Dematerialised units

An investor in an AIF trust holds units. The units represent that investor's beneficial interest in the corpus.

Those units used to exist as entries in the fund's own records. They no longer do. All schemes of AIFs are mandated to issue units in dematerialised form only.

So the record now sits with a depository, not with the manager. The investor receives unit statements from the depository periodically, showing the balance held and the transactions during the period.

That is a real protection, and the workbook says so plainly: the compliance requirement protects investor interests. An investor no longer has to take the manager's word for how many units they own.

Each unit issued in demat form is given an ISIN — the same kind of code a listed share carries. The fund then uploads the NAV for each ISIN into the depository system, so the value appears where the holding appears.

Two separate rules are worth keeping apart. Units of the AIF must be in demat form. And the AIF's own investments must also be held in demat form, subject to some exceptions.

Three distinct requirements, in three different chapters.

1. Units must be issued in demat form. Section 13.4 states that units representing unit capital held in the fund by an investor have to be issued in dematerialised mode only, and that the requirement is specified as part of the subscription agreement. Accordingly, investors receive their unit statements from the depository on a periodical basis, showing the balance held and transactions during the period. The workbook cites SEBI circular SEBI/HO/AFD/PoD1/CIR/2023/96 dated 21 June 2023 there, and section 14.15 cites SEBI/HO/AFD/PoD1/CIR/2023/186 dated 11 December 2023 for the mandate that all schemes of AIFs issue units in dematerialised form only.

2. Each unit gets an ISIN, and the NAV is uploaded against it. Section 14.15 (Reporting of Value of units of AIFs) requires that each unit of an AIF issued in dematerialised form be assigned a particular International Securities Identification Number (ISIN). AIFs, through their RTAs, must upload the latest NAV corresponding to each ISIN in the depository system before 1 May 2026 or within 30 days from the date of valuation of the investment portfolio, whichever is later. The AIF Manager is responsible for accurate and timely uploading.

The valuation date for this purpose is defined:

Depositories must carry a disclaimer wherever an AIF NAV is displayed, stating that the NAV shown is on the basis of the valuation methodology and accounting practice followed by the respective AIF and that the reader should refer to the fund documents.

3. The AIF's own investments must also be in demat form. Section 17.9.1 requires AIFs to hold their investments in dematerialised form, subject to conditions specified by SEBI. Any investment made by an AIF on or after 1 July 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. Three exceptions apply:

• investments in instruments not eligible for dematerialisation;
• investments held by a liquidation scheme of the AIF that are not available in dematerialised form;
• such other investments and schemes as SEBI may specify.

Why the custodian is involved. Because securities held by AIFs are in dematerialised form, the custodian is responsible for settlement of transactions and for ensuring that the dematerialised investment accounts of the fund reflect the correct position at any time.

One consequence on the RTA side. Appointment of a registrar and transfer agent is compulsory for an AIF, because RTAs registered under the SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 act as collecting agents for stamp duty on the issue, transfer and sale of units of AIFs.

Mrs Anjali Deshmukh commits Rs 2 crore to Sahyadri Growth Fund II. On her first drawdown of Rs 50 lakh she is allotted units.

How the allotment now works:

Suppose the unit price on allotment is Rs 100. She is credited 50,000 units, and that number sits in a depository record the manager cannot edit. That is the investor protection the workbook points to.

Now the NAV reporting. The scheme's portfolio is valued by an independent valuer whose report is dated 31 March. The NAV comes out at Rs 128.40 per unit.

The valuation date is the date of the valuation report, being 31 March. The NAV must be uploaded against the scheme's ISIN within 30 days of it, so by 30 April. Her depository statement then shows 50,000 units worth Rs 64,20,000, with SEBI's disclaimer beside it noting that the NAV follows the fund's own valuation methodology.

Had the fund used an internal valuer, the 30 days would run from the date the valuation was documented in the fund's internal records, which may be a different date entirely.

The investment side, which is a separate rule. In August the fund agrees to buy shares of Vindhya Foods Pvt Ltd from an existing shareholder.

The fund also holds compulsorily convertible debentures of an older investee that were never eligible for dematerialisation. Those fall in the first exception and may stay as they are.

And what the investor sees on the screen. Beside the Rs 64,20,000, the depository must print SEBI's prescribed disclaimer: that the NAV shown is on the basis of the valuation methodology and accounting practice followed by the respective AIF, and that the reader should refer to the fund documents for details. So the depository record proves how many units she owns. It does not certify what they are worth — that number is still the manager's, and the manager is the one responsible for uploading it accurately and on time.

Three chapters carry a piece of this. Chapter 13, section 13.4 (the Subscription or Contribution Agreement), requires units to be issued in dematerialised mode only. Chapter 14, section 14.15 (Reporting of Value of units of AIFs), adds the ISIN and the NAV upload. Chapter 17, section 17.9.1, requires the AIF's investments to be held in demat form from 1 July 2024, with three exceptions.

Expect a date question — investments made on or after 1 July 2024 must be in demat form, irrespective of whether they are subscribed directly or acquired from another entity. Expect the exceptions listed: instruments not eligible for dematerialisation, and holdings of a liquidation scheme not available in demat form. And expect the NAV upload timing: before 1 May 2026 or within 30 days from the date of valuation of the investment portfolio, whichever is later, with the valuation date being the report date for independent valuers and the internal documentation date for internal valuers.

• Two different demat rules. The units of the AIF must be issued in demat form; the AIF's investments must separately be held in demat form. Different chapters, different dates, different exceptions.
• The investment rule applies irrespective of how the investment is acquired. Buying from an existing shareholder does not escape it.
• The exceptions are narrow. Instruments not eligible for dematerialisation, and a liquidation scheme's holdings that are not available in demat form. Inconvenience is not an exception.
• The NAV deadline is a whichever-is-later test — before 1 May 2026, or 30 days from the valuation date. Answering only 30 days, or only the date, is half the rule.
• The valuation date differs by who valued. Report date for an independent valuer; internal documentation date for an internal valuer.
• The NAV is uploaded by the AIF through its RTA, and the manager is responsible for accuracy and timeliness. The depository only displays it, with a disclaimer.
• Each ISIN is per scheme's units, and the NAV is uploaded corresponding to each ISIN.
• The RTA appointment is compulsory because of stamp duty collection, not because of dematerialisation. Two separate reasons that are easy to merge.