SEBI Circular

SEBI: AIF Guidelines: Dematerialized Investments & Custodian appointment: Dated 12.01.2024

A new circular has been issued by SEBI notifying all the Depositories, Custodians & Alternative Investments Funds about the latest amendment of the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations). This amendment pertains to the guidelines given for the AIFs holding their investments in dematerialised form, the appointment of a custodian & reporting of investments of AIFs that are under custody. The amendment was sanctioned on January 5, 2024, & hence the circular was issued on January 12, 2024.

The said amendment focuses on three different areas & hence, the circular is divided into three parts, that are:

1. Holding investments of AIFs in dematerialised form.
2. Appointment of Custodian for AIFs
3. Reporting on Investments of AIFs under Custody

Holding Investments of AIFs in Dematerialised Form

Regulation 15 (1)(i) of the AIF regulations deals with conditions laid down for the Alternative Investment Funds’ investments by all the categories. It states that AIFs should hold their investments in dematerialised form, subject to conditions specified by the board. However, this does not apply to certain investments by AIFs or schemes of AIFs that are excluded by the board.

In the subject of holding investments of AIFs in a Dematerialised form, the provision states that investments made by an AIF where the date of investment is on or after October 01, 2024, must mandatorily be held in a dematerialised form only. It does not matter whether the investment by the AIFs is directly in the investee company or by acquisition from another entity; if it is made on or after October 01, 2024, it must be held in dematerialised form only. The investments made before October 01, 2024, are not affected by this proviso, except the ones that fall under the below-mentioned cases:

1. The investee company of the AIF has been directed to take necessary steps under the appropriate laws for the facilitation of the dematerialisation of its securities. 
2. The control over the investee company is exercised by the AIF on its own or in collaboration with other SEBI-registered entities or intermediaries that are authorised to hold their investments in the dematerialised form.

The investments that are made by the AIFs before October 01, 2024, & fall under the above-mentioned cases and must be held and converted in dematerialised form on or before January 31, 2025.

However, the above-mentioned requirement of holding the investments in dematerialised form only must not be applicable to the following cases:

1. Any scheme of an AIF whose tenure (does not include the permissible extension) is ending on or before January 31, 2025.
2. Any scheme of an AIF having an extended tenure as of the date of the circular.

Appointment of Custodian for AIFs

The second component of the circular deals with the Appointment of a Custodian for AIFs.

Regulation 20(11) of the AIF Regulations states that a custodian who is registered with the board shall be appointed. The purpose of such an appointment is to ensure the safekeeping of the AIFs’ securities. Appointment of a custodian must be carried out by the Sponsor or the Manager of the AIF in the manner prescribed by the board. Further, the regulation states that if the said custodian is the associate of the Sponsor or Manager of the AIF, they can act as the custodian only if the following conditions, as mentioned in the regulation, are met.

The conditions are as follows:

1. Appointment of the custodian for any scheme of the AIF must be made before the date of the first investment of the scheme.
2. Appointment of the custodian for such existing schemes that fall under Category I & II AIFs & have a total of less than or equal to INR 500 crore while holding at least one investment as of the date of this circular shall be done on or before January 31, 2025.
3. In circumstances where the associates of the Sponsor or Manager are the custodians, it is the manager’s responsibility to ensure that Regulation 20(11A) of the AIF Regulations is complied with on or before January 31, 2025.

Reporting of Investments of AIFs under Custody

The third fragment of the circular deals with the Reporting of Investments of AIFs under Custody. The custodian is obligated to report & disclose such information concerning the investments of the AIF in the manner as set by the board from time to time.

The circular also talks about the formulation of implementation standards by the pilot Standard Setting Forum for AIFs (SFA) in collaboration with SEBI to report the data on investments of AIFs under the custody of the custodian. The implementation standards so formulated must highlight the format & modes through which a chain can be formed wherein data can be reported to the custodian by the manager of AIF & thereafter to SEBI by the custodian.

The implementation standards formulated above must be acknowledged and adhered to by the manager of the AIFs & the custodian with due diligence. It is also important to note that these standards shall be available on the website of industry associations that are a part of the SFA, i.e., India Venture & Alternate Capital Association (IVCA), PE VC CFO Association & Trustee Association of India within 60 days of issuance of this circular.

It is the responsibility of the Sponsor/Trustee of the AIF to ensure that the provisions of this circular are in compliance with the “Compliance Test Report” issued by the manager as prescribed in para 15.2 of the SEBI Master Circular dated July 31, 2023. The AIFs shall report all the necessary information that is crucial to ascertain proper compliance with this circular, enclosed in a report whose format must be as per the prescribed format for the quarterly reports in the SEBI Intermediary Portal. The manager of the AIF is obligated to disclose all the crucial & necessary information in the above-mentioned quarterly report to SEBI.

The above-mentioned circular was issued in accordance with powers bequeathed under Section 11(1) of the SEBI Act, 1992 & with due approval of the competent authority. The objective of the issuance of this circular is to protect the interests of the investors and to promote the development of the securities market, along with effective regulation of the same.

AIF-Guidelines