INDIA Trends and Developments Contributed by: Tejesh Chitlangi, Sushreet Pattanayak, Pooja Mehta and Anita Jain, IC Universal Legal
Regulatory Developments Domestic AIFs
the outset, reducing risks in the early stages of the investment process. This expansion broadens custodial oversight to smaller funds that were previously exempt. The SEBI has emphasised that custodians affiliated with the fund manager or sponsor must comply with Regulation 20(11A) of the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations), ensuring independent custodial oversight to curb conflicts of interest within the ecosystem. By mandating dematerialisa - tion and strengthening custodial oversight, the SEBI is mitigating operational risks while improving governance and transparency within the AIF space. • Valuation – the SEBI has implemented a standardised approach for the valuation of investment portfolios aiming to ensure fair and transparent disclosure of portfolio values to investors. The valuation of securities, other than unlisted securities and listed securities that are non-traded and thinly traded, for which valuation norms have been laid down by the SEBI (Mutual Funds) Regulations, 1996, must be carried out in accordance with the above regulations, and valuation of unlisted securities and listed securities that are non-traded and thinly traded must be carried out in accordance with the Inter - national Private Equity and Venture Capital Valuation (IPEV) Guidelines. This initiative ensures that valuation principles, methodolo - gies, and standards are consistent across the AIF industry. As a result, the performance of individual AIFs, as well as the overall AIF sec - tor, can be benchmarked based on a uniform valuation methodology, reflecting their perfor - mance in a fair and accurate manner. • Dissolution period – a “dissolution period” for AIFs has been introduced, allowing fund man - agers to manage unliquidated investments beyond the original tenure of AIFs providing
The International Monetary Fund continues to be optimistic about India’s economic prospects, raising its GDP growth forecast for FY 2024-25 to 7%. A diverse set of investors looking to par - ticipate in India’s growing economy are increas - ingly turning towards investment products in the form of SEBI-regulated AIFs, tailored to their specific investment goals and risk appetites. The past few years have seen a surge in regu - latory activity surrounding AIFs, with the SEBI implementing several measures to ensure that enhanced governance norms are adopted by AIFs so that their growth is sustainable. Some of these measures are encapsulated below. • Dematerialisation the SEBI has mandated for all AIF investments made on or after 1 Octo - ber 2024 to be held in dematerialised form. AIF schemes with tenure ending on or before 31 January 2025, or those already in their extended tenure, have been exempted from this requirement. In addition, the SEBI mandated that all AIFs issue units to investors in dema - terialised form only. The aim is to streamline the management of AIF/investors’ holdings by standardising ownership and by transfer track - ing, reducing the potential for operational errors, and ensuring enhanced regulatory oversight. • Custodians – to improve custodial oversight, the SEBI now requires the appointment of a custodian before the first investment is made by any new AIF scheme, regardless of the fund’s corpus size. Previously, this require - ment applied only to Category I and II AIFs with a corpus exceeding INR 500 crore, and all category III AIFs. This change ensures that robust custodial safeguards are in place from
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