This change follows amendments to the SEBI (Alternative Investment Funds) Regulations, 2012, which were updated on January 5, 2024, to mandate dematerialisation for AIFs. 

As per SEBI’s new circular, any investment made by an AIF on or after July 1, 2025, must be held in dematerialised form, regardless of whether the investment is made directly or acquired from another entity. 

However, investments made before this date are exempt unless the investee company is legally required to facilitate dematerialisation or if the AIF, alone or in conjunction with SEBI-registered intermediaries, holds control over the investee company. In such cases, the deadline for dematerialisation has been set for October 31, 2025.

This move is aimed at enhancing transparency and ensuring better tracking of investments. The shift to dematerialisation is expected to reduce the risk of fraud, improve liquidity, and streamline regulatory oversight. By requiring AIFs to hold securities in demat form, SEBI aims to curb non-transparent investment structures and ensure better compliance. 

SEBI has also provided relief for certain AIF schemes, specifically those set to expire (without extensions) on or before October 31, 2025, and those already in an extended tenure as of February 14, 2025. The trustee or sponsor of an AIF must ensure compliance, as this requirement will be reflected in the ‘Compliance Test Report’ mandated under SEBI regulations. The circular is effective immediately and is part of SEBI’s ongoing efforts to bring greater transparency and investor protection to the alternative investment space.