Valuation principles pursuant to SEBI's February 21, 2012 MF Regulations Amendments, w.e.f July 2, 2012 as amended w.e.f. 25th November 2013, March 29, 2016 July 3, 2017, May 7, 2018 and September 12, 2018.
The principles of fair valuation have been incorporated via amendments to Regulations 47 and the Eighth schedule, which hitherto governed the valuation policy adopted by Kotak Mahindra Mutual Fund (KMMF), along with the various circulars issued by SEBI.
The gist of the principles of fair valuation as laid down by the aforesaid circular are as under:
- The valuation shall be reflective of the realizable value of the securities / assets and
- should take into consideration prices of the same security or similar security reported on all available public platforms.
- Non traded debt and money market securities of short term maturities, may be valued on amortization basis, provided such valuations are reflective of the fair value of the securities.
- The valuation shall be done in good faith and in a true and fair manner through appropriate valuation policies and procedures including dealing with exceptional events, duly approved by the Board of the Asset Management Company.
- Disclosure of the valuation policy and procedures to be made in Statement of Additional Information (SAI) and website.
- Investments in new types of securities shall be made on the establishment of valuation methodologies, duly approved by the Board of the Asset Management Company.
- Periodic review of valuation policies to ensure appropriateness by the AMC/ Trustee boards, along with an annual review by an independent auditor.
- Seek and address the issue of conflict of interest.
- Irrespective of the aforesaid policies, AMC to be responsible for fair valuation i.e. could deviate from established policies, with appropriate reporting to the Board of Trustees and AMC.
- AMC / Sponsor shall be liable to compensate investors / schemes for any unfair treatment to any investor as a result of inappropriate valuation.
Keeping in view the aforesaid, and also with a view to ensuring fairness to all classes of unit holders, including the one's staying in the fund, the purchasing investor and the redeeming investor, the following valuation policies and procedures are proposed to be adopted.
Valuation policies and procedures:
I. Equity and equity related securities:
Investments are stated at market / fair value at the Balance Sheet date / date of determination.
In valuing the Schemes' investments:
- Traded equity securities and warrants are valued at the last quoted closing price on the National Stock Exchange of India Limited (NSE). For Kotak Sensex ETF, equity securities are valued at the last quoted closing price of Bombay Stock Exchange Ltd (BSE). However, if the equity securities and warrants are not listed/traded on NSE/BSE, as the case may be the securities are valued at the last quoted closing price on the exchange where it is principally traded.
- When a security is not traded on any stock exchange on a particular valuation day, the value at which it was traded on NSE or any other stock exchange as the case may be, on the earliest previous day is used, provided that such day is not more than thirty days prior to the valuation date.
- Non-traded / thinly traded / privately placed equity securities including those not traded within thirty days are valued at fair value as per procedures determined by the Investment committee.
- In respect of warrants to subscribe 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. Appropriate discount shall be deducted to account for the period, which must elapse before the warrant can be exercised.
- Until they are traded, the value of "rights" shares shall be calculated as the difference between the ex rights price and the rights offer price.
- Where the rights are not treated pari passu with the existing shares, suitable adjustments shall be made to the value of the 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.
- In respect of special circumstances, such as, non listing of security, due to merger, De-Merger, Split, Hiving off, etc. fair value principles are adopted. Such fair valuation principles could be the difference between the price as existed on the date previous to the ex-date and the ex-date price of the existing equity shares, duly adjusted for discount, if any. However, where in opinion of the fund manager, based on materiality and the additional information available, a review of the fair price is required; he may recommend the same to the Investment Committee for reconsideration.
II. Debt, sovereign securities (including T-Bills), money market and related securities :
A. For Securities with residual maturity greater than 60 days:
All securities (including traded and non traded) will be valued as per the prices provided by the AMFI approved agencies currently CRISIL & ICRA ( simple average ). Only in exceptional circumstances securities may be valued as per the norms laid down by the Investment Committee. Eg. First time purchase of a security for which price is not provided by the agencies etc.
B. For Securities with residual maturity upto 60 days:
All securities with residual maturity of upto 60 days are valued on amortization basis from the last valuation price or cost, as the case may be.
CRISIL & ICRA are agencies that provide the benchmark yields for such securities, which in turn are constructed after considering the traded prices, if any, of same / similar securities. At the time of first purchase the spread between the purchase yield and the benchmark yield would be fixed. This spread would remain fixed through the life of the instrument and would be changed only if there is a justification for the change, as may be decided by the Investment Committee.
The amortised price may be used for valuation as long as it is within ± 0.10% of the reference price (derived from benchmark yield +/- spread as above). In case the variance exceeds ± 0.10%, the valuation shall be adjusted to bring it within the ± 0.10% band.
Internal trade (including interscheme) would be considered for valuation. The criteria for internal traded price shall be minimum of a single trade of FV of Rs 5 crore and above.
III Real Estate Investment Trust ('REITs') & Infrastructure Investment Trust ('InvITs')
Investments in InvIT/ReIT shall be valued as follows:
- At the last quoted closing price at the principal stock exchange.
- If the traded price is not available then valuation shall be as per the direction of Investment
a) In case InvIT/ReIT is not being traded on any given day, last traded price would be taken as fair market value provided such last trade is not beyond previous 30days.
b) In case InvIT/ReIT is not being traded for previous 30days, latest NAV declared by investment manager of INVIT trust shall deemed to be fair price.
c) In case investment committee can establish a case that NAV as published by investment manager of InvIT is not representative of fair value than at a price suggested to be fair value.
- All inter scheme transactions shall be carried out at fair valuation prices, taking into account the prices of same / similar securities/ previous day valuations, at the time of the interscheme transaction, in accordance with the procedures laid down by the Investment Committee.
- CBLO, reverse Repo would be accounted on amortization basis. Bank deposits are valued at cost.
- Instruments bought on repo' basis are valued at the resale price after deduction of applicable interest up to the date of resale. Instruments sold on repo' basis are adjusted for the difference between the repurchase price (after deduction of applicable interest up to the date of repurchase) and the value of the instrument.
- Investments in unlisted mutual fund schemes are valued based on the net asset value of the respective schemes as on the valuation date. In case of listed investments in mutual fund units, valuation shall be at the last quoted closing price at the principal stock exchange, if the traded price is not available, last declared NAV of the schemes available on AMFI site can be considered for valuation.
- Investments in gold are valued at the price arrived at by converting the price of gold quoted on the London Bullion Market Association [LBMA], in US Dollars into Indian Rupees at the exchange rate published by the Reserve Bank of India as increased by custom duty for import of gold and other charges as applicable..
- Investments in securities outside India are valued at the closing price on the stock exchange on which it is listed or at the last available traded price at the exchange rate published by the Reserve Bank of India. Investment in units of overseas mutual funds is valued based on the net asset value of the overseas mutual fund as on the valuation date at the exchange rate published by the Reserve Bank of India.
- Interest rate swaps are valued on amortization basis for residual maturity upto 60 days and on the basis of independent external quotes, for cases where the residual maturity is greater than 60 days.
- All option positions are valued at the last traded price where it is traded. In case there is no traded price available then the option positon is valued at fair value based on a theoretical price as derived by Black & Scholes option pricing formula.
- All open future positions are valued at the futures settlement price as determined by the exchange where it is traded.
- The lending fees received on securities lent under Securities lending scheme would be amortised till the maturity of the contract.
- In case of exceptional events, the guidance given by the Investment Committee shall be executed. Given the dynamic nature of the markets, defining the exceptional events like say RBI policy changes, market illiquidity etc. could be difficult. Resultantly, defining standard processes and procedures for handling exceptional events may not be appropriate.
- The Investment Committee shall address issues of conflict of interest, if and when they arise. In our opinion, in the normal course of business, so long as the standard valuation policies are adopted, no conflict of interest issue arises.
- The aforesaid valuation policy shall be reviewed by the internal auditors periodically and annually by the statutory auditors.