Guidelines for AIFs with respect to holding their investments in dematerialized form and appointment of custodian
SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) have been amended and notified on January 05, 2024, with respect to AIFs holding their investments in dematerialized form and appointment of custodian.
Alternative Investment Funds (AIFs):
Definition: AIFs are category of Investments funds that are beyond traditional Investments like stocks, bonds and cash. AIFs pool money from various investors with the aim of investing in different asset classes, strategies, or financial instruments that might not be covered by conventional investment funds.
Holding Investments of AIFs in dematerialized form
General Requirement: According to Regulation 15(1)(i) of AIF Regulations, AIFs are required to hold their investments in dematerialized form, subject to conditions specified by the Board.
Effective Date for Dematerialization: Any investment made by an AIF on or after October 01, 2024, must be held in dematerialized form, regardless of whether it is a direct investment in the investee company or acquired from another entity.
Exemption for Pre-October 01, 2024 Investments: Investments made by an AIF before October 01, 2024, are generally exempt from the dematerialization requirement. However, there are exceptions:
If the investee company is legally required to facilitate dematerialization
If the AIF, alone or with other registered entities, exercises control over the investee company. Investments covered under the above exceptions; the AIF must hold them in dematerialized form by January 31, 2025
Exemptions from Dematerialization Requirement: The dematerialization requirement does not apply to certain schemes of an AIF:
Schemes with a tenure ending on or before January 31, 2025.
Schemes in extended tenure as of the date of the circular.
Custodians of AIFs
The custodian of an Alternative Investment Fund (AIF) is a financial institution or entity responsible for the safekeeping and administration of the fund’s assets, particularly its securities.
Appointed of Custodians for AIFs:
According to Regulation 20(11) of AIF Regulations, the Sponsor or Manager of an AIF is required to appoint a custodian registered with the regulatory authority (referred as to the board)
According to Regulation 20(11A) of AIF Regulations, a custodian that is associated with the Sponsor or Manager of an AIF may serve as a custodian for that AIF, but only if specific conditions outlined in the regulations are met.
Appointment Timeline for Custodian: The custodian for a scheme of an AIF must be appointed before the date of the first investment of that scheme.
Deadline for Existing Category I and II AIFs: Existing schemes of Category I and II AIFs, with a corpus less than or equal to INR 500 crore and holding at least one investment as of the date of the circular, are required to appoint a custodian on or before January 31, 2025.
Compliance Deadline for AIFs with Associate Custodians: For AIFs that have custodians associated with their manager or sponsor, the managers of such AIFs must ensure compliance with Regulation 20(11A) of AIF Regulations on or before January 31, 2025.
SW Point of View:The Guideline is issued in exercise of powers conferred under section 11(1) of the SEBI Act, 1992 to protect the interests of investors in securities and to provide the development of, and to regulate the securities market.
