SEBI Issues Circular on Dematerialization and Custodian Appointment for AIF Investments

Key Takeaways:

1. Dematerialization of AIF Investments:

AIFs are required to hold their investments in dematerialized form, with certain exemptions and deadlines specified.

Investments made by AIFs on or after October 01, 2024, must be held in dematerialized form.

Investments made prior to October 01, 2024, are exempted, with specific conditions for dematerialization.

Certain schemes and tenures are exempt from the dematerialization requirement.

2. Appointment of Custodian for AIFs:

The Sponsor or Manager of the AIF must appoint a custodian registered with SEBI for safekeeping of the AIF’s securities.

Conditions for the appointment of custodians, including deadlines for existing schemes, are specified.

3. Reporting of Investments under Custody:

Custodians are required to report or disclose information regarding AIF investments in a manner specified by SEBI.

The Standard Setting Forum for AIFs (SFA) will formulate implementation standards for reporting data on AIF investments under custody.

Synopsis:

The Securities and Exchange Board of India (SEBI) has issued a significant circular, SEBI/HO/AFD/PoD/CIR/2024/5, dated January 12, 2024, which amends the SEBI (Alternative Investment Funds) Regulations, 2012. This circular introduces crucial guidelines related to the dematerialization of Alternative Investment Fund (AIF) investments and the mandatory appointment of custodians. Let’s break down the key points and guidelines mentioned in the circular:

Circular Details:

Circular No.: SEBI/HO/AFD/PoD/CIR/2024/5

Date: January 12, 2024

Issued to: All Alternative Investment Funds, All Depositories, All

Custodians

Subject: Guidelines for AIFs with respect to holding their investments in dematerialized form and appointment of custodian

Key Guidelines:

A. Holding Investments of AIFs in Dematerialized Form:

1. Dematerialization Requirement: AIFs are required to hold their investments in dematerialized form, subject to conditions specified by SEBI.

2. Investments Made After October 01, 2024: Any investment made by an AIF on or after October 01, 2024, must be held in dematerialized form, regardless of whether the investment is made directly in the investee company or acquired from another entity.

3. Exemptions for Investments Made Prior to October 01, 2024:

Investments made by an AIF prior to October 01, 2024, are exempted from the dematerialization requirement, except in specific cases such as when the investee company is mandated to facilitate dematerialization of its securities or when the AIF exercises control over the investee company.

Investments meeting the conditions specified in the exemptions must be held in dematerialized form by the AIF on or before January 31, 2025.

4. Exemptions from Dematerialization Requirement: Certain schemes of AIFs are exempt from the requirement of holding investments in dematerialized form, including schemes with tenures ending on or before January 31, 2025, and schemes in extended tenure as of the date of the circular.

B. Appointment of Custodian for AIFs:

1. Custodian Appointment Requirement: The Sponsor or Manager of the AIF is mandated to appoint a custodian registered with SEBI for safekeeping of the AIF’s securities, as per the conditions specified by SEBI.

2. Timeline for Custodian Appointment:

The custodian for a scheme of an AIF must be appointed prior to the date of the first investment of the scheme.

Existing schemes of Category I and II AIFs with corpus less than or equal to INR 500 crore and holding at least one investment as of the date of the circular must appoint a custodian on or before January 31, 2025.

Managers of AIFs with custodians that are associates of their manager or sponsor must ensure compliance with the regulations by January 31, 2025.

C. Reporting of Investments of AIFs under Custody:

1. Reporting Requirement: Custodians are required to report or disclose information regarding investments of the AIF in a manner specified by SEBI.

2. Formulation of Implementation Standards: The Standard Setting Forum for AIFs (SFA), in consultation with SEBI, will formulate implementation standards for reporting data on investments of AIFs under custody with the custodian. These standards will specify the format and modalities of reporting of data by the manager of AIF to the custodian and subsequently, by the custodian to SEBI.

3. Compliance Test Report: The trustee/sponsor of AIF must ensure that the Compliance Test Report prepared by the manager includes compliance with the provisions of the circular.

Conclusion:

The circular aims to enhance transparency and security in the handling of AIF investments by introducing guidelines for dematerialization and the appointment of custodians. It is crucial for AIFs, custodians, and other relevant entities to adhere to these guidelines within the specified timelines to ensure compliance with the amended regulations.

The circular is available on the SEBI website under the categories “Legal framework – Circulars” and “Info for – Alternative Investment Funds”.

FAQ:

Q1: What is the deadline for dematerialization of AIF investments made prior to October 01, 2024?

A1: Investments made prior to October 01, 2024, which meet specific conditions must be held in dematerialized form by the AIF on or before January 31, 2025.

Q2: When should the custodian for a scheme of an AIF be appointed?

A2: The custodian for a scheme of an AIF should be appointed prior to the date of the first investment of the scheme.

Q3: What information should be included in the Compliance Test Report prepared by the manager of AIF?

A3: The Compliance Test Report should include compliance with the provisions of the circular issued by SEBI.

Q4: Where can the circular be accessed?

A4: The circular is available on the SEBI website under the categories “Legal framework – Circulars” and “Info for – Alternative Investment Funds”.