An equity fund holds 2.8% of its NAV in Chandrakala Textiles, whose shares are suspended at a last price of Rs 420 after an audit qualification. The valuation committee can hold at Rs 420, mark down 50%, or use a peer multiple implying Rs 260. What does each do to NAV, and to investors who enter or leave this week?

Holding at Rs 420 overstates NAV by about 1.08% if Rs 260 is fair, paying leavers too much and charging entrants too much. The 50% markdown cuts NAV by 1.40%, understating it and doing the reverse. The peer multiple, -1.07%, is the best documented estimate. Support it, with a further discount for the audit risk if the committee can justify one, reviewed every day.

Imagine a housing society that values each member's share of a common hall at last year's price after the roof has caved in. Anyone who sells their flat this week is paid for a hall that no longer exists; the buyer and the members who stay pay for it. A NAV is the price at which money enters and leaves the fund, so a wrong price is a transfer between investors, not just an accounting error. A suspended stockA share in which the exchange has halted trading, so there is no current market price to value it at. has no market price, which forces a judgement.

The holding is 2.8% of NAV at Rs 420. Holding at Rs 420 changes nothing. A 50% markdown takes the position to 1.4% and NAV down 1.40%. The peer multiple at Rs 260 is a 38.1% cut, so NAV falls 1.07%. The choice looks small at the fund level and is large for anyone transacting this week.

Put rupees on it. If Rs 260 is right, keeping Rs 420 overstates NAV by 1.08%. The Rs 60 crore of redemptions are paid about Rs 64 lakh more than their share, and the Rs 40 crore of purchases get units worth about Rs 43 lakh less than they paid. The 50% markdown understates NAV by 0.34%, and the transfers run the other way: leavers are short-changed by about Rs 20 lakh.

The peer multiple, because it is the only option built from evidence. SEBI's valuation principles require the AMC to value a non-traded security at fair value in good faith, with a documented method; confirm the current wording, but a last traded price after a suspension for an audit qualification is hard to call fair. A flat 50% is a guess dressed as prudence, and prudence that underpays leavers is still unfair. Holding at Rs 420 invites the fastest-moving investors to redeem at a stale price, the same first-mover advantageThe gain available to investors who leave a fund before a known loss is reflected in its price, paid for by those who stay. that turns a small problem into a run.

Two cautions keep the answer honest. The peer multiple uses earnings the auditor has just questioned, so the committee may justify a further discount for that risk and must record why. And the value must be reviewed every day, with the reasoning minuted, because new facts, such as a forensic audit or a resumption date, should move the price immediately.