SEBI’s Dematerialisation Mandate: A Majority OF AIFs Get ISINs

Over 99% of the 301 Alternative Investment Funds (AIFs) in the country with corpus of INR 500 Cr and above have obtained the International Securities Identification Numbers (ISINs) from the depositories, as per the Indian Venture and Alternate Capital Association (IVCA) and the Private Equity Venture Capital Chief Financial Officer Association (PEVCCFOA).

ISINs are 12-digit alpha-numeric codes that uniquely identify a security. ISINs are issued for bonds, equities, commercial papers, and warrants. The codes do not contain information characterising financial instruments but rather serve to uniformly identify a security for trading and settlement purposes.

The development comes months after the Securities and Exchange Board of India (SEBI) issued a circular directing AIFs with a corpus of INR 500 Cr and above to dematerialise their units by October 31, 2023.

Other AIFs, with corpus less than INR 500 Cr, have to dematerialise their units by April 30, 2024.  

For the uninitiated, an AIF comprises investment funds that are privately pooled. It invests in private equity, venture capital, managed funds, and hedge funds, among others. AIFs issue multiple classes of units to investors.

Dematerialisation essentially means transforming the physical shares and securities into digital or electronic form, ensuring better safety, convenience and efficiency. 

ISINs & Dematerialisation

Following SEBI’s notification, AIFs had to apply for ISINs for every series, class and sub-class of their units.

Speaking on the matter, Siddarth Pai, founding partner at 3one4 Capital said that getting ISINs is the first and the toughest step in the process of dematerialisation. 

“Once the ISIN is generated, the dematerialisation process becomes a lot easier to undertake as it happens via the corporate action route. This involves giving details of the investors, their holding in the AIF, their demat details, etc to the depositories for credit of units to their accounts. This is an ongoing process,” he said.

Pai is also the co-chair of the regulatory affairs committee at IVCA and one of the founding members of PEVCCFOA.

A media report earlier last month had said that less than 5% of the AIFs with a corpus of INR 500 Cr or more had dematerialised their units and a majority were in a fix. The report also said that every ISIN number is specific to a paid-up value and every time an AIF makes a drawdown or a distribution, it changes the net paid-up value. 

Higher Investor Protection

Pai said that the AIFs obtained the ISINs due to concerted efforts by the depositories – National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CSDL) – and AIF industry bodies IVCA and PEVCVCFOA.

“The entire operating framework, manner of dematerialisation and guidelines were done in consultation with industry and under the guidance of SEBI in a collaborative manner. Dematerialisation will help increase the guardrails for investor protection and allow for easier onboarding and KYC of investors into AIFs,” he said.

In the recent past, SEBI has taken a number of new measures related to AIFs. Earlier, it slashed the validity period of approval granted to AIFs and VC funds to make overseas investments to four months from six months earlier. The market regulator also changed the quarterly reporting format for AIFs two months ago.

Meanwhile, Pai is of the opinion that dematerialisation will make the KYC process and onboarding of investors easier for AIFs.

Dematerialisation of AIF units will ensure that digital initiatives like the consolidated account statement, account aggregator, annual information statement by CBDT, etc., will reflect AIF holdings. This gives investors a consolidated insight into their financial holdings, he added.

The government has been pushing for dematerialisation as it brings in higher transparency, efficiency, and safety. Recently, the Ministry of Corporate Affairs also issued a notification mandating dematerialisation of securities for unlisted companies. 

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