SEBI Tackles Compliance Challenges for Category II AIFs Under SEBI AIF Regulations, 2012

Securities and Exchange Board of India (“SEBI”), in its 209^th board meeting dated March 24, 2025, has addressed the compliance challenges faced by Category II Alternative Investment Funds (“Category II AIFs”) due to the recent amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”).

Currently, Category II AIFs are required to invest primarily in unlisted companies, in accordance with Regulation 17(a) of the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”). However, after the introduction of Regulation 62A of SEBI LODR Regulations, any entity that had issued listed non-convertible debt securities (“NCDs”) on or before January 1, 2024, which continued to be listed, is not permitted to issue unlisted NCDs. Additionally, in case an entity proposes to issue any listed NCDs on or after January 1, 2024, then its unlisted NCDs which were previously issued, are mandatorily required to be listed. With these changes, there is a likelihood that debt securities that could have been issued in unlisted form, will now have to be listed. The resultant drop in availability of unlisted debt securities can create hindrance for the AIFs in complying with the minimum investment norms in unlisted securities.

In order to address this issue, SEBI has allowed Category II AIFs to treat their investment in listed debt securities with a credit rating of ‘A’ or below equivalent to investment in unlisted securities, to meet the minimum investment requirement in unlisted securities under the AIF Regulations.

To read the press release on board meeting click here

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SEBI Relaxes Timelines for Holding AIFs’ Investments in Dematerialised Form

Securities and Exchange Board of India (“SEBI”), vide its circular dated February 14, 2025, has relaxed the timelines for Alternative Investment Funds (“AIFs”) holding their investments in dematerialised form.

In terms of Regulation 15(1)(i) of the SEBI (AIF) Regulations, 2012, AIFs are mandated to hold their investments in dematerialised form, subject to such conditions as may be specified by SEBI from time to time.

In this regard, SEBI has provided that any investment made by an AIF on or after July 1, 2025 (erstwhile October 1, 2024) shall be held in dematerialised form only, irrespective of whether the investment is made directly in the investee company or is acquired from another entity.

The investments made by an AIF prior to July 1, 2025 are exempted from the requirement of being held in dematerialised form, except where: (a) investee company of the AIF has been mandated under applicable law to facilitate dematerialisation of its securities; or (b) the AIF, on its own, or along with other SEBI registered intermediaries/ entities which are mandated to hold their investments in dematerialised form, exercises control over the investee company. Such investments as mentioned in point (a) and (b) which are made prior to July 1, 2025 shall be held in dematerialised form by the AIF on or before October 31, 2025 (erstwhile January 31, 2025).

Further, the aforesaid requirement of holding investments in dematerialised form shall not be applicable to: (a) scheme of an AIF whose tenure (not including permissible extension of tenure) ends on or before October 31, 2025; and (b) scheme of an AIF which is in extended tenure as on February 14, 2025 (erstwhile January 12, 2024).

To read the circular click here

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