly traded Debt securities: Thinly traded debt security is defined in SEBI (Mutual Fund) Regulations as follows: A debt security (other than Government Securities) shall be considered as a thinly traded security if on the valuation date, there are no individual trades in that security in marketable lots (currently Rs 5 Crore) on the principal stock exchange or any other stock exchange. Ref.: SEBI Circular No. MFD/CIR No.14/442/2002 dated February 20,

9 Process to be followed at Mirae Asset Mutual Fund while determining whether security is thinly traded: In order to determine whether a debt security is thinly traded or not, the volumes traded on NSE and BSE a Whole Sale Debt Market (WDM) segment, on the date of valuation should be considered. Volumes traded on NSE WDM and BSE WDM can be obtained from service provider, Bilav software Pvt. Ltd., or it can be obtained directly from the NSE site / BSE site. Please refer to Section II for valuation of thinly traded debt securities. 1.2 FOREIGN EQUITY Valuation of Investment made in Foreign Equity: On the Valuation Day, the securities issued outside India and listed on the stock exchanges outside India shall be valued at the closing price on the stock exchange at which it is listed or at the last available traded price. However, in case a security is listed on more than one stock exchange, the AMC reserves the right to determine the stock exchange, the price of which would be used for the purpose of valuation of that security. The stock exchange once selected would be used consistently till changed by recording the reasons in writing by Board of AMC. Due to difference in time zones of different markets, in case the closing prices of securities are not available within a given time frame to enable the AMC to upload the NAVs for a Valuation Day, the AMC may use the last available traded price for the purpose of valuation. The use of the closing price / last available traded price for the purpose of valuation will also be based on the practice followed in a particular market. In case a security is not traded on valuation day, the last traded price/last available price would be used for valuation till T 30 days. In case security is not traded for more than 30 days, the same would be valued on a fair value basis by the Valuation Committee of the AMC. On the Valuation Day, all assets and liabilities denominated in foreign currency will be valued in Indian Rupees at the exchange rate available at 5.00 p.m. The source for the price will be taken in the following order of preference: (a) RBI, (b) Reuters, or (c) any other standard reference rate. In case any exchange rate is not available on the valuation day, the last available rate would be used for valuation. 9

10 The Trustees reserve the right to change the source for determining the exchange rate. The exchange gain / loss resulting from the aforesaid conversion shall be recognized as unrealized exchange gain / loss in the books of the Scheme on the day of valuation. Further, the exchange gain / loss resulting from the settlement of assets / liabilities denominated in foreign currency shall be recognized as realized exchange gain / loss in the books of the scheme on the settlement of such assets / liabilities Valuation of Rights shares: Rights shares shall be valued in line with the SEBI regulations as stated below. Until they are traded, the value of the rights shares should be calculated as: Vr = n/m (Pex - Pof) where Vr = Value of rights n = No of rights shares 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. Process to be followed at Mirae Asset Mutual Fund for valuation of Investment made in Foreign Equity: 1. For valuation purposes, exchanges mentioned in Annexure 1 for different countries, has been selected as appropriate stock exchange for equity and equity related securities held by all the schemes. 2. Due to difference in time zones of different markets, the closing prices of securities available till 5.00 p.m. will be taken for valuation. In case the closing prices of securities are not available within a given time frame as mentioned above, the last available traded price shall be used for the purpose of valuation. The source for the price will be taken in the following order of preference: (a) RBI, (b) Reuters, or (c) any other standard reference rate. In case where any price of a security is not available on the valuation day, the last closing price would be used for valuation. 10

11 In addition to the above the accounting / valuation for currency rates is given below: 1. When certain portion of the fund is allocated for investment overseas, this will be accounted as purchase of foreign currency. The FX rates will be treated as cost of purchase. This will create FX position in portfolio. 2. When purchase / sales of securities are made, Purchase / sale will be recorded like normal purchase/sale transaction in the portfolio currency (in this case INR). The purchase / sale price plus/minus brokerage & other charges in the foreign currency will be converted to INR at the agreed FX rate On the date of settlement the difference between FX reference rates on trade date and actual FX rate used for settlement will be treated as gain / loss due to FX fluctuation. Daily basis when the closing prices and the currency rates are received Closing prices and FX rate will be applied to the portfolio and unrealized capital gain and FX gain is calculated separately. The closing time for the currency will be taken as 5.00 p.m. The source for the price will be taken in the following order of preference: (a) RBI, (b) Reuters, or (c) any other standard reference rate. Annexure - 1 Country Exchange Name 1. Australia Australian Securities Exchange 2. Hong Kong Hong Kong Exchange 3. Indonesia Indonesia Exchange 4. Korea Korea Stock Exchange 5. Malaysia Kuala Lumpur Stock Exchange 6. Philippines Philippines Stock Exchange 7. Singapore Singapore Exchange 8. Taiwan Taiwan Exchange 9. Thailand Thailand Exchange 11

12 1.3 VALUATION OF ADR/GDR Mutual Fund can invest in ADRs/GDRs in line with the SEBI Circular dated September 1, 1999 and September 30, Exchange to be considered for valuation of ADRs/GDRs is to be approved by the AMC Board. Process of valuation would be as follows: i. Receiving last quoted price If the security is listed in a time zone ahead of ours than the same day price as provided by Reuters would be used for valuation. If the security is listed in a time zone behind ours than the previous day s price would be used for valuation. In case the security is not traded on the above mentioned days, price of previous day should be used provided the price is not more than 30 days old. ii. Converting the price in Indian Rupees (INR) Since these prices are in foreign currency these are to be converted in Indian Rupees by applying the closing exchange rate on the date of valuation. This closing price in INR should be used for valuation of ADR/GDR. Alternatively closing price of the security should be converted to INR at last day s closing exchange rate of that currency (i.e. the closing rate of the date of which prices are considered). The source for the price will be taken in the following order of preference: (a) RBI, (b) Reuters, or (c) any other standard reference rate. 12

13 1.4 STOCK AND INDEX DERIVATIVES: Equity / Index Options Derivatives (i) Market values of traded open option contracts shall be determined with respect to the exchange on which contracted originally, i.e., an option contracted on the National Stock Exchange (NSE) would be valued at the closing /settlement option price on the NSE. The price of the same option series on the Mumbai Stock Exchange (BSE) cannot be considered for the purpose of valuation, unless the option itself has been contracted on the BSE. (ii) The Exchanges give daily closing/settlement prices in respect of all derivatives positions. These closing prices would be adopted for the positions, which are not traded Equity / Index Futures Derivatives (i) Market values of traded futures contracts shall be determined with respect to the exchange on which contracted originally, i.e., futures position contracted on the National Stock Exchange (NSE) would be valued at the closing price on the NSE. The price of the same futures contract on the Mumbai Stock Exchange (BSE) cannot be considered for the purpose of valuation, unless the futures contract itself has been contracted on the BSE. (ii) The Exchanges give daily closing/settlement prices in respect of all derivates positions. These closing prices would be adopted for the positions, which are not traded. 13

14 2. VALUATION OF GOVERNMENT SECURITIES: 2.1 VALUATION OF CENTRAL GOVERNMENT SECURITIES: SEBI Regulations has prescribed following methodology for valuation of Government Securities: Valuation with Residual Maturity of upto 60 Days Government Securities (GSec) & State Govt. Securities (State Development Loans SDL) for tenor less than 60 days will be valued at the average of the prices provided by approved agencies by AMFI (currently CRISIL and ICRA), till the time CBV can value GSec & SDL upto 60 days. Once the CBV gets equipped to value GSec & SDL, the valuation will be done as per the amortization process as follows: As per AMFI circular no. 135/ BP/ 41/ dated September 19, 2013, for the sovereign securities (including T-Bills) with residual maturity up to 60 days, the amortized price may be used for valuation as long as it is within ±10 basis points (bps) (±0.10%) of the reference price. In case the variance exceeds ±10 bps of the reference price, the valuation shall be based on the adjusted price as derived by CBV. Valuation with Residual Maturity of more than 60 Days Government Securities & State Govt. Securities of tenor more than 60 days will be valued at the average of the scrip level prices provided by approved agencies by AMFI (currently CRISIL and ICRA). (As per SEBI Circular No. MFD/CIR No.14/442/2002 dated February 20, 2002) Process followed at Mirae Asset Mutual Fund for valuation Government Securities: In accordance with the SEBI regulations, prices released by an agency suggested by AMFI, presently CRISIL, are used for valuation of the Government Securities. 14

15 2.2 VALUATION OF STATE GOVERNMENT SECURITIES: Traded: Government Securities & State Govt. Securities of any tenor will be valued at the average of the scrip level prices provided by approved agencies by AMFI (currently CRISIL and ICRA). 3. DEBT SECURITIES OTHER THAN GOVERNMENT SECURITIES: SEBI Regulations have prescribed following methodology for valuation of Debt securities: Detailed Process is as under Debt papers valuation is broadly classified under two categories: a) Less than or equal to 60 days to Maturity b) More than 60 days to Maturity 3.1 VALUATION OF TRADED DEBT AND MONEY MARKET INSTRUMENTS WITH RESIDUAL MATURITY OF UPTO 60 DAYS. All money market and debt securities, including floating rate securities, with residual maturity of up to 60 days shall be valued at T+1 price (settlement price) calculated based on the yield of the security on the valuation date. AMC is also required to classify its debt instruments under two categories for the purpose of valuation Non banking Finance Company, PTCs (Pool), Real estate and Others (i.e. NPR and Others). The designated agencies (presently, CRISIL and ICRA) provides relevant matrices for the above sectors separately for securities having residual maturity less than 60 days. When such securities are not traded on a particular valuation day they shall be valued on straight line amortization basis as long as their valuation remains within ±0.10% band of the price derived from the reference rate for each bucket (reference rate for every 15-day bucket will be provided by designated agencies). In case of amortized value falling outside the above band, the adjusted price as 15

16 derived from the CBV shall be considered. It is further clarified that in case of floating rate securities with floor and caps on coupon rate and residual maturity of up to 60 days than those shall be valued on amortization basis taking the coupon rate as floor It has been observed that prices and yields reported on public platforms may not always be reflective of current market trading levels. To prevent frivolous and dated prices from distorting the valuation of mutual fund assets, it is proposed that: Traded price would be given first preference over the benchmark yields provided by the entrusted agency (ies). a) For instruments maturing less than or equal to 60 days, the traded price/yields (Yield for discounted securities and weighted average price for others) may be taken if there are at least 3 trades aggregating to Rs. 100 Crores or more. b) In the case of a Scheme s own trade (Ignore Inter-Scheme Transfers), only a trade of a market lot or more is to be taken as reflective of the realizable value of the total holding in a single instrument, wherein the market lot is defined as Rs. 5 Crores (fair Value). c) In case of both Market Trades and own Trades, Weighted average yield/price (Yield for discounted securities and weighted average price for others) shall be considered for valuation at trade date (T). Market Trades would be given higher priority. In case of qualifying market trades on multiple public platforms, the order of preference would be FIMMDA, Exchange (NSE, BSE) and own trades. The qualifying criteria will be observed at the exchange/ platform. d) If the above mentioned criteria for Market Trades are not met, but there is a qualifying own trade on a particular valuation day, the price at which the own trade has taken place will be considered for valuation. Valuing at Clean Price: Debt securities are valued at clean price, which means excluding accrued interest component of the security. If corporate bonds and debentures are quoted cuminterest on the exchange, the valuation must be done by excluding the accrued interest portion (i.e. from the last due date of interest till date) from the quoted price, since the interest is accrued and accounted separately on a daily basis. 16

17 3.2 VALUATION OF TRADED DEBT AND MONEY MARKET INSTRUMENTS WITH RESIDUAL MATURITY OF > 60 DAYS. Papers covered under category (a) (>60 days to maturity) are marked to market on daily basis. The designated agencies (presently, CRISIL and ICRA) provide daily Valuations for the entire spectrum of Debt Securities with residual Maturity exceeding 60 days. For new securities issued [primary segment & such securities which do not form part of the universe of the Scrip Level Valuation provided by the designated agencies (presently, CRISIL and ICRA)], the valuation will be done on traded yield for CPs, CDs & ZCBs and on traded prices for Bonds till such time the valuation is provided by the said agencies. Valuation of BRDS (Bill Re-discounting Scheme) instruments: BRDS is issued in physical form in the form of usance promissory note. Sec 45 U of the Reserve Bank of India (Amendment) Act, 2006 defines BRDS as a money market instrument. SEBI Regulations also defines BRDS as money market instrument. As BRDS is termed as a money market instrument and is a negotiable instrument, the same should be valued similar to other money market instruments as per the extant Valuation policies. 4. VALUATION OF OTHER INSTRUMENTS: 4.1 VALUATION OF RIGHTS ENTITLEMENTS: As per Schedule VIII of SEBI (Mutual Fund) Regulations When Company announces rights to the existing equity shareholders, under its Listing Agreement with Stock Exchange; it has to declare ex-right date for the purpose of trading on the Stock Exchange. Ex-right date is a date from which the underlying shares, which are traded on the Stock Exchange, will not be entitled to the rights. These rights entitlements can also be renounced in favour of a willing buyer. These renunciations are in some cases traded on the Stock Exchange. In 17

18 such case these should be valued as traded equity related securities as detailed at para 1 above Till the rights are subscribed, the entitlements as per Regulations have to be valued as under: Valuation of non-traded rights entitlement is principally the difference between the right price and ex-right price. SEBI Regulations have explained this with the help of following formula: V r = n / m x (P ex P of ) Where V r n m P ex P of = Value of Rights = Number of rights offered = Number of original shares held = Ex-right price = Rights offer price The following issues while valuing the rights entitlements have to be addressed: i) In case original shares on which the right entitlement accrues are not traded on the Stock Exchange on an ex-right basis, right entitlement should not be recognised as investments. ii) When rights are not treated pari passu with the existing shares such as, restrictions with regard to dividend etc., suitable adjustment should be made by way of a discount to the value of rights at the last dividend announced rate. iii) Where right entitlements are not subscribed to but are to be renounced, and where renouncements are being traded, the right entitlements have to be valued at traded renunciation value. iv) Where right entitlements are not traded and it was decided not to subscribe the rights, the right entitlements have to be valued at zero. v) In case the Rights Offer Price is greater than the ex-rights price, the value of the rights share is to be taken as zero. 4.2 VALUATION OF SUSPENDED SECURITY: In case trading in an equity security is suspended for trading on the stock exchange up to thirty days, then the last traded price would be considered for valuation of that security. 18

19 4.2.2 If an equity security is suspended for trading on the stock exchange for more than thirty days, then it would be considered as non-traded and valued accordingly. 4.3 VALUATION OF INTEREST RATE SWAP (IRS): Interest Rate swaps will be valued separately than the underlying asset or a portfolio of assets. If the tenure of the IRS is less than 6 months then value of IRS contract would be present value of the difference between the fixed and floating interest to be received/paid on maturity of the contract. If the tenure is more than 6 months, value of IRS contract would be present value of the difference between the fixed and floating interest to be received/paid on maturity of the contract. Floating rate interest till maturity is the interest accrued till the valuation date plus the interest on remaining period at reversal rate. Reversal rate for the day would be obtained from Reuters for different maturities. The relevant rate is taken on the basis of maturity of the contract. However, if the maturity date falls between the two years, the reversal rate is arrived by interpolation on valuation date. Detailed methodology would be worked out by CRISIL for valuation of Interest Rate Swap and the same would become part of the Bond Valuer software. Interpolation time period for valuation of securities shall be increased from 5 days to 15 days on either side of the bucket. (AMFI circular December 28, 2010) Methodology of IRS valuation is tabulated below: In case of Receive Fixed and Pay Floating: FIXED Receivable (A) Notional Contract value * Fixed interest rate * period of contract REVERSAL RATE Interest rate as per Reuters FLOATING Payable (B) Accumulated interest till date + (Reversal rate* Compounded face value * No. of days remaining/365) NO. OF DAYS REMAINING XXXXX XXX XXXXXX XXXX UNRAELISED GAIN/(LOSS) (C) (A) (B) XXXXX BALANCE DAYS For NEXT XXXX 19

20 RESET DATE/MATURITY DATE PV ON UNRELIASED G/(L) (C)/(1+REVERSAL RATE/365*Balance days to maturity/interest reset date XXXX Gain/(Loss) Already Provided XXXX Mark to Market Loss XXXX Effective from , trades in Bonds will have to be reported in NSE, BSE and/or MCX. There are 2 sections for reporting in NSE: 1. NSEOTC (Transition from FIMMDA to NSE), and 2. NSEWDM. Any trading of Bonds will be reported in any of the above platforms. The prices for the Bonds will be referred from any of these platforms for the purpose of valuation. 4.4 VALUATION OF UNITS OF MUTUAL FUNDS: (i) (ii) In case of traded Mutual Fund schemes, the units would be valued at closing price on the stock exchange on which they are traded like equity instruments. In case the units are not traded for more than 7 days, last declared NAV would be considered for valuation (NAV is declared by Mutual Fund on weekly basis in case of close-ended schemes.) In case of non-traded Mutual Fund scheme, the last declared NAV would be considered for valuation. As per AMFI circular Dated December 28, 2010 and clarification dated June 30, 2011, MF units listed and traded would be valued at the closing traded price as on the valuation date. Unlisted MF units and listed untraded MF units would be valued at would be valued at the NAV as on the valuation date. 4.5 VALUATION OF GOLD IN CASE OF EXCHANGE TRADED GOLD FUNDS: (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 parts per thousand, subject to the following: 20

21 (a) adjustment for conversion to metric measures 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 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) 4.6 VALUATION OF EXCHANGE TRADED FUND (ETF) ETFs shall be valued at closing prices available on the stock exchange. (NSE/BSE). 21

22 SECTION II VALUATION NORMS FOR NON-TRADED SECURITIES INTRODUCTION: A. Two distinct definitions for recognition as non-traded securities are noted. i) If the equity securities are not traded on any stock exchange for a period of thirty days prior to the valuation date, the scrip must be treated as `nontraded' scrip ii) If the debt securities are not traded on any stock exchange for a period of fifteen days prior to the valuation date, the scrip must be treated as `nontraded' scrip. B. Basic Conditions of valuation of Non-traded / Thinly traded Securities The Regulations prescribe following conditions for valuation of non-traded securities: i) Non-traded securities shall be valued in `good faith on the basis of the valuation principles laid down by SEBI. ii) The basis should be appropriate valuation methods on the principles approved by Board of AMC. iii) Such basis should be documented in Board minutes iv) Methods used to arrive at good faith valuation should be periodically reviewed by the Trustees. v) Methods used to arrive at good faith valuation should be such that the auditors report the same as `fair and reasonable in their report on the annual accounts. Process to be followed at Mirae Asset Mutual Fund for valuation of non-traded securities 1. EQUITY AND EQUITY RELATED SECURITIES: 1.1 APPLICATION MONEY FOR PRIMARY MARKET ISSUE: i) Application money should be valued at cost up to 30 days from the closure of the issue. If the security is not allotted within 30 days from the closure of 22

23 ii) the issue, application money is to be valued as per the directives of valuation committee. Rationale of valuing such application money should also be recorded. Equity securities allotted and proposed to be listed, but not listed, are to be valued at cost till three months from the date of allotment and after three months, are to be valued as unlisted securities. Method of valuing unlisted equity is stated at para 1.3 below. 1.2 NON-TRADED / THINLY TRADED EQUITY A. As per SEBI Circular No. MFD/CIR/ 8 / 92 / 2000 dated September 18, 2000 non traded / thinly traded equity is to be valued s follows: (a) (b) (c) (d) (e) (f) (g) Based on the latest available Balance Sheet, net worth shall be calculated as follows: Net Worth per share = [share capital+ reserves (excluding revaluation reserves) Misc. expenditure and Debit Balance in P&L A/c] Divided by No. of Paid up Shares. Average capitalisation rate (P/E ratio) for the industry based upon either BSE or NSE data (which should be followed consistently and changes, if any noted with proper justification thereof) shall be taken and discounted by 75% i.e. only 25% of the Industry average P/E shall be taken as capitalisation rate (P/E ratio). Earnings per share (EPS) of the latest audited annual accounts will be considered for this purpose. The value as per the net worth value per share and the capital earning value calculated as above shall be averaged and further discounted by 10% for ill-liquidity so as to arrive at the fair value per share. In case the EPS is negative, EPS value for that year shall be taken as zero for arriving at capitalised earning. In case where the latest balance sheet of the company is not available within nine months from the close of the year, unless the accounting year is changed, the shares of such companies shall be valued at zero. In case an individual security accounts for more than 5% of the total assets of the scheme, an independent valuer shall be appointed for the valuation of the said security. 23

24 B. In line with these guidelines issued by SEBI, Mirae Asset Mutual Fund non-traded / thinly traded securities should be valued as follows: Net worth per share is computed as follows: i) Net worth of the company = Paid up share capital + Reserves other than Revaluation reserve - Miscellaneous expenditure, debit balance in Profit and Loss account and certain contingent liabilities. ii) Net worth per share = (Net worth of the company / Number of paid up shares) Computation of capitalised value of earning per share (EPS): i) Determination of the Industry Price Earning Ratio (P/E) to which the company belongs. The definition of industry in India is not clear. It is observed that different funds use different classification of industry. A clear example is of a company producing `synthetic yarn, which is an important input for textile companies and therefore should be classified under textile industry, though it is often classified under petrochemical industry since it is a petrochemical product. Therefore, the classification of industries should be adopted consistently from database used for analysis of the companies by the AMC, such as Capital Market, Prowess (CMIE), etc. Presently Industry P/E Ratio used is provided by NSE on a monthly basis. However, the P/E ratio data if not available from BSE/NSE, P/E provided by the sources mentioned above should be taken. ii) Compute EPS from the latest audited annual accounts. In case the EPS is negative, EPS value shall be considered as zero iii) Compute capitalised value of EPS at 75% discount (P/E*0.25) * EPS Computation of fair value per share to be considered for valuation at 10 % discount for illiquidity. 24

25 [(Net worth per share + Capitalised value of EPS) / 2] * 0.90 The fair value arrived at as per the method prescribed above is compared with the last traded price on the stock exchange and the lower of the two is considered for valuation In case the latest balance sheet i.e. balance sheet prepared within nine months from the close of the accounting year of the company, is not available (unless the accounting year is changed) the shares should be valued as zero In case an individual non traded / thinly traded security as valued aforesaid, accounts for more than 5% of the total asset of the scheme, AMC should appoint an independent valuer. The security shall be valued on the basis of the valuation report of the valuer To determine if a security accounts for more than 5% of the total assets of the scheme, it should be valued by the procedure above and the proportion which it bears to the total net assets of the scheme to which it belongs would be compared on the date of valuation. 1.3 VALUATION OF UNLISTED EQUITY: A. SEBI Circular No. MFD/CIR/03/526/2002 dated May 9, 2002 has prescribed the method of valuation for unlisted equity securities. These guidelines are similar to the guidelines issued by SEBI for non traded / thinly traded securities mentioned above only except the following: Computation of Net worth per share as lower of (a) and (b): (a) i) Net worth of the company = Paid up share capital + Reserves other than Revaluation reserve - Miscellaneous expenditure not written off or deferred revenue expenditure, intangible assets and accumulated losses. ii) Net worth per share = (Net worth of the company / Number of paid up shares). (b) i) Net worth of the company = Paid up capital + Consideration on exercise of Option/Warrants received/receivable by the company + free reserves other than Revaluation reserve Miscellaneous 25

26 ii) expenditure not written off or deferred revenue expenditure, intangible assets and accumulated losses. Net worth per share = (Net worth of the company/{number of paidup shares + number of shares that would be obtained on conversion/exercise of outstanding warrants and options}). If the net worth of the company is negative, the share should be marked down to Zero Computation of fair value per share to be considered for valuation at 15 % discount for illiquidity. [(Net worth per share + Capitalised value of EPS) / 2] * In case the latest balance sheet i.e. balance sheet prepared within nine months from the close of the accounting year of the company, is not available (unless the accounting year is changed) the shares should be valued as zero At the discretion of the AMC and with the approval of the trustees, an unlisted equity scrip may be valued at a price lower than the value derived using the aforesaid methodology. B. In line with these guidelines issued by SEBI, unlisted equity shares are valued at Mirae Asset Mutual Fund as follows: Value of the unlisted equity security is arrived as per the methodology prescribed by SEBI and then that value is reported to valuation committee. Security is valued at the least of these two values. In other words unlisted equity security is valued at the least of the following values: 1. Value computed as per the SEBI guidelines 2. Cost of acquisition This process is documented and reason if any for not considering least of these values or considering the valuation lower than the least, is also recorded in the valuation paper. 26

27 1.4 VALUATION OF NON -TRADED WARRANTS: (As per Eighth Schedule to SEBI (Mutual Fund Regulations) In respect of warrants to subscribe for shares attached to instruments, the warrants can be valued similarly to the valuation of convertible portion of debentures as mentioned in the paragraph 2.3, as reduced by the amount which would be payable on exercise of the warrant. If the amount payable on exercise of the warrants is higher than the value of the share, the value of the warrants should be taken as zero. Value of Warrant = [Value of share computed as stated in the paragraph above - exercise price]. 1.5 VALUATION OF PREFERENCE SHARES: SEBI has not prescribed valuation policy for valuing non-traded/unlisted preference shares as it has stated in case of equity shares. In case of convertible preference shares, valuation guidelines relating to convertible debentures can be applied. Non-convertible preference shares can be considered as Non-convertible debentures for the purpose of valuation. In case, dividend is not received, it would be treated as NPA. 1.6 VALUATION OF SHARES ON DE-MERGER: On de-merger following possibilities arise which influence valuation these are: i. All the demerged shares are traded immediately on de-merger: In this case all the demerged shares are valued at respective traded prices. ii. Shares of only one company continue to be traded on de-merger: In case where one entity is demerged into two or more entities and one of those entities continues to be listed, the value of unlisted entity will be calculated as the difference between the closing price of the security that continues to be listed on the previous trading day (before demerger) and ex-date (after demerger). The difference in price of two dates will be the valuation price of the unlisted entity/entities proportionately, till they are listed and traded on a stock exchange. The benefit of this method of valuation is that it is not a subject matter and is determined based on the market price. The same would be reviewed by the valuation committee every 30 days if the security is not listed. 27

28 iii. All the demerged shares are not traded on de-merger: Shares of demerged companies are to be valued equal to the pre de merger value up to a period of 90 days from the date of de merger. In case shares of all the companies are not traded for more than 90 days, these are to be valued as unlisted security. 1.7 VALUATION OF ILLIQUID SECURITY IN EXCESS OF 15% OF TOTAL ASSETS OF THE SCHEME: (As per SEBI Circular No. MFD/CIR/ 8 / 92 / 2000 dated September 18, 2000) Illiquid security means securities defined as non-traded, thinly traded and unlisted equity shares. As per the SEBI Regulations aggregate value of Illiquid securities should not exceed 15% of the total assets of the scheme and any illiquid securities held above 15% of the total assets shall be assigned zero value. Provided that in case any scheme has illiquid securities in excess of 15% of total assets as on September 30, 2000 then such a scheme shall within a period of two years bring down the ratio of illiquid securities within the prescribed limit of 15% in the following time frame: (i) (ii) All the illiquid securities above 20% of total assets of the scheme shall be assigned zero value on September 30, All the illiquid securities above 15% of total assets of the scheme shall be assigned zero value on September 30, In respect of close-ended funds, for the purpose of valuation of illiquid securities, the limits of 15% and 20% applicable to open-ended funds should be increased to 20% and 25% respectively. Wherever a scheme has illiquid securities as at September 30, 2001 not exceeding 15% in the case of an open ended funds and 20% in the case of closed ended funds, the concessions of giving time period for reducing the illiquid security to the prescribed limits would not be applicable and at all time the excess over 15% or 20% shall be assigned nil value. 28

29 1.8 VALUATION OF NON TRADED / UNLISTED / THINLY TRADED RIGHTS ENTITLEMENTS: (As per Schedule VIII of SEBI (Mutual Fund) Regulations) In case right Entitlements are not traded for more than 30 days or unlisted or thinly traded, the same shall be valued as below When Company announces rights to the existing equity shareholders, under its Listing Agreement with Stock Exchange; it has to declare ex-right date for the purpose of trading on the Stock Exchange. Ex-right date is a date from which the underlying shares, which are traded on the Stock Exchange, will not be entitled to the rights. These rights entitlements can also be renounced in favor of a willing buyer. These renunciations are in some cases traded on the Stock Exchange. In such case these should be valued as traded equity related securities as detailed at Section I above Till the rights are subscribed, the entitlements as per Regulations have to be valued as under: Valuations of non-traded/thinly traded/unlisted rights entitlement, SEBI Regulations have explained this with the help of following formula: V r = n/m * (P ex P of ) Where V r n m P ex P of = Value of Rights = Number of rights offered = Number of original shares held = Ex-right price = Rights offer price The following issues while valuing the rights entitlements have to be addressed: i) In case original shares on which the right entitlement accrues are not traded on the Stock Exchange, right entitlement should be valued at zero. ii) When rights are not treated pari passu with the existing shares such as, restrictions with regard to dividend etc., suitable adjustment should be made by way of a discount to the value of rights at the last dividend announced rate. 29

30 iii) Where right entitlements are not subscribed to but are to be renounced, and where renouncements are being traded, the right entitlements have to be valued at traded renunciation value. iv) Where right entitlements are not traded and it is decided not to subscribe the rights, the right entitlements have to be valued at zero. v) In case the Rights Offer Price is greater than the ex-rights price, the value of the rights share is to be taken as zero. 1.9 VALUATION OF PARTLY PAID-UP EQUITY SHARES Partly paid-up equity shares shall be valued at Underlying Equity price as reduced by the balance call money payable. 2. VALUATION OF GOVERNMENT SECURITIES: Non-Traded State Government Securities: If Govt. secs is not traded or the volume of trade is below Rs.5 crore it will be considered as non-traded or thinly traded State Government securities. Also if the latest traded price available is more than seven days before the valuation date it will be considered as non-traded. Non-traded/Thinly traded State Government securities will be valued based on the current YTM of Central Government securities with similar maturity period and after adjusting for necessary mark up for such securities. The valuation committee will review the mark up at regular interval for any revision in it. Mark up to be reviewed at least once in 7 days. The mark up recommended to be done till the next revision to the YTM of similar paper of Central Government securities is as follows: States Gujarat & Madhya Pradesh Arunachal Pradesh, Manipur, Mizoram, Nagaland, Sikkim & Tripura Indicative yield spreads +25 bps over corresponding GOI-Sec +30 bps over corresponding GOI-Sec 3. VALUATION OF NON TRADED DEBT SECURITIES OTHER THAN GOVERNMENT SECURITIES Debt papers valuation is broadly classified under two categories: a) More than 60 days to Maturity b) Less than or equal to 60 days to Maturity. 30