SEBI issues guidelines for AIFs on holding investment in demat form, custodian appointments

Capital markets regulator SEBI on Monday put in place guidelines for Alternative Investment Funds (AIFs) pertaining to holding their investments in dematerialised form along with the appointment of custodian.

Under the latest guidelines, AIFs are required to hold their investments in dematerialised form, unless exempted by Sebi.

The new framework, effective from October 1, 2024, mandates that any investment made by an AIF after this date must be held in dematerialised form, SEBI said in a circular.

However, investments made before this date have been exempted except in cases where the investee company is legally required to facilitate dematerialisation or when the AIF, alone or with other SEBI registered entities, has control over the investee company.

SEBI also said investments made before October 1, 2024, falling under these two conditions mentioned must be dematerialised by January 31, 2025.

Further, there are exemptions for AIF schemes with tenures ending on or before January 31, 2025, and those in extended tenure as of the circular's date.

The sponsor or manager of an AIF is required to appoint a custodian registered with the board for the safekeeping of the AIF's securities.

A custodian, which is an associate of the sponsor or manager, can only act as a custodian under certain specified conditions.

Among the conditions is that a custodian for a scheme of an AIF must be appointed before the date of the scheme's first investment. Existing schemes of Category I and II AIFs, with a corpus of Rs 500 crore or less and holding at least one investment should appoint a custodian by January 31, 2025.

Under the rule, custodians are required to report or disclose information about AIF investments in the manner specified by Sebi.

The regulator said that Standard Setting Forum for AIFs (SFA), in collaboration with SEBI, will have to formulate implementation standards for reporting AIF investment data under custodianship.

These standards, specifying the format and reporting modalities from AIF managers to custodians and subsequently to SEBI, will be formulated by the SFA.

Managers of AIFs and custodians have been directed to adopt to these implementation standards.

The standards will be published on the websites of industry associations -- the Indian Venture and Alternate Capital Association (IVCA), PE VC CFO Association, and Trustee Association of India -- within 60 days.

An AIF is a privately pooled investment vehicle that mobilises funds from investors to invest in various asset classes such as real estate, private equity, hedge funds, or other alternative investments.