The SEBI has mandated that as per Regulation 15(1)(i) of AIF Regulations, all AIFs must hold their investments in a dematerialized form and has issued guidelines and timeline for the same:
Mandatory Dematerialization Post-October 2024: Any investment made by an AIF on or after October 01, 2024, must be in dematerialized form. This applies irrespective of whether the investment is made directly in the investee company or acquired from another entity.
Exemptions and Conditions: Investments made prior to October 01, 2024, are exempted from this requirement, with two key exceptions. Firstly, if the investee company is legally required to facilitate dematerialization, and secondly, if the AIF, alone or with other SEBI-registered entities, exercises control over the investee company.
Compliance Deadline: AIFs must ensure that investments falling under the exceptions mentioned are held in dematerialized form by January 31, 2025.
Exceptions to the Rule: Certain AIF schemes are not subject to this requirement, notably those whose tenure ends or is in extended tenure as of January 31, 2025.
B. The Critical Role of Custodians
The amendments also emphasize the importance of custodians in safeguarding the securities of AIFs.
Appointment of Custodians: As per Regulation 20(11) of AIF Regulations, AIFs are required to appoint a custodian registered with SEBI for the safekeeping of their securities. This is a critical move to enhance the security and integrity of AIF investments.
Compliance for Existing Schemes: Existing Category I and II AIFs with a corpus of up to INR 500 crore must appoint a custodian by January 31, 2025. This is particularly significant for ensuring the safeguarding of investor interests.
Regulations for Associated Custodians: AIFs utilizing custodians that are associates of their managers or sponsors must ensure compliance with Regulation 20(11A) by the January 2025 deadline.
C. Enhanced Reporting and Transparency
The amendments also introduce rigorous reporting standards for investments under custody.
Standard Setting for Reporting: The pilot Standard Setting Forum for AIFs (SFA), in collaboration with SEBI, is tasked with formulating standards for reporting data on AIF investments under custody. This ensures uniformity and clarity in reporting.
Adherence to Standards: Both AIF managers and custodians must adhere to these implementation standards, further enhancing the transparency and accountability of AIF operations.
Incorporation in Compliance Reports: The trustee or sponsor of an AIF must ensure that compliance with these provisions is included in their regular reporting to SEBI.
