On May 18, IND SEBI proposed revised investment funds rules.
IND SEBI issued consultation paper on proposed amendment to alternative investment funds (AIF) regulations, 2012, to strengthen various governance mechanisms of AIFs.
Follows IND SEBI Jan. 2023, issued AIF amendment regulations 2023, see #159007.
Objectives
The amendments aim to specify the guidelines for borrowing, to mandate AIFs to hold their securities in demat form only and to mandate the renewal of registration of AIFs.
In addition, to extend the mandate for appointment of custodian to all AIFs and specify maximum extension of tenure by large value fund for accredited investors (LVFs).
Borrowing by Category
The proposed amendments include key provisions on permitted borrowing for category I and II AIFs, including the shortfall in drawdown from an investor while investing.
It has been proposed that category I and category II AIFs shall not borrow funds directly or indirectly or engage in leverage for the purpose of making investments.
Category I and II AIFs may borrow for the purpose of meeting shortfall in drawdown while making investment in an investee company, subject to the specified conditions.
Category I and category II AIFs shall maintain a thirty-day cooling off period between two periods of permissible leverage, as provided in IND SEBI's AIF regulations.
Dematerialization
AIFs shall hold the instruments of their investments only in dematerialized form.
Existing investments made by AIFs in investee companies where the AIF have controlling interest, investments in such companies shall be in dematerialized form.
A time period of 6 months may be provided for dematerialization of the investments.
Other Proposals
Other amendments proposed by IND SEBI include provisions on mandating appointment of custodian for AIFs and the maximum extension of tenure by LVFs.
In addition, provisions on the renewal of registration and grant certifications of AIFs.
Effectiveness
The deadline for comments is May 31, 2023.
Nov. 2023 Regulation Amendments
On Nov. 25, 2023, IND SEBI said board approved proposals in order to facilitate ease of compliance and to strengthen investor protection in alternative investment funds.
It agreed that any fresh investment made by an AIF, beyond Sep. 2024, shall be held in dematerialized form, existing investments made by AIFs have been exempted.
Existing investments are exempted except in cases where the investee company has been mandated under applicable law to facilitate dematerialization of its securities.
Or in cases of investments where the AIF, on its own, or along with other SEBI registered intermediaries/entities which are mandated to hold their investment in dematerialized form, has control in the investee company.
In addition, the said requirement is exempted for investments held by liquidation schemes of AIFs; schemes of an AIF whose tenure (not including permissible extension of tenure) ends within one year from the date of issuance of necessary notification.
Or schemes of an AIF in extended tenure as on date of issuance of notification.
The mandate for appointment of custodian shall now be extended to all the AIFs.
AIFs may appoint a custodian who is associate of manager or sponsor of AIF, subject to conditions similar to those prescribed under SEBI (mutual funds) regulations, 1996 for permitting related party of sponsor of a mutual fund to act as its custodian.
The cost of compliance to schemes coming under this mandate was an average of INR 88k per annum for availing custodial services, based on analysis of sample data.
Documents dated Jan. 5, 2024, received from IND SEBI Jan. 12, summarized Jan. 17.
Jan. 12, 2024 IND SEBI Guidelines
On Jan. 12, 2024, IND SEBI issued circular to guide alternative investment funds (AIFs) re holding their investments in dematerialized form, appointment of custodian.
Any investment made by AIF on/after Oct. 1, 2024 shall be held in dematerialized form only; the investments made by an AIF prior to Oct. 1, 2024 are exempted from the requirement of being held in dematerialized form, subject to prescribed exceptions.
The investments made by an AIF prior to Oct. 1, 2024 which are covered by such exceptions shall be held in dematerialized form by the AIF on/before Jan. 31, 2025.
In relation to appointment of custodian for AIFs, IND SEBI guided that custodian for a scheme of an AIF shall be appointed prior to date of first investment of the scheme.
Existing schemes of Category I and II AIFs with corpus of INR 500 crore and below, holding at least one investment as at Jan. 5, shall appoint custodian by Jan. 31, 2025.
For AIFs with custodians that are associates of their manager/sponsor, their managers shall ensure compliance with regulation 20(11A) of the Securities and Exchange Board of India (alternative investment funds) regulations 2012 on/before Jan. 31, 2025.
Custodians shall report/disclose such information regarding investments of the AIF.
IND SEBI said Pilot Standard Setting Forum for AIFs (SFA), in consultation with IND SEBI, shall formulate implementation standards for reporting data on investments.
IND SEBI guided on preparation of compliance test report, #181016; and information necessary to ascertain compliance with provisions of this circular shall be incorporated in the format for quarterly reporting by AIFs in the IND SEBI Intermediary Portal.
In Apr. 2024, IND SEBI issued AIF (second amendment) regulations, 2024, #209833.
Jun. 2024 IND CDSL Codes for AIF Transactions
On Jun. 6, 2024, IND CDSL issued new transaction status, transaction codes for AIF.
Include transaction status, codes for inter-depository transactions (IDT), off/on market transactions, pledge transactions; DPs are advised to update back-office software.
Regulators
IND CDSL; IND GVT; IND SEBI
Entity Types
B/D; Fiduciary; IA; Inv Co
Reference
Com CDSL/OPS/DP/SETTL/2024/308, 6/6/2024; Cir SEBI/HO/AFD/PoD/CIR/2024/5, 1/12/2024; OG 33004/99, REGD. No. D. L.-33004/99, 19, Reg SEBI/LAD-NRO/GN/2024/163, LAD-NRO/GN/2012-13/04/11262, 1/5/2024; PR 27/2023, 11/25/2023; CP, 5/18/2023; ESG; Citation: Securities and Exchange Board of India (alternative investment funds) regulations 2012; Securities and Exchange Board of India (alternative investment funds) (amendment) regulations 2024;
