AIF Registration

Issuance of units of AIFs in dematerialised form

The Securities and Exchange Board of India (SEBI) released a circular on June 21, 2023, prescribing new rules for issuing units of Alternative Investment Funds (AIFs) in a dematerialised form. It is a significant move aimed at improving transparency and investor protection. The timeframes and compliance requirements for these revisions to the SEBI (AIF) Regulations, 2012, are spelt out in the circular. SEBI is bringing about a transformative change in the operating dynamics of AIFs. This blog will discuss the issuance of units of AIFs in dematerialised form.

Alternative Investment Funds

Alternative investment funds are investment vehicles that take money from sophisticated investors and distribute it among various financial securities in accordance with a predetermined investment strategy. Such a fund’s primary goals are to diversify investors’ portfolios and provide sufficient returns to help them achieve their financial objectives.

High-net-worth people and institutions frequently deploy their capital to these types of investment vehicles. Individual investors can also invest in an AIF if they can meet the requirements.

Dematerialisation

Physical shares and securities can be converted into digital or electronic form and stored in a Demat Account through a process called dematerialisation. The primary goals are to make the buying, selling, transferring, and holding of shares easier and more cost-effective and error-free. Instead of physical certificates, all of your securities are kept in electronic format.

A depository is in charge of keeping a shareholder’s securities in electronic form. These securities are held by a registered Depository Participant (DP). According to the Depositories Act of 1996¹, a DP is a depository agent who offers depository services to traders and investors.

There are now two depositories with SEBI registrations and operating permits in India:

• Central Depository Services (India) Ltd. (CDSL) and 
• National Securities Depository Ltd. (NSDL).

There are risks associated with holding certificates in physical form, including certificate fraud, the loss of valuable certificates, and delays in certificate transfers. Customers can transform their physical certificates into an electronic format through dematerialisation, which gets rid of the aforementioned inconveniences.

Why Is Dematerialisation Needed?

Keeping track of all the paper-based documentation might be challenging at times. Additionally, the volume of paperwork that is growing daily makes it possible to overlook a crucial document. 

It is time and money efficient to obtain duplicate certificates in the event that the original certificates are lost for some reason. Dematerialised shares receive credits and bonuses directly into their accounts, eliminating the possibility of loss in transit. This also results in lower interest rates for loans related to Demat accounts.

AIFs/schemes of AIFs may raise money from any investor under the SEBI (Alternative Investment Funds) Regulations, 2012 (the “AIF Regulations”) by issuing units that represent the beneficial interest of the investors in the scheme. However, it has been noted that the majority of AIF units are still retained in physical form and have not undergone dematerialisation. So dematerialisation has been made mandated by SEBI in its new circular for the interest of the investor.

Key Points of the Circular

AIFs must issue units in dematerialised form in accordance with AIF Regulation 10(aa), subject to any constraints SEBI may impose from time to time.

The following are specified in this regard:

• The updated AIF requirements for all AIF schemes require the dematerialisation of units. The AIF corpus size is used to categorise the timeline for this. The deadline is October 31, 2023, for plans with a corpus equal to or more than Rs 500 crore, and it is extended to April 30, 2024, for schemes with a corpus of less than Rs 500 crore. All units should only be issued in dematerialised form after these dates. 

• Schemes whose term (excluding authorised extensions) ends on or before April 30, 2024, are an exception to this requirement. 

• The Private Placement Memorandum (PPM), AIF-investor agreements, and other fund documents shall regulate the terms of transfer of AIF units held in dematerialised form by an investor.

Particulars	Dematerialisation of all the units issued	Issuance of only dematerialised form of units
Scheme of the AIF with a corpus equal to or more than Rs. 500 crores	Latest by October 31, 2023	November 01, 2023, onwards
Scheme of the AIF with a corpus less than Rs. 500 crores	Latest by April 30, 2023	May 01, 2024, onwards

Instructions to the Depositories

According to the circular, the depositories are hereby instructed to: 

• The depositories are directed to alter the pertinent bylaws, rules, and regulations as necessary to execute the aforementioned clauses.

• Establish a system to ensure that any transfer of AIF units held in a dematerialised form that is subject to Private Placement Memorandum, agreements made between the AIF and the investors, or any other fund documents is carried out in accordance with the foregoing, i.e., only after approval by the AIF/manager of the AIF;

• Inform their members and participants of this circular’s terms and post them on their websites.

The manager of AIF must submit a report on compliance with the terms of this circular on the SEBI Intermediary Portal (www.siportal.sebi.gov.in) in the manner prescribed there. The sponsor and trustee of the AIF shall, as the case may be, ensure that compliance with the conditions of this circular is included in the “Compliance Test Report” issued by the management pursuant to SEBI Circular No. CIR/IMD/DF/14/2014, dated June 19, 2014.

Conclusion

With immediate effect, the circular will go into effect. In order to protect the interests of investors in securities, encourage the growth of the securities industry, and regulate the securities market, this circular is being issued in accordance with the authority granted by Section 11(1) of the Securities and Exchange Board of India Act, 1992.

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1. https://www.sebi.gov.in/acts/act03a.pdf