Changes to Alternative Investment Fund regulations

Posted On - 20 December, 2023 • By - Tanuj Modi

The Securities and Exchange Board of India (SEBI) in its 203rd board meeting approved amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) (please here to view the board meeting). The amendments aim to facilitate ease of compliance and strengthen investor protection in alternative investment funds (AIFs). The key changes are as follows:

A.  Mandatory Dematerialization:

(i)   Fresh Investments: Any investment made by an AIF after September 2024 must be held in dematerialized form.

(ii) Existing Investments: The existing investments are exempted from this mandatory dematerialisation except in cases:

(a)  where the investee company is required to facilitate dematerialization of its securities under law. It is relevant to note that, recently the central government has mandated dematerialization of securities of private companies (please click here to read more);

(b) investments where the AIF, independently, or with other SEBI-registered entities which are mandated to hold their investment in dematerialised form, has control over the investee company.

However, the above mandatory dematerialization will not be applicable on the investments held by: (a) liquidation schemes of AIFs; (b) schemes of an AIF whose tenure is ending within one year from the date of notifying this amendment in the AIF Regulations; and (c) schemes of an AIF whose tenure has been extended as on the date of notifying this amendment in the AIF Regulations.

B.  Appointment of Custodian:

Under the AIF Regulations, the schemes of category III AIFs and schemes of category I and II AIFs with the corpus more than INR 500 crore are mandatorily required to appoint a custodian. Now, all AIFs are mandatorily required to appoint a custodian. The AIFs may appoint a custodian who is an associate of manager or sponsor of the AIF, subject to similar conditions applicable for permitting related party of sponsor of a mutual fund to act as its custodian, as provided under SEBI (Mutual Funds) Regulations, 1996.

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