India’s Alternative Investment Funds (AIFs) have seen notable regulatory updates across 2024 and 2025. This guide breaks down the key changes, why they matter, and what investors and fund managers should do now.
Read More: Alternative Investment Funds – Meaning, Types and Benefits
Quick Snapshot
- Co‑investment within the AIF structure (2025): Category I/II AIFs can offer co‑investments as separate schemes with simplified treatment.
- Accredited‑investor focus (2025, proposed/board‑approved): A separate AI‑only scheme type and relaxations for Large Value Funds (LVFs) are on the anvil.
- Unliquidated investments (2024): Clear pathways via Dissolution Period or Liquidation Scheme, including a 25% bid‑arrangement threshold and in‑specie distribution rules.
- Borrowing and LVF tenure (2024): Tighter rules on temporary borrowing for Cat I/II AIFs; LVF tenure extension capped at up to 5 years with investor approval.
- Codification and hygiene (2024): Updated master framework and amendments covering demat of units, custodian mandates, PPM filing via merchant banker, disclosures.
Why this matters
For HNIs and NRIs allocating to AIFs, these changes tighten governance, improve end‑of‑life clarity for funds, and expand structured co‑investment access while keeping risks and disclosures front and centre. For managers to influence fundraising terms, side‑vehicle design, exit mechanics, and compliance workflows.
2025: What’s new
1) Co‑investment inside the AIF structure
What changed: Category I and II AIFs can now run co‑investment opportunities within the AIF umbrella. Each co‑investment can be treated like a separate scheme, enabling cleaner documentation, ring‑fenced economics, and operational simplicity.
What it means for you:
- Investors: Easier access to deal‑by‑deal exposure alongside the main fund, with scheme‑level rights and disclosures.
- Managers: Less friction than standalone co‑investment vehicles; simpler compliance mapping and reporting.
2) AIFs for Accredited Investors and LVF relaxations (policy direction)
What’s in motion: SEBI has pressed for an AI‑only scheme type and additional flexibilities for Large Value Funds, alongside proposals to further streamline onboarding (e.g., provisional onboarding during accreditation).
Practical read‑through: Expect lower operational friction for AI‑only pools, possible tweaks to minimums for LVFs, and faster investor onboarding once final rules/circulars drop.
Action point: If you run LVFs or target Accredited Investors, pre‑draft revised PPM terms, side letter templates, and onboarding SOPs so you can move quickly when final circulars are notified.
2024: The big changes to internalise now
1) Dealing with unliquidated investments at fund expiry
Two pathways:
- Dissolution Period: Extend time to realise residual assets; AIF/manager must arrange a bid for at least 25% of the value of unliquidated investments to give dissenting investors an exit option.
- Liquidation Scheme: Roll assets into a new scheme dedicated to realisation; allows in‑specie distribution when conditions are met.
Investor takeaways: You get clearer options at end‑of‑life and better visibility on timelines, cash‑flowing exits, and asset transfers.
Manager checklist: Update fund documents, investor‑consent workflows, disclosures, escrow mechanics, and valuation memos for both routes.
2) Borrowing limits and who bears the cost
Temporary borrowing for Cat I/II AIFs is tightly scoped (e.g., to bridge investor shortfalls for a limited period). Costs are charged to defaulting investors, not the scheme at large. Build robust capital‑call enforcement and back‑up lines with clear pass‑through.
3) LVF tenure extension is now capped
Large Value Funds for Accredited Investors can now extend tenure by up to 5 years, subject to two‑thirds by value investor approval, ending the earlier open‑ended extensions. Calibrate DPI timelines and GP carry waterfalls accordingly.
4) Structural hygiene and filings
- Dematerialised units: Broad push to hold units in demat for traceability and transfer efficiency.
- Custodian mandate: Universal custodian appointment for independent oversight.
- PPM filing via Merchant Banker: Standardised filing, version control, and change‑tracking for material updates.
What investors should do now?
- Re‑read PPM and side letters: Confirm how your scheme implements DP/Liquidation Scheme options, voting thresholds, and in‑specie rules.
- Stress‑test exit timelines: Model base, bear, and tail scenarios for residual assets; monitor ESCROW and bidder processes.
- Watch co‑investment terms: Fee offsets, carry splits, and downside‑protection terms differ by deal; insist on clarity at the scheme level.
- Validate accreditation status: If you qualify as an Accredited Investor, prepare documentation early to access AI‑only schemes and LVF relaxations when notified.
What managers should do now?
- Document playbooks: SOPs for DP/Liquidation, valuation frequency, and investor communications at scheme end.
- Tighten capital calls: Default waterfalls, interest, and use of short‑term borrowing aligned with regulations.
- Prepare co‑investment templates: Offer documents, allocation policies, information sharing, and conflict management.
- Compliance hygiene: Ensure demat, custodian, and PPM‑through‑merchant‑banker processes are live and tested.
FAQs
1) What is the minimum ticket size for AIFs today? ₹1 crore for most investors, with specific relaxations for employees, directors, and Accredited Investors as per current rules. Always check your scheme’s PPM.
2) How will co‑investment within the AIF structure affect fees? It enables separate scheme‑level economics. Look for fee offsets against the main fund, bespoke carry, and expense caps detailed in the co‑investment scheme documents.
3) Can my AIF distribute securities instead of cash at the end? Yes, in‑specie distribution is permitted under defined conditions, with clear disclosure and consent steps.
4) Are LVFs more flexible now? Yes. Tenure extension is capped at up to 5 years with investor approval. Further relaxations for AI‑only pools are expected once notified.
5) Who pays when the fund borrows to bridge a shortfall? Rules require the cost to be charged to defaulting investors, causing the shortfall, not the entire investor base.
Conclusion
SEBI’s 2024–2025 updates aim to balance capital formation with investor protection. Expect cleaner exits for ageing portfolios, better governance on borrowing and tenure, and more structured access to co‑investments, especially for Accredited Investors. Review your AIF documents, align processes, and be readiness‑driven.
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Key updates you should know now:
- Co-investment inside AIFs (final, 2025): Category I/II AIFs can offer co-investment within the AIF structure; each co-investment can be treated as a separate scheme. This simplifies docs and ring-fences economics.
- Accredited-Investor focus (board-approved/proposed, 2025): SEBI moved toward an AI-only scheme type and additional relaxations for LVFs; also consulted on provisional onboarding via KRAs while accreditation completes. Treat as policy direction until the final circulars are notified.
- Unliquidated assets at fund expiry (final, 2024): Clear routes via Dissolution Period and Liquidation Scheme. AIF/manager must arrange a 25% bid to give dissenters an exit; in-specie distributions permitted subject to conditions.
- Borrowing for Cat I/II AIFs (final, 2024): Temporary borrowing is more tightly scoped, and costs are charged to defaulting investors, not the scheme.
- LVF tenure cap (final, 2024): Large Value Funds for Accredited Investors can extend tenure up to 5 years, with two-thirds by value investor approval. Prior open-ended extensions removed.
- Codification/hygiene (2024): Amendments and master updates reinforced demat of units, universal custodian, and PPM filing via merchant banker. Use the Aug 6, 2024, consolidated regs as the live base text.
Read More: AIFs vs Mutual Funds: Which Works Better for Wealthy Investors?
