AIF Regulations: All units to be dematerialised after September 2024

The press statement from the Securities and Exchange Board of India (Sebi) stated that this has been done to facilitate ease of compliance and to strengthen investor protection in AIFs.

Any investment made in alternative investment funds (AIFs) after September 2024 will have to be in a dematerialised form, said the regulator after the Board meeting held on November 25.

Also, all AIFs will now will to appoint a custodian, which is a requirement that is only placed on select AIFs previously.

The press statement from the Securities and Exchange Board of India (Sebi) stated that this has been done to facilitate ease of compliance and to strengthen investor protection in AIFs.

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The Chairperson of Sebi, Madhabi Puri Buch said, "Existing investments have been exempted... except in two cases, one where the investee company is anyway mandated under the law to dematerialise or where the AIFs along with other registered intermediaries have controlling interest in the company and therefore can ensure that the dematerialisation happens."

"Further, in consultation with the industry, it was felt there needs to be certain exemptions," added Buch

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Therefore there are exemptions for investments held by liquidations schemes for AIFs; schemes of an AIF whose tenure ends within a year from the date of issuance of necessary notification in this regard; and for schemes of an AIF which are in extended tenure as on the date of issuance of the notification.

The consultation paper released on this, dated February 3, 2023, noted that most of the AIFs are not dematerialised.

It said, "As on December 31, 2022, there are 1022 AIFs registered with SEBI. As per the information collected from depositories, it is observed that only 12 ISINs have been created with CDSL for 5 schemes of AIFs as on October 03, 2022 and 87 ISINs have been created with NSDL for 29 schemes of AIFs as on December 20, 2022. It is understood from the discussion with depositories that the aforesaid schemes of AIFs have dematerialised their units upon demand/request from their investors."

It noted that AIFs preferred issuing units in physical form for various reasons, such as limited number of investors in the schemes and manager of AIFs prefer to retain control with respect to transfer of units of AIFs by investors.

Despite these, the paper noted that dematerialisation was essential.

It added, "Dematerialization of units of AIFs is a step towards digitalization of all types of financial securities and is envisaged to facilitate transparency and adequate monitoring."