Venture Debt and Private Credit Valuation in India: How Debt Instruments in an AIF Portfolio Are Actually Valued

Marcken Consulting | Insights on Valuation and Corporate Compliance

1. Scope of This Article

This article deals with one narrow question: how a debt instrument sitting in an AIF portfolio is actually valued, and what the working file must show. It assumes the regulatory framework rather than restating it.

For the framework itself — who may act as the independent valuer, the eligibility criteria after the September 2024 relaxation, the valuation frequency under Regulation 23, deviation thresholds and reporting to benchmarking agencies — see our companion article on Registered Valuer for AIF Fund Valuation: Eligibility, SEBI Framework and Compliance. For the current circular position, including the depository NAV reporting mandate, see SEBI’s June 2026 AIF Master Circular: What Changes for Fund Valuation.

Two points from that framework are worth carrying into what follows. First, unlisted debt, and listed debt that is non-traded or thinly traded, is expressly carved out of the mutual fund valuation norms and directed to the IPEV Guidelines, following SEBI’s Valuation Framework Circular dated 19 September 2024. Second, from 1 April 2026 the December 2025 edition of the IPEV Valuation Guidelines applies, and its expanded treatment of debt valuation, calibration, complex capital structures and hybrid instruments is directly relevant to venture debt and structured credit portfolios.

2. The Core Model for a Performing Debt Instrument

Fair value is the present value of the contractual cash flows, discounted at the yield a market participant would demand for that instrument on the valuation date. The mechanics are trivial. The judgement sits entirely in the discount rate, and that is where valuation files succeed or fail.

2.1 Building the discount rate

A defensible yield is built up component by component, each with an identifiable source:

1. Risk-free base. The government security yield at a tenor matching the weighted average life of the instrument, not its legal maturity. For an amortising facility or one with a cash sweep, these differ materially.
2. Credit spread. Derived from the issuer’s actual or implied rating, corroborated against traded spreads for comparable paper of similar rating, tenor and sector. An assumed spread with no external corroboration is the weakest link in most files.
3. Illiquidity premium. Reflecting the absence of a secondary market and any transfer restrictions in the debenture trust deed or facility agreement.
4. Instrument-specific adjustments. Security cover and its quality, seniority and subordination, the covenant package, cash sweep mechanics, corporate or personal guarantees, and embedded put or call options.

2.2 Calibration to the entry yield

Where the instrument was originated recently and at arm’s length, the entry yield is strong evidence of fair value at inception, and IPEV calibration principles require the valuer to check that the model reproduces it. That evidence weakens the moment the issuer’s credit profile, the interest rate environment or the market spread for comparable paper moves. Carrying an instrument at par two years after origination, on the strength of the original pricing alone, is not calibration. It is an unexamined assumption.

2.3 The most common error in Indian debt fund files

Carrying a debt instrument at amortised cost and describing that as fair value is not acceptable under the SEBI framework, and it remains the single most frequent weakness we encounter. Amortised cost is an accounting measurement basis under Ind AS 109. Fair value under Ind AS 113 asks a different question: what would a market participant pay today. The two numbers coincide only when nothing has changed since origination, and something has almost always changed.

3. Instruments Where the Core Model Is Not Enough

3.1 Venture debt with warrants or equity kickers

The instrument must be bifurcated. The debt leg is valued on the yield basis set out above. The warrant is valued separately, ordinarily on an option pricing model calibrated to the volatility of comparable listed companies and to the borrower’s most recent priced equity round. Reporting a single combined number without showing the bifurcation is a routine audit finding, and carrying the warrant at nil or at cost with no supporting model is worse: it understates NAV and misstates the fund’s return profile.

3.2 Convertible instruments

Where conversion is compulsory, or where the conversion economics make it the rational outcome, the instrument is valued on the equity leg. That brings the underlying company’s enterprise valuation into scope, and with it the full IPEV toolkit of market multiples, DCF and price of recent investment. Where conversion is genuinely optional and out of the money, the debt leg dominates and the option is valued as a residual.

3.3 Market-linked and structured debentures

The payoff depends on a reference index, basket or credit event. Valuation requires an option-adjusted model, and the file must document the model selected, each input and the basis of calibration. A vendor quote alone, without the valuer’s own assessment, is not sufficient support.

3.4 Payment-in-kind and moratorium structures

Accrued but uncollected interest must be reflected in the projected cash flows and tested for recoverability, rather than presumed collectible at par. Where the borrower has been unable to service cash interest, that fact is itself evidence bearing on the credit spread.

3.5 Impaired and stressed exposures

Once repayment becomes doubtful, a yield-based model stops being meaningful, because there is no yield at which the contractual cash flows are the expected cash flows. Fair value moves to a recovery-based estimate comprising:

1. The realisable value of the security package, assessed on a distressed rather than a going-concern basis where appropriate.
2. The expected enforcement or resolution timeline.
3. The ranking of the fund’s claim against other creditors.
4. The direct and indirect costs of recovery.
5. Discounting to the valuation date at a rate reflecting the uncertainty of the recovery itself.

Where an insolvency or resolution process is under way, the estimate should be tested against the liquidation value on record and against any resolution plan, with differences explained rather than averaged away.

4. What a Complete Debt Valuation File Contains

1. Engagement letter recording scope, purpose, valuation date, premise and basis of value.
2. Instrument-wise term sheet summary and contractual cash flow schedule.
3. Discount rate build-up for each instrument, with the source for every component.
4. Credit assessment of each borrower, stating the date of the underlying financial information relied on.
5. Calibration analysis against the entry yield or the most recent transaction.
6. Separate valuation of warrants, conversion features and other embedded options.
7. Recovery models for any exposure classified as stressed or impaired.
8. Sensitivity analysis on yield and, where relevant, on recovery and timing assumptions.
9. Reconciliation to the prior valuation date, explaining the movement by cause.
10. Statement of independence, valuer credentials and adherence to the applicable valuation standards.
11. Restriction of use and reliance clauses.

5. Seven Recurring Weaknesses in Debt Fund Valuation

1. Amortised cost presented as fair value. Discussed at 2.3 above, and the first thing a reviewer tests.
2. A uniform discount rate across the portfolio. One yield applied to instruments of different seniority, tenor, security cover and credit quality, which cannot be right and is rarely defended.
3. Stale credit information. Borrower financials twelve to eighteen months old, used with no interim credit update, no covenant compliance check and no repayment history review.
4. Warrants and conversion features carried at nil. Treated as a free option rather than a valued asset.
5. No calibration. The model is never tested against the entry price or the most recent market evidence.
6. Valuation date drift. Portfolio data as at one date, market inputs as at another, with no reconciling note. This matters more since NAV became reportable to the depositories by reference to the valuation date.
7. No prior-period reconciliation. The movement in value is unexplained, which is the first question an auditor, an investor and a regulator will each ask.

6. Conclusion

For a debt-oriented AIF, the technical burden of valuation sits in three places: the credit-calibrated discount rate, the bifurcation of hybrid instruments, and the treatment of stressed exposures. A file that documents those three well will generally withstand audit, investor and regulatory scrutiny. One that does not will not, however competent the arithmetic. The December 2025 IPEV edition, applicable from 1 April 2026, raises the documentation bar on exactly the hybrid structures that venture debt and private credit funds hold most.

7. Frequently Asked Questions

7.1 Can an AIF carry its debt portfolio at amortised cost?

No. The SEBI framework requires fair value. Amortised cost may coincide with fair value where nothing has changed since origination, but that has to be demonstrated rather than assumed.

7.2 Do the IPEV Guidelines apply to debt instruments?

Yes, where the debt is unlisted, non-traded or thinly traded. The IPEV framework is not confined to equity, and the December 2025 edition expanded its guidance on hybrid instruments including venture debt.

7.3 How is a defaulted loan in an AIF debt portfolio valued?

On a recovery basis: realisable value of the security package, expected enforcement timeline and cost, ranking of the claim, discounted to the valuation date. Continuing to accrue contractual interest is not appropriate.

7.4 How should a venture debt warrant be valued?

Separately from the debt leg, ordinarily on an option pricing model calibrated to comparable listed company volatility and to the borrower’s most recent priced equity round. It should not be carried at nil or at cost.

7.5 Does a venture debt fund need a different valuer from a private credit fund?

The eligibility criteria are identical. The competence requirement is not. Venture debt portfolios carry warrants and conversion features requiring option valuation, which is a different skill from credit spread analysis.

7.6 What discount rate should be used for an unlisted NCD?

Not a single prescribed rate. A build-up of the maturity-matched government security yield, a credit spread corroborated against comparable traded paper, an illiquidity premium and instrument-specific adjustments for security, seniority and covenants.

7.7 What is the difference between the independent valuation and NAV?

The independent valuation establishes the fair value of each portfolio instrument. NAV is the scheme-level figure derived from those values after adjusting for cash, liabilities, accrued expenses and the distribution waterfall.

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Marcken Consulting LLP — IBBI-Registered Valuer (Securities or Financial Assets)
Website: marckenconsulting.com
Phone: +91 99980 59923 / +91 99985 39902
Email: crm@marckenconsulting.com

Where a transaction also requires a Merchant Banker’s certificate, that certificate is issued by a SEBI-registered Category-I Merchant Banker within the same coordinated engagement.

This article is general guidance on valuation methodology as understood at the date of publication and is not a substitute for advice on a specific engagement.