Sebi sets up panel for dotcom valuation norms

Sebi sets up panel for dotcom valuation norms
ENS ECONOMIC BUREAU

JULY 6: With dotcom (Internet) companies adopting different valuation practices, the Securities and Exchange Board of India (Sebi) has referred setting out accounting standards for the valuation of dotcom companies to a sub-committee of the regulator's Accounting Standards Committee.

The sub-committee headed by ASC chairman Y H Malegam would study three dotcom related issues -- gross or net revenue to be given final accounting, basis for revenue recognition (particularly things like mutual promotional tie-ups) and pre-paid/intangible assets vs period costs.

Sebi executive director Pratip Kar said that the regulator would focus only on the accounting aspects of the dotcom companies and the financial disclosures to be made. ``Recognition of revenue and whether it is to be on gross or net basis is a major area which will be focussed on, as at present valuations of these companies' shares depend a large extent on their revenue models and streams,'' he said.

The recent experience has shown that the valuations of these companies had given rise to market volatility. The issue of dotcom valuation cropped up after the takeover of IndiaWorld by Satyam Infoway for a sum of Rs 499 crore.

The other members of the panel include J R Varma, full-time member in Sebi, Pratip Kar, Infosys director T V Mohandas Pai, NSE dy MD Ravi Narain and Bhavna Doshi from the Institute of Chartered Accountants of India.

Incidentally IOSCO's - the world regulatory body for securities - technical committee is also looking into valuation issues of Internet companies. Sebi, it may be recalled, is a member of the body's emerging markets committee. Varma will also be attending a meeting of the technical committee in this regard.

The Sebi board meeting also took up the issue of valuation of debt securities and thinly traded or non-traded securities and standardisation norms for net asset values of such instruments and provisioning norms for the non-performing assets of mutual fund schemes. On the investment valuation norms for securities which are traded (thinly or otherwise) not traded at all, the committee retained the existing regulations for valuing them on the basis of the last quoted price on the stock exchanges.

A non-traded security was defined as any security which was not traded on any exchange for a period of 30 days prior to the valuation date. Currently the period is 60 days. The committee has decided to lay down a formula for valuing such securities.

In respect of non-traded debt securities, the committee has recommended the valuation methods for such instruments with less than 182 days to maturity and over 182 days to maturity. For the purposes of valuation, all non-traded debt securities would be classified into investment and non-investment grades.

The valuation approach for non-traded debt securities is based on the concept of rising spreads over the benchmark rate, to arrive at yields for pricing non-traded securities. All the recommendations made by the committee at today's meeting are based on a discussion paper prepared by the Association of Mutual Funds of India (Amfi).

With regard to non-performing assets of mutual funds, the committee examined a report on the issue by Amfi, which primarily concentrated on provisioning and valuation norms of NPAs arising from debt securities. The committee recommended that an asset will be classified as NPA if the interest or principal has not been received or has remained outstanding for one quarter (the current norm is two years) from the due date of such income or installment.

MFs would also need to make disclosures of their NPAs on a half yearly basis, Kar said. The objective, said Kar, was to frame a fair policy to ensure an accurate evaluation of NAV of MFs and to protect the interests of the investors.