The Securities Exchange Board of India (“SEBI”) on June 21, 2023 issued a circular no. SEBI/HO/AFD/PoD1/CIR/2023/96 on ‘Issuance of units of AIFs in dematerialized form’ (available, here) , which directed all schemes of alternative investment funds (“AIFs”) to dematerialize their units as per the following timeline:

On December 11, 2023, SEBI issued another circular no. SEBI/HO/AFD/PoD1/CIR/2023/186 (“Circular”), which sets out the process to be followed for dematerializing or crediting the units issued in cases where investors are yet to provide demat account details to AIFs.

Key aspects of the Circular are as follows:

1. Units already issued by schemes of AIFs to existing investors who have not provided their demat account details, are required to be credited to a separate demat account named ‘Aggregate Escrow Demat Account’. This account is required to be opened by AIFs for the sole purpose of holding demat units of AIFs on behalf of such investors.
2. Schemes of AIFs with a corpus of more than Rs. 500 Crore (Rupees five hundred crore) are required to credit units already issued to existing investors (on-boarded before November 1, 2023) who have not provided their demat account details, into the Aggregate Escrow Demat Account latest by January 31, 2024.
3. Schemes of AIFs with a corpus of less than Rs. 500 Crore (Rupees five hundred crore) are required to credit units issued to their investors who have not provided their demat account details by April 30, 2024, into the Aggregate Escrow Demat Account latest by May 10, 2024.
4. Units issued by such schemes as on April 30, 2024, to investors who have provided demat account details are required to be credited to the respective investors’ demat accounts at the earliest, but not later than May 10, 202
5. As and when such investors provide their demat account details to the AIF, their units held in the Aggregate Escrow Demat Account will be transferred to the respective investors' demat accounts within 5 (five) working days.
6. Units of AIFs held in the Aggregate Escrow Demat Account can be redeemed, and the proceeds shall be distributed to the respective investors’ bank accounts with a full audit trail of the same.
7. Transfer of units of AIFs from or within the Aggregate Escrow Demat Account has not been permitted.
8. Managers of the AIFs are required to maintain investor-wise KYC details of units held in the Aggregate Escrow Demat Account, including name, PAN, and bank account details, along with an audit trail of the transactions. The same is also required to be reported to depositories and custodians on a monthly basis.
9. The depositories are required to make necessary amendments to their relevant bye-laws, rules, and regulations for the implementation of the provisions in the Circular, including facilitation of the Aggregate Escrow Demat Account for AIFs; and also bring the provisions of the Circular to the notice of their members and participants and disseminate the same on their respective websites.
10. Managers of the AIFs are required to continuously reach out to existing investors to obtain their demat account details and credit the units issued to the investors to their respective demat accounts.
11. The AIF industry and depositories are required to adopt implementation standards as formulated by the pilot standard setting forum for AIFs (“SFA”), along with the two depositories, in consultation with SEBI. Such standards are to be published on the websites of depositories and the industry associations that are part of the SFA, i.e., the Indian Venture and Alternate Capital Association (IVCA), the PEVC CFO Association, and the Trustee Association of India, within 45 (forty-five) days from the issuance of the Circular. Such standards will, inter-alia, include formats for information and records to be maintained by managers of AIFs with respect to investor-wise holding/transactions in the Aggregate Escrow Demat Account and the standard for reporting such details to the depositories and custodians.

Please find a copy of the circular, here.

This update has been contributed by Adity Chaudhury (Partner) and Mayuri Kalelkar (Associate).

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