Relaxation in timelines for holding AIFs’ investments in dematerialised form

Introduction

The Securities and Exchange Board of India has mandated crucial relaxations with regard to the timeline allowed for these Alternative Investment Funds (“AIF”) to hold their respective investments in dematerialised form^[1]. This measure is a modification to the Master Circular for AIFs to ensure a smooth transition while actually complying with the regulatory guidelines.

Explanation

Background and Key Changes

Under the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”), AIFs are required to hold their investments in dematerialised form. Initially, SEBI had given this transition specific timelines in a circular issued on January 12, 2024, and then embedded into Chapter 21 of the Master Circular dated May 07, 2024. Responding to the industry feedback, SEBI has, however, relaxed these timelines to ensure they don’t create any hurdles during the transition phase.

Revised Timelines for Dematerialisation

The key changes introduced in the circular are as follows:

New Investments Post-July 1, 2025: Any investment made by an AIF on or after July 1, 2025, must be held in dematerialised form, regardless of whether it is acquired directly from the investee company or through a secondary transaction.

Exemptions for Existing Investments:

Investments made before July 1, 2025, are exempt from mandatory dematerialisation, except in specific cases:

1. If the investee company is required by law to facilitate dematerialisation of its securities;
2. If the AIF, either alone or along with other SEBI-registered intermediaries, exercises ‘control’ over the investee company as defined under Regulation 2(1)(f) of AIF Regulations.

Deadline for Mandatory Dematerialisation:

For investments falling under the above exceptions, AIFs must hold them in dematerialised form by October 31, 2025.

Exemptions from the Requirement:

Schemes of AIFs whose tenure (excluding extensions) ends on or before October 31, 2025.

Schemes of AIFs already in an extended tenure as of February 14, 2025.

Compliance and Regulatory Oversight

The trustee or sponsor of the AIF must ensure compliance with these provisions through the ‘Compliance Test Report’ prepared by the AIF manager as per Chapter 15 of the Master Circular.

The circular takes effect immediately and has been issued under SEBI’s regulatory authority to protect investor interests and maintain transparency in securities markets.

Conclusion

While SEBI’s call to relax the deliberation timelines for dematerialisation investments in AIFs brings much-awaited relief and flexibility to fund managers and investors alike, the new framework ensures the transition to a fully dematerialised ecosystem continues at the right pace, offering ample time to comply with the bare minimum of regulatory requirements. The AIFs need to plug in new deadlines in their calendars to avoid any regulatory hiccup.

^[1] https://www.sebi.gov.in/legal/circulars/feb-2025/relaxation-in-timelines-for-holding-aifs-investments-in-dematerialised-form_91919.html