The SEBI recently notified amendment to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”), which have come into force from January 5, 2024 onwards (the “Amendment”). The Amendment introduces three pertinent modifications to the existing AIF regulations, which are enlisted below:

Amendments in detail

1. Insertion in Regulation 15, sub-regulation (1) after clause (h): Regulation 15 (General Investment Conditions) as the name suggests, enlists the conditions to be observed by all categories of AIF, for their investments. As per the insertion, AIF shall hold their investments in dematerialized form and it remains subject to any conditions specified by SEBI from time to time. A proviso has also been provided to this new regulation which lays down exceptions for this requirement, namely (i) investments by AIF in such instruments, which are not eligible for dematerialization, (ii) investments held by a liquidation scheme of an AIF which is not available in dematerialized form, and iii) such other, (a) investment by AIF and (b) other scheme of AIF, as may be notified by SEBI.
2. Substitution of Regulation 20, sub-regulation (11): Regulation 20 (General Obligations) forms part of Chapter IV (General Obligations and Responsibilities and Transparency) of the AIF Regulations. It lays down amongst others the responsibilities of the manager of AIF, and mandates conformity with, (i) the Code of Conduct under Fourth Schedule of the AIF Regulations, (ii) the AIF Regulations, placement memorandum, agreements with investors and other applicable laws etc.
   
   Sub-regulation 11 now provides for, (i) the appointment of a custodian, who is registered with SEBI, (ii) by the sponsor or manager of AIF, (iii) to safeguard the securities of the AIF. It has now been mandated for all types of AIFs, while previously it was applicable only to AIFs having corpus of more than INR 5,00,00,00,000 (Indian Rupees five hundred crores). Additionally, a new proviso has been inserted, whereby the custodian is required to report and disclose information regarding investments of AIF in a manner specified by SEBI.
3. Insertion of Regulation 20, sub-regulation 11A: The above regulation for appointment of custodian, is accompanied with a new regulation that lays down certain conditions to be met for such appointment of a custodian, who is an associate of the Sponsor or Manager of an AIF, to act as a custodian for that AIF. It requires:
   the sponsor or manager to have a net worth of atleast INR 2,00,00,00,00,000 (Indian Rupees twenty thousand crores),
   50% (fifty percent) or more of the directors of the custodian to not represent the interest of the sponsor or manager or their associates,
   the custodian and the sponsor or manager of the AIF to not be subsidiaries of each other,
   the custodian and the sponsor or manager of the AIF to not have common directors, and
   the custodian and the manager of the AIF to sign an undertaking to act independently of each other in their dealings.

Author`s View: 

These amendments to the AIF Regulations reflect a strategic move towards fortifying investor protection and streamlining operational practices in the alternative investment landscape. The insistence on adopting to the dematerialized form for holding investments align with modern financial trends, and the universal mandate for custodian appointment ensures a standardized/independent mechanism to safeguard interests of investors. The conditions outlined in Regulation 20 (11A) for custodian appointment underscores a commitment towards robust governance. These modifications enhance the overall transparency, mitigate conflicts of interest and represents regulatory practice that fosters resilient and accountable investment environment in India.

The Amendment to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 is accessible here. Feel free to reach out for any insights or recommendations you may have.

Please find attached a copy of the Amendment.

This update has been contributed by Jitendra Soni (Partner) and Ojaswini Mandhan (Associate).

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