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Guidelines for AIFs with respect to Dematerialization and Appointment of Custodian

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SEBI has recently by way of a circular issued guidelines for Alternative Investment Funds (AIFs) with respect to holding their investments in dematerialised form and appointment of custodian. These guidelines are in furtherance of the SEBI (AIFs) (Amendment) Regulations, 2024, notified by SEBI on January 05, 2024 which mandated that AIFs shall hold their investments in dematerialised form and that the Sponsor or Manager of the AIF shall appoint a Custodian registered with SEBI for safekeeping of the securities. The guidelines specify as under:

Holding investments of AIFs in dematerialised form

Any investment made by an AIF on or after October 1, 2024, must be held exclusively in dematerialized form. Additionally, investments made by an AIF prior to October 1, 2024, are exempt from the dematerialization requirement, except in cases where (i) the investee company of the AIF is legally mandated to facilitate dematerialization of its securities, or (ii) the AIF, either independently or along with other SEBI-registered intermediaries / entities which are mandated to hold their investments in dematerialized form, exercises control over the investee company. Such investments are required to be held in dematerialized form on or before January 31, 2025.

Appointment of Custodian

Under the AIF Regulations, the Sponsor or Manager of the AIF are required to appoint a custodian registered with the Board for safekeeping of the securities of the AIF. SEBI has expanded the mandatory custodian appointment requirement to include schemes with a corpus of ₹500 crore or less. Previously, this norm was applicable only to Cat III AIFs and Cat I and II AIFs with a corpus exceeding ₹500 crore. This mandate now applies to all AIFs. Custodians must be appointed prior to the date of first investment of the scheme. Existing schemes shall appoint custodian on or before January 31, 2025.

Reporting of investments of AIFs

Custodians are obligated to report or disclose information regarding AIF investments in a manner to be specified by SEBI. The pilot Standard Setting Forum for AIFs (SFA), in consultation with SEBI, will establish implementation standards for reporting AIF investment data under custody with the custodian. These standards will outline the format and modalities of reporting by AIF managers to custodians and subsequently by custodians to SEBI. Managers and custodians must adopt and adhere to these standards, which will be published on the websites of industry associations which are part of the SFA, i.e., Indian Venture and Alternate Capital Association (IVCA), PE VC CFO Association, and Trustee Association of India, within 60 days of this circular’s issuance.

The SEBI Circular is available on their website and is also enclosed below.

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com.


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