Alternative investment funds (AIFs) are in a fix over the market regulator’s diktat to dematerialise units of funds with a corpus of ₹500 crore or more by October 31, reported Business Line.
Less than 5 per cent of these funds have dematerialised their units, said people in the know. Those that haven’t do not have clarity on whether to freeze the account or suspend further subscriptions after the said deadline. Any such actions may commercially impact the AIFs and lead to outflows.
The industry may reach out to the Securities and Exchange Board of India (SEBI) seeking extension of timeline, grandfathering of existing investments and exemption for funds whose life is ending in the next three years.
“Dematerialisation has become a millstone around the industry’s neck,” said an official.
“Given the tight timelines, only a few funds with limited investors who have drawn down all their capital have been able to complete the process.”
Depositories are still rewriting the basic information they need from AIFs, with the latest change happening last Friday, the official said.
“A fundamental rewrite of the entire operating guidelines is needed,” he added.
Overseas investors are worried as they will have to obtain and/or furnish their PAN number to open the demat account and link it to the bank account.
Trusts and partnership firms are not permitted to open a demat account in their name. Dematerialisation of joint account holders in AIF units could pose a challenge.
“The regulator could consider grandfathering of existing investments and exempt schemes which are still in the process of fundraising and have not exhausted the commitment period. The industry is awaiting clarity on aspects such as exemption to foreign investors to open bank accounts and the course of action for investors not providing demat accounts,” said Leelavathi Naidu, Partner, IC Universal Legal.
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.
Every ISIN number is specific to a paid up value. Every time an AIF makes a drawdown or makes a distribution, it results in changes to the net paid up value. Drawdowns are made over several years and units are redeemed over the life of the fund.
“AIFs would perpetually be in the mode of cancellation and creation of new ISIN numbers. This is an administrative nightmare and will increase the cost of compliance manifold,” said Deepak Aggarwal, Managing Partner, Blue Reservoir Business Services.
Dematerialisation of AIF units is touted as a step towards digitisation. “Even today, AIFs issue units and statements of accounts virtually. The units are privately held and are unlikely to be listed due to the nature of how AIFs operate,” said Aggarwal.