20 SEBI Mandates Dematerialization of AIF Units, Introduces Aggregate Escrow Demat Account

Key Takeaways:

- AIFs must issue units in dematerialized form and credit them directly to investors' demat accounts.

- Existing units must be dematerialized by October 31, 2023 (for AIFs with corpus > INR 500 crore) or April 30, 2024 (for AIFs with corpus < INR 500 crore).

- Units of investors who have not provided demat account details will be temporarily held in an "Aggregate Escrow Demat Account" until the details are provided.

- Depositories have been directed to facilitate the dematerialization process and ensure compliance with AIF regulations.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has introduced a comprehensive framework for the issuance and holding of units of Alternative Investment Funds (AIFs) in dematerialized form. This move aims to enhance transparency, investor protection, and operational efficiency in the AIF industry.

Under the new regulations, all AIFs are required to issue units in dematerialized form, subject to specific timelines based on their corpus size. AIFs with a corpus exceeding INR 500 crore as of October 31, 2023, must dematerialize all units issued after that date and credit them directly to investors' demat accounts. For AIFs with a corpus below INR 500 crore as of October 31, 2023, and newly launched AIFs, the dematerialization requirement applies from May 1, 2024, onwards.

Existing units held by investors must also be dematerialized within the prescribed timelines. AIFs with a corpus exceeding INR 500 crore have until January 31, 2024, to credit existing units to investors' demat accounts or to an "Aggregate Escrow Demat Account" for investors who have not provided their demat account details. AIFs with a corpus below INR 500 crore have until May 10, 2024, to complete this process.

The "Aggregate Escrow Demat Account" is a temporary holding account introduced by SEBI to facilitate the dematerialization process for investors who have not provided their demat account details. Units held in this account can be redeemed, and proceeds will be distributed to the respective investors' bank accounts with a full audit trail.

AIF managers are required to maintain investor-wise KYC details, including names, PAN, and bank account details, for units held in the Aggregate Escrow Demat Account. This information must be reported monthly to depositories and custodians.

To ensure smooth implementation, SEBI has directed depositories to make necessary amendments to their bye-laws, rules, and regulations. Depositories must also facilitate the transfer of units held in dematerialized form, subject to the approval of the AIF or its manager, as per the terms of the private placement memorandum (PPM) or agreements with investors.

FAQs:

Q1: Why is SEBI mandating the dematerialization of AIF units?

A1: The dematerialization of AIF units aims to enhance transparency, investor protection, and operational efficiency in the AIF industry.

Q2: What are the deadlines for dematerializing existing units?

A2: AIFs with a corpus exceeding INR 500 crore must dematerialize existing units by January 31, 2024, while those with a corpus below INR 500 crore have until May 10, 2024.

Q3: What is the purpose of the Aggregate Escrow Demat Account?

A3: The Aggregate Escrow Demat Account is a temporary holding account for units of investors who have not provided their demat account details. Units held in this account can be redeemed, and proceeds will be distributed to the respective investors' bank accounts.

Q4: What are the responsibilities of AIF managers regarding the Aggregate Escrow Demat Account?

A4: AIF managers must maintain investor-wise KYC details, including names, PAN, and bank account details, for units held in the Aggregate Escrow Demat Account. This information must be reported monthly to depositories and custodians.

Q5: What role do depositories play in the dematerialization process?

A5: Depositories have been directed to make necessary amendments to their bye-laws, rules, and regulations to facilitate the dematerialization process. They must also ensure compliance with AIF regulations regarding the transfer of units held in dematerialized form.

Key Precedents:

- SEBI Circular No. SEBI/HO/AFD/PoD1/CIR/2023/96 dated June 21, 2023:

This circular introduced the requirement for AIFs to issue units in dematerialized form and credit them directly to investors' demat accounts.

- SEBI Circular No. SEBI/HO/AFD/PoD1/CIR/2023/186 dated December 11, 2023:

This circular specified the process for crediting units to the Aggregate Escrow Demat Account for investors who have not provided their demat account details.

The regulations and circulars issued by SEBI aim to enhance transparency, investor protection, and operational efficiency in the AIF industry by mandating the dematerialization of units and introducing measures to facilitate the process.

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Here's AIF Circular's Verbatim Chapter 20

Chapter 20 - Issuance and credit of units of AIFs in dematerialised form

Issuance of units of AIFs in dematerialised form{54}:

In terms of Regulation 10(aa) of AIF Regulations, AIFs shall issue units in dematerialised form subject to the conditions specified by SEBI from time to time. In this regard, the following is specified -

20.1. All schemes of AIFs shall dematerialise their units in the following time frame:

20.2. The requirement of dematerialisation of units of AIFs as specified at para 20.1 above, shall not be applicable for schemes whose tenure (excluding permissible extensions in tenure) ends on or before April 30, 2024.

20.3. The terms of transfer of units of AIF held by an investor in dematerialised form shall continue to be governed by the terms of private placement memorandum (‘PPM’), agreements entered between the AIF and the investors and any other fund documents.

20.4. The manager of AIF shall submit report on compliance with aforesaid provisions on SEBI Intermediary Portal (www.siportal.sebi.gov.in) in the format as specified therein and/or as part of quarterly regulatory reporting to SEBI, as the case may be.

Credit of units of AIFs in dematerialised form{55}:

In cases where investors are yet to provide demat account details to AIFs, the process to be followed for dematerialising/crediting the units issued, is specified as under -

20.5. Managers of AIFs shall continue to reach out to existing investors to obtain their demat account details and credit the units issued to them to their respective demat accounts. Depositories shall also aid in this process as advised by SEBI. In this regard, AIF industry and depositories shall adopt implementation standards as formulated by the pilot Standard Setting Forum for AIFs (‘SFA’), along with the two depositories, in consultation with SEBI. The standards shall detail steps to be taken by AIF managers and depositories to reach out to investors and facilitate conversion and credit of their units in demat form.

20.6. Units already issued by schemes of AIFs to existing investors who have not provided their demat account details, shall be credited to a separate demat account named “Aggregate Escrow Demat Account”. This account shall be opened by AIFs for the sole purpose of holding demat units of AIFs on behalf of such investors. New units to be issued in demat form shall be allotted to such investors and credited to the Aggregate Escrow Demat Account.

20.7. As and when such investors provide their demat account details to the AIF, their units held in Aggregate Escrow Demat Account shall be transferred to the respective investors’ demat accounts within 5 working days. No transfer of units of AIFs from/within Aggregate Escrow Demat Account shall be allowed, other than for the aforesaid purpose.

20.8. The timeline for Schemes of AIFs with corpus > INR 500 Crore to credit units already issued to existing investors (on-boarded prior to November 01, 2023) who had not provided their demat account details by then, into Aggregate Escrow Demat Account was January 31, 2024. Units already issued by such schemes to existing investors who had provided demat account details, were to be credited to respective investors’ demat accounts at the earliest, but not later than January 31, 2024.

20.9. Schemes of AIFs with corpus < INR 500 Crore shall credit units issued to their investors who have not provided their demat account details by April 30, 2024, into Aggregate Escrow Demat Account latest by May 10, 2024. Units issued by such schemes as on April 30, 2024, to investors who have provided demat account details shall be credited to respective investors’ demat accounts at the earliest, but not later than May 10, 2024.

20.10. Accordingly, the following is clarified with respect to issuance and credit of units of AIFs in demat form:

20.11. Units of AIFs held in Aggregate Escrow Demat Account can be redeemed and proceeds shall be distributed to respective investors’ bank accounts with full audit trail of the same.

20.12. Managers of AIFs shall maintain investor-wise KYC details of units held in Aggregate Escrow Demat Account, including name, PAN and bank account details, along with audit trail of the transactions. The same shall also be reported to Depositories and Custodians on a monthly basis.

20.13. For this purpose, AIF industry shall adopt implementation standards as formulated by the SFA and depositories jointly, in consultation with SEBI, for compliance with the provisions of this circular. Such standards shall, inter-alia, include formats for information/ records to be maintained by managers of AIFs with respect to investor-wise holding/ transactions in the Aggregate Escrow Demat Account and reporting of the same to Depositories and Custodians.

20.14. Managers of AIFs shall adhere to such implementation standards formulated by the SFA in consultation with SEBI. Such standards are published on websites of Depositories and the industry associations which are part of the SFA, i.e., Indian Venture and Alternate Capital Association (IVCA), PEVC CFO Association and Trustee Association of India.

Directions to depositories for dematerialisation of units of AIFs:

20.15. The Depositories have been directed to:

20.15.1. make necessary amendments to the relevant Bye-laws, Rules and Regulations for the implementation of the provisions of this chapter, including facilitation of Aggregate Escrow Demat Account for AIFs;

20.15.2. put in place a system to facilitate that any transfer of units of AIF held in dematerialised form, which requires approval of the AIF/manager of AIF in terms of PPM or agreements entered between the AIF and the investors or any other fund documents, is carried out accordingly i.e. only after approval of AIF/manager of the AIF;

20.15.3.bring the provisions of this chapter to the notice of their members / participants and also disseminate the same on their websites.

Note:-

{54}SEBI Circular No. SEBI/HO/AFD/PoD1/CIR/2023/96 dated June 21, 2023

{55}SEBI circular no. SEBI/HO/AFD/PoD1/CIR/2023/186 dated December 11, 2023