The Securities and Exchange Board of India (SEBI) has introduced significant amendments to the Alternative Investment Funds (AIF) Regulations, 2012 ("AIF Regulations"), with changes notified on January 5, 2024, focusing on the requirement for AIFs to hold their investments in dematerialised form. Subsequently, SEBI issued a circular on January 12, 2024, which was later integrated into Chapter 21 of the Master Circular for AIFs dated May 7, 2024 ("Master Circular").
In a recent development, SEBI has relaxed the timelines for AIFs to comply with these dematerialisation requirements. The key modifications to Paragraph 21 of the Master Circular are as follows:
1. All investments made by an AIF on or after July 1, 2025, must be held in dematerialised form. This requirement applies irrespective of whether the investment is made directly in the investee company or acquired from another entity.
2. Investments made by an AIF prior to July 1, 2025, are exempt from dematerialisation, except in the following cases:
a. If the investee company is legally required to facilitate dematerialisation of its securities.
b. If the AIF, alone or with other SEBI-registered intermediaries/entities mandated to hold investments in dematerialised form, exercises control over the investee company. The definition of 'control' is as per Regulation 2(1)(f) of the AIF Regulations.
3. Investments made prior to July 1, 2025, which fall under the above-mentioned conditions, must be dematerialised by October 31, 2025.
4. The dematerialisation mandate will not apply to:
a. Schemes of an AIF whose tenure (excluding permissible extensions) ends on or before October 31, 2025.
b. Schemes of an AIF that are already in extended tenure as of February 14, 2025.
5. The trustee or sponsor of the AIF must ensure that the 'Compliance Test Report' prepared by the manager, in accordance with Chapter 15 of the Master Circular, includes adherence to these dematerialisation provisions.
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