Are Your Investments Aligned? Unpacking India's Recent Changes in AIF Regulations

The Securities and Exchange Board of India (SEBI) has amended the Alternative Investment Funds (AIFs) Regulations, 2012, specifically focusing on the holding of investments in dematerialized form and the appointment of custodians. The amendments were notified on January 5, 2024, and are detailed below:

A) Holding Investments in Dematerialized Form:

i) AIFs are mandated to hold their investments in dematerialized form, with conditions specified by SEBI. The requirement is not applicable to certain investments specified by the Board.

ii) Investments made by an AIF on or after October 1, 2024, shall be held in dematerialized form. 

iii) Investments made prior to October 1, 2024, are exempted, if the investee company is mandated to facilitate dematerialization or if the AIF, alone or with other SEBI-registered entities, exercises control over the investee company.

iv) Investments made by AIF prior to October 01, 2024, which are covered under para (iii) above shall be held in dematerialized form by the AIF on or before January 31, 2025.

v) The above does not apply to AIF schemes ending on or before January 31, 2025, and AIF schemes in extended tenure as of the date of the circular.

B) Appointment of Custodian for AIFs:

i) As per regulation 20(11) Sponsors or managers of AIFs shall appoint a SEBI-registered custodian for safekeeping of AIF securities. 

ii) Custodians associated with the sponsor or manager may act only when fulfilling the conditions specified under regulation 20(11A).

iii) A custodian for an AIF scheme shall be appointed before the date of the scheme's first investment.

iv) Existing Category I and II AIFs, with corpus ≤ INR 500 crores and at least one investment as on the date of this circular, shall appoint a custodian by January 31, 2025.

v) Compliance with Regulation 20(11A) of AIF Regulation by AIFs with custodians that are associates of their manager or sponsor, managers of such AIFs shall be ensured by January 31, 2025.

C) Reporting of AIF Investments under Custody:

i) Custodians shall report or disclose AIF investment information in a manner specified by SEBI.

ii) The Standard Setting Forum for AIFs (SFA), in consultation with SEBI, shall formulate implementation standards for reporting AIF investment data.

Source: SEBI | Guidelines for AIFs with respect to holding their investments in dematerialised form and appointment of custodian