Investment Manager approval
Also written Investment Manager approval (AIF units)
The requirement that an off-market transfer or pledge of AIF units in dematerialised form succeeds only after the fund's Investment Manager has approved it, where the AIF's own documents require that approval.
In plain language
AIF units can be pledged or transferred off-market in dematerialised form, just like other securities. But an AIF is not an ordinary demat holding — the fund's own documents, the PPM and agreements with investors, may say who must sign off before that happens.
When the fund documents require it, the transaction goes through only after the fund's Investment Manager approves it. This is a depository-operations gate, not a rule about who an Investment Manager is — that broader role sits in the AIF Regulations paper, not here.
How it works
From Chapter 7, section 7.7.1 (Off-market transfer and pledge creation of AIF units): the off-market transfer and pledge creation of AIF units held in dematerialised form "will get executed successfully only after the approval of Investment Managers (IMs)."
Terms of transfer or pledge creation continue to be governed by the AIF's PPM, the agreements between the AIF and its investors, and any other fund documents. If those fund documents require prior IM approval for a transfer or pledge, depositories facilitate the transaction only after that approval is given. Separate logins are provided to Investment Managers specifically for approving off-market and pledge transactions — a distinct workflow step built into the depository system for this purpose.
A worked example
An investor in Meridian Category II AIF wants to pledge 2,500 of her AIF units, held in demat form, as collateral for a loan of Rs 40 lakh. The fund's PPM requires prior Investment Manager approval for any pledge of units.
The pledge instruction for all 2,500 units is submitted through the depository system, but it does not execute automatically the way an ordinary securities pledge would. It waits until Meridian's Investment Manager logs into its dedicated approval workflow and approves the pledge. Only after that approval is recorded does the depository complete the transaction.
Had the fund's PPM been silent on IM approval for pledges, no such gate would apply, and the pledge would proceed like an ordinary demat pledge once the pledgee confirms.
Why NISM asks about it
Chapter 7, section 7.7.1, sets this out immediately after the Aggregate Escrow Demat Account rules for AIF units. Expect a question on when IM approval is required (only if the fund documents call for it, not universally) and on the fact that IMs get a separate login for this specific purpose.
Common exam traps
- IM approval is required only where the fund's own documents require it — it is not a blanket rule for every AIF unit transfer or pledge.
- This is a depository-operations approval gate, not the same thing as the Investment Manager's general role in managing an AIF's investments — that broader concept is defined elsewhere, not in this paper.
- IMs approve through a separate login built for this purpose, distinct from an ordinary DP or client login.
Where this is taught
Free preparation for NISM Series VIRelated terms
- DematerialisationConverting securities held as physical certificates into book-entry holdings: the certificates are defaced, mutilated and surrendered to the issuer, and an equivalent quantity is credited to the holder's demat account.
- Alternative Investment FundA privately pooled investment vehicle registered with SEBI that raises money from select Indian or foreign investors under a defined investment policy — never from the public at large.
- Category II AIFThe residual AIF category: anything that is neither Category I nor Category III and takes no fund-level leverage beyond a narrow temporary carve-out — private equity, private debt and fund-of-funds.
- Investment ManagerThe person or entity appointed by an AIF's sponsor to manage its investments — deal sourcing, structuring, oversight and exit — known abroad as the "General Partner" in an LLP fund.
- Aggregate Escrow Demat AccountA separate demat account an AIF opens solely to hold demat units for investors who have not yet given their demat details; units move out to the investor within 5 working days once details arrive.