The Securities and Exchange Board of India (SEBI) has issued a circular on February 14, 2025, providing relaxation in timelines for Alternative Investment Funds (AIFs) to hold their investments in dematerialised form.
This follows amendments made to the SEBI (Alternative Investment Funds) Regulations, 2012 which were notified on January 5, 2024, mandating AIFs to transition their investments to dematerialised form. SEBI had earlier issued a circular on January 12, 2024, outlining the deadlines for compliance, which was later incorporated into Chapter 21 of the Master Circular for AIFs dated May 7, 2024. However, recognizing the operational challenges faced by AIFs, SEBI has now decided to relax these timelines.
Under the revised framework, any investment made by an AIF on or after July 1, 2025, must be held only in demat form, irrespective of whether the investment is made directly in the investee company or acquired from another entity. However, investments made before this date are exempt from this requirement, except in specific cases. If the investee company is legally mandated to facilitate demat of its securities, or if the AIF, either alone or in conjunction with SEBI registered intermediaries, exercises control over the investee company, the investments must be converted into demat form by October 31, 2025. Furthermore, SEBI has clarified that AIF schemes whose tenure ends on or before October 31, 2025, or those that are already in an extended tenure as of February 14, 2025, are not required to transition to dematerialised holdings.
This relaxation provides AIFs with much-needed operational flexibility, allowing them additional time to comply with the dematerialisation requirement without disrupting their existing investment structures. The exemption of most pre-July 2025 investments from dematerialisation significantly reduces the compliance burden, making it easier for AIFs to manage their portfolios. In the long run, the move towards full dematerialisation will enhance transparency, security, and liquidity in AIF investments, benefiting both investors and market participants. However, AIF managers will need to ensure strict compliance with the new framework, particularly in reporting dematerialisation status through the Compliance Test Report, as mandated in Chapter 15 of the Master Circular.
While the relaxed timelines ease the transition, some challenges remain. AIFs that hold investments requiring mandatory dematerialisation under the new provisions must ensure compliance by October 31, 2025, which could create operational and financial strain. Additionally, funds nearing the end of their tenure may need to reassess their exit strategies to align with the regulatory requirements.
Overall, SEBI’s decision strikes a balance between regulatory enforcement and practical feasibility, allowing the AIF ecosystem to gradually transition towards a fully dematerialised investment framework while ensuring investor protection and market stability.
