Under the SEBI (Alternative Investment Funds) Regulations, 2012, AIFs were initially required to hold their investments in dematerialized form within a specified timeline. The SEBI Circular of January 12, 2024, later encapsulated this requirement within Chapter 21 of the Master Circular for AIFs, published on May 7, 2024. The intent was to streamline the process of tracking and managing investments, enhance transparency, and reduce risks associated with physical securities.
However, following discussions and requests from AIFs and other stakeholders, SEBI has decided to relax the initial timeline to ensure that funds have sufficient time to comply with the new requirements without undue burden.
Key Changes in the Relaxed Timelines
Investments After July 1, 2025: From July 1, 2025, all investments made by AIFs, whether directly in the investee company or acquired from another entity, will be required to be held in dematerialized form. This includes any new investments made post this date, ensuring uniformity in the treatment of securities and streamlining the entire investment process.
Investments Made Before July 1, 2025: Investments made by AIFs prior to July 1, 2025, are generally exempt from the requirement to hold investments in dematerialized form. However, there are two important exceptions to this rule:
- If the investee company has been mandated by applicable law to facilitate the dematerialization of its securities, the AIF must comply with the dematerialization requirement.
- If the AIF (either individually or along with other SEBI-registered intermediaries/entities) exercises control over the investee company, the AIF will also be required to hold its investments in dematerialized form. The term ‘control’ is defined under Regulation 2(1)(f) of the AIF Regulations.
Compliance and Reporting
The trustee or sponsor of an AIF must ensure that the Compliance Test Report prepared by the AIF manager, as outlined in Chapter 15 of the Master Circular for AIFs, includes adherence to the provisions of this new circular. This ensures that AIFs are accountable for their compliance with the updated timeline.
Immediate Effect and Regulatory Authority
This relaxation is effective immediately upon issuance of the circular, providing AIFs with the flexibility to adjust their internal processes and systems accordingly. The circular was issued under the authority of Section 11(1) of the Securities and Exchange Board of India Act, 1992, and Regulation 15(1)(i) and Regulation 36 of the AIF Regulations, 2012, to safeguard investor interests and regulate the securities market.
