How AIFs Can Standardise Demat Compliance Across Their Portfolio

Most AIF fund managers in India are dealing with the same demat compliance problem at scale: a portfolio of fifteen to forty companies at various stages of dematerialisation readiness, a SEBI audit cycle that requires all holdings to be in electronic form, and no standardised process for getting portfolio companies from physical to demat without consuming disproportionate relationship capital and operations bandwidth.

The company-by-company approach chasing each portfolio company individually, accepting whatever timeline they propose, and managing exceptions manually does not scale. Funds with larger portfolios are discovering that demat compliance management is becoming a material operations burden, with the compliance team spending as much time on shareholder coordination as on investment activity. This guide is written for AIF fund managers and portfolio operations teams who want to build a systematic, repeatable process for driving demat compliance across their portfolio structured by eligibility, sequenced by priority, and supported by a framework that portfolio companies can follow without hand-holding.

KEY TAKEAWAYS

• A portfolio-wide demat programme requires two parallel workstreams: existing companies (retroactive conversion) and new investments (demat as a pre-closing condition).
• Portfolio companies should be segmented by complexity not all companies require the same timeline or level of fund support to complete demat.
• The fund's role is to set the standard, provide the framework, and apply consistent relationship pressure not to manage the demat process itself for each company.
• A standardised demat policy embedded in term sheets and shareholder agreements eliminates the need for retroactive enforcement for all future investments.
• Common gaps NRI shareholders, missing certificates, multi-class share structures have predictable solutions that a fund can document and share as a portfolio playbook.

The Structure: Why Individual Company Outreach Does Not Scale

The standard AIF approach to demat compliance is to send a letter or email to each portfolio company individually, request a completion date, follow up periodically, and escalate if there is no response. This works for a portfolio of five companies. It breaks down for a portfolio of twenty-five.

The problems with the individual approach are predictable:

• Inconsistent urgency different portfolio companies interpret the request differently. Some treat it as urgent; others treat it as a soft suggestion. Without a clear policy, there is no basis for escalation.
• Repeated education every company needs to be explained what demat involves, what a DP is, what an ISIN is, and what the timeline looks like. The fund's operations team repeats the same explanation twenty times.
• No visibility into progress the fund has no standardised way to track which companies are in which phase of the demat process. The compliance team is managing status from memory and email threads.
• Reactive problem-solving complications (NRI shareholders, missing certificates) surface company by company and are solved in isolation, when the same solutions could be documented once and shared across the portfolio.
• No leverage for laggards without a formal policy and defined consequences, the fund has limited ability to apply pressure beyond relationship capital. Companies that deprioritise demat face no formal consequence.

The Solution Structure: A Two-Workstream Demat Programme

A systematic portfolio demat programme has two distinct workstreams that operate simultaneously but with different structures, timelines, and tools.

Workstream A: Retroactive Demat for Existing Portfolio Companies

This covers all companies the fund has already invested in where shares are currently held in physical form or where demat is incomplete. These companies are at varying stages of readiness and require a segmentation-first approach before any outreach begins.

Workstream B: Proactive Demat Standards for New Investments

This covers all investments made going forward. The standard is embedded in the term sheet and shareholder agreement demat is a pre-closing condition, not a post-closing action item. No new investment closes without the company's shares being dematerialised and the fund's allotment issued electronically.

The two workstreams require different tools and different communications. The rest of this guide covers each in detail.

Also Read: Why AIFs Are Mandating Demat Across Their Portfolio

Workstream A Step 1: Segment the Existing Portfolio by Demat Complexity

Before any outreach, categorise every portfolio company into one of three tiers based on demat complexity. This segmentation determines the timeline, the level of fund support required, and the appropriate escalation mechanism for each company.

Categorise each portfolio company immediately before any outreach. The categorisation determines the communication tone, the timeline commitment you request, and the resources you offer. Sending a Tier 3 company the same generic demat letter as a Tier 1 company signals that you do not understand their specific situation and reduces the credibility of your request.

Workstream A Step 2: Develop a Portfolio Demat Playbook

Before reaching out to any portfolio company, the fund's operations team should build a demat playbook that portfolio companies can follow without needing to start from scratch. The playbook converts the fund's accumulated knowledge of demat complications into a reusable resource that reduces the education burden for each company.

What the Playbook Should Include

• A clear step-by-step process from register audit to ISIN allotment to reconciliation identical to what the best-prepared companies do naturally
• A DP shortlist two to three DPs with demonstrated private company ISIN experience that the fund has evaluated and trusts. Including a preferred DP eliminates the DP selection step for portfolio companies and ensures they start with a competent provider
• NRI shareholder guidance a one-page document explaining exactly what account type an NRI investor needs (NRO vs NRE), what documents are required, and how to initiate account opening with the recommended DP's NRI desk
• Missing certificate resolution guide the exact process for issuing a duplicate certificate under Section 46 of the Companies Act, including the newspaper advertisement requirement and the 30-day waiting period
• Register gap remediation templates draft board resolutions for ratifying unresolved allotments, draft letters for requesting signed transfer deeds from historical shareholders
• Timeline tracker template a simple spreadsheet with one row per shareholder and columns for demat account status, DRF submission date, DRF status, and credits confirmed. Portfolio companies submit this to the fund at each check-in

The playbook is a one-time investment of two to three days of operations team time that saves multiple weeks per portfolio company over the life of the fund. Build it once, version it annually as regulations change, and share it with every portfolio company at the outset of the programme.

Workstream A Step 3: Tiered Outreach with Specific Deadlines

Send the initial demat communication to all portfolio companies simultaneously. The communication should vary by tier in tone and deadline, but the core message is consistent: this is a fund-level compliance requirement with a defined timeline, and the fund is providing resources to support completion.

Template: Initial Demat Communication to Portfolio Companies

Subject: Demat Compliance Requirement Action Required by [Date]

Dear [Founder name],

As you are likely aware, SEBI regulations require [Fund Name] to hold all portfolio securities in dematerialised form. The MCA has also extended the demat mandate to private companies with paid-up share capital above Rs 4 crore, effective September 2024.

We are writing to all portfolio companies to request that dematerialisation be completed within the following timeline:

• Tier 1 companies (simple cap table): 8 weeks from this letter
• Tier 2 companies (NRI shareholders or dual share class): 14 weeks from this letter
• Tier 3 companies (complex cap table): 20 weeks from this letter

We have attached our Portfolio Demat Playbook, which includes a step-by-step guide, a recommended DP list, and guidance for common complications including NRI shareholder account opening and missing certificate resolution.

Please confirm receipt of this letter and share your current demat status within 5 business days. We will schedule a brief call to discuss your specific situation and timeline.

Regards,

[Fund Manager / Portfolio Operations Team]

Workstream A Step 4: Progress Tracking and Escalation Framework

Once outreach is sent, the fund needs a consistent mechanism for tracking progress and escalating non-compliance. Without a structured tracker, the compliance team reverts to chasing companies by email which does not scale.

The Portfolio Demat Tracker

Maintain a single portfolio-level tracker with one row per portfolio company. At minimum, the tracker should record: company name, tier classification, demat deadline, date of initial outreach, date of first response, ISIN application submitted date, ISIN allotment date, DRF completion date, reconciliation confirmed date, and fund holding in depository confirmed date. Update the tracker at each check-in and review it in every portfolio operations meeting.

Escalation That Works

The most effective escalation mechanism is founder-to-partner communication, not operations-team-to-founder communication. When a portfolio company falls into Amber status, the fund partner who sits on the board or has the closest relationship with the founder makes a direct call. The message is simple: 'I need to understand why demat is not progressing and what we can do to help you complete it in the next four weeks.' This is not a threat it is a demonstration that the fund takes this seriously at the leadership level, which changes the founder's prioritisation.

Workstream A Step 5: Managing Common Compliance Gaps

Gap 1: NRI Shareholders Who Cannot Open NRO Demat Accounts Quickly

This is the most common delay in portfolio-wide demat programmes. The fund can accelerate this by: introducing the portfolio company to the preferred DP's NRI services desk directly (warm introduction by the fund carries more weight than a cold request from the company), providing a document checklist that anticipates every NRI KYC requirement so the shareholder can gather documents in one pass rather than back-and-forth, and setting a specific deadline for the NRI shareholder to confirm account opening initiation not account opening completion.

Gap 2: Missing or Improperly Issued Share Certificates

When a portfolio company's share audit reveals that certificates were never properly issued to certain shareholders, the fund should understand the root cause before recommending a resolution path. If the shareholder was always intended to receive shares but the certificate was simply never printed and delivered, the fix is straightforward issue the certificate now. If there is any ambiguity about whether the allotment was properly authorised, the fund's legal team should be involved before any remediation action is taken. Retroactively ratifying an unauthorised allotment is a materially different situation from issuing a certificate for a properly authorised but administratively incomplete allotment.

Gap 3: Multiple Share Classes With Sequential ISIN Applications

Portfolio companies with equity and CCPS sometimes apply for ISINs sequentially equity first, CCPS after the equity ISIN is allotted. The fund playbook should explicitly instruct companies to apply for all ISINs simultaneously. Include a checklist item: 'List every share class in your register of members. Submit one ISIN application per class on the same day.' This single instruction, if followed, saves two to three weeks per additional share class.

Gap 4: Historical Shareholders Who Are Unreachable

Startups sometimes have shareholders from very early rounds friends-and-family investors, early advisors who are no longer in regular contact with the company. The fund should advise portfolio companies to start with the most reachable shareholders and work outward. For genuinely unreachable shareholders, the company should document every contact attempt dates, methods, responses before seeking legal advice on whether demat can proceed without their cooperation. This documentation protects the company if the issue surfaces during future due diligence.

Workstream B Embedding Demat Standards in New Investments

For all new investments going forward, the fund eliminates the retroactive problem entirely by making demat a pre-closing condition embedded in the term sheet and shareholder agreement.

Term Sheet Language

Recommended Term Sheet Clause Demat Pre-Closing Condition

'Closing of this investment is conditional upon the Company having obtained an ISIN for its equity shares and all other classes of securities in the Company's issued share capital from NSDL or CDSL, having appointed a SEBI-registered Depository Participant, and having dematerialised all existing shares such that each existing shareholder's holding is reflected in their respective demat accounts and reconciled against the Company's register of members. The Company shall provide the Investor with depository holding statements from all existing shareholders and the ISIN allotment confirmation letter from NSDL/CDSL as part of the closing conditions checklist.'

Shareholder Agreement Language

In addition to the term sheet condition, embed an ongoing demat obligation in the shareholder agreement. This covers two scenarios: future share issuances (all new shares must be issued in demat form) and corporate action reporting (the company must notify the fund's operations team and report to the depository within a specified timeframe of any corporate action affecting the securities). These clauses convert demat from a one-time closing condition into an ongoing operational obligation with a contractual basis.

Due Diligence Checklist Addition

Add demat as a standalone section in the fund's standard due diligence checklist not buried under 'corporate governance' or 'cap table'. The section should request: ISIN allotment confirmation, DP agreement, tripartite agreement, depository holding statements from all shareholders, reconciliation confirmation, and confirmation that all future allotments will be in demat form. Making demat a named section sends the signal to portfolio companies and their advisors that it is a substantive requirement, not an administrative afterthought.

Deadlines and What Happens When They Are Missed

A demat compliance programme without defined consequences for non-compliance is a suggestion programme. The fund needs a clear, pre-communicated escalation path that portfolio companies understand before they receive their first outreach.

The Bottom Line

Portfolio-wide demat compliance is an operations problem, not a legal problem. The legal requirement is clear. The challenge is converting a set of twenty-five individually complicated situations into a standardised, trackable programme that moves at pace without consuming the fund's relationship capital or operations bandwidth.

The keys are segmentation before outreach, a playbook that answers the questions every portfolio company will ask, tiered deadlines that reflect actual complexity, a tracker that makes progress visible at the portfolio level, and escalation mechanisms that are pre-communicated and consistently applied. Funds that build this structure once complete their portfolio demat programmes in six to nine months. Funds that manage it company by company are still chasing the same laggards two years later.

Also Read: SEBI Demat Compliance for AIFs

Also Read: Share Dematerialisation for Indian Startups: The Complete Guide

Frequently Asked Questions

How should a fund handle a portfolio company that has a co-investor who refuses to cooperate with demat?

This is a shareholder-level cooperation issue that the portfolio company must resolve, not the fund directly. The fund's lever is the shareholder agreement if the co-investor signed a shareholder agreement with a cooperation clause covering regulatory compliance, the company can invoke that clause. The fund can support by making a direct outreach to the co-investor's fund manager if they are an institutional investor a fund-to-fund conversation often unlocks cooperation that a company-to-investor conversation does not.

Can the fund pay for the demat costs of a portfolio company to accelerate compliance?

Yes, and some funds do this for Tier 3 companies where cost is cited as a barrier. The mechanics vary some funds advance the cost as an interest-free operational support loan, others treat it as a portfolio support expense charged to the management company. The cost of a full demat process Rs 75,000 to Rs 2 lakh is modest relative to the fund's investment in the company and the compliance risk of the holding remaining physical. If cost is a genuine barrier, remove it proactively rather than allowing it to become a months-long excuse.

What should the fund do if a portfolio company's demat is technically complete but the reconciliation has discrepancies?

A technically complete demat with unresolved reconciliation discrepancies is not complete from the fund's compliance perspective. Each discrepancy is a shareholder whose holding cannot be confirmed. The fund should require the company to investigate and resolve every discrepancy before accepting the demat as complete. Accepting a partial reconciliation creates an audit exception that the fund will need to explain in its SEBI filing.

How often should the fund request updated depository holding statements from portfolio companies?

Annually at minimum once per SEBI compliance cycle. Most funds request holding statements in Q4 of each financial year for inclusion in the annual filing. For portfolio companies that are actively issuing new shares through ESOP exercises, bridge rounds, or new allotments the fund should request updated statements after each new allotment to confirm that the fund's fully diluted ownership is correctly reflected in the depository records.

Should the fund nominate a preferred DP for the entire portfolio?

A preferred DP relationship where the fund has negotiated terms and introduced the DP to multiple portfolio companies is beneficial but should not be mandatory. Making DP selection mandatory limits portfolio companies' flexibility and may not always be appropriate for their specific shareholder composition. The fund should offer one or two preferred DPs as a recommended starting point, available for introductions and pre-negotiated fees, while allowing companies to choose a different DP if they have a compelling reason.