As Sebi's Demat Deadline Comes Near, AIFs Look For Extension, Exemption
The Alternative investment funds (AIF) are facing conundrum as Sebi's directive on dematerialisation nears the deadline and less than five per cent of these funds have completed the dematerialisation process, as per reports.
Those yet to do so are still coordinating with investors for demat account details and are uncertain whether to freeze or halt subscriptions post the specified date. Such actions could have commercial repercussions for the AIFs and lead to fund outflows.
The industry might approach the Securities and Exchange Board of India (Sebi) seeking an extended timeline, grandfathering existing investments, and exemptions for funds nearing their expiration within the next three years.
An official remarked, "Dematerialisation has become a burden on the industry. Given the tight schedules, only a few funds with a limited number of investors who have utilised all their capital have managed to complete the process." Depositories are still revising the essential information they require from the AIFs, with the latest update occurring last Friday.
The official added, "Despite consultations, uncertainties persist. What's necessary is a fundamental overhaul of the entire operational guidelines to better suit the nature of AIFs, instead of trying to fit AIFs into the framework designed for listed securities."
Foreign investors are concerned as they will need to obtain and provide their PAN number to open a demat account and link it to their bank account. Currently, there's no requirement for obtaining a PAN for investing in an AIF, as long as the investor is KYC compliant.
Trusts and partnership firms are not allowed to open a demat account in their name under current regulations. The dematerialisation of joint account holders in AIF units could pose a challenge.
Leelavathi Naidu, Partner at IC Universal Legal, stated, "The regulator could contemplate grandfathering of existing investments and exempt schemes that are still in the process of fundraising and haven't completed the commitment period. The industry is seeking clarity on matters such as exemptions for foreign investors to open bank accounts and the course of action for investors not providing demat accounts."
AIFs issue multiple classes of units to investors and will need to apply for ISINs (International Securities Identification Number) for every series, class, and sub-class. Each generated ISIN number is specific to a paid-up value. Whenever an AIF conducts a drawdown or a distribution, it leads to changes in the net paid-up value of an AIF unit. Drawdowns occur over several years, and units are regularly redeemed throughout the fund's lifespan.
"AIFs would constantly be involved in canceling and creating new ISIN numbers. This is an administrative nightmare and will significantly escalate compliance costs," remarked Deepak Aggarwal, Managing Partner at Bluereservoir Business Services.
The dematerialisation of AIF units was promoted as a move towards digitalisation, transparency, and effective monitoring. Aggarwal argued, "If the goal is digitalisation, AIFs even now issue units and statements of accounts virtually. Additionally, AIF units are privately held and are unlikely to be listed due to the very nature of their operation." Globally, private equity and venture capital investors aren't obliged to hold units in dematerialised form, according to experts.
