Do’s & Don’ts registering a Category I AIF  (legal / regulatory checklist under SEBI (AIF) Regulations, 2012 — as amended)

Below, I’ve distilled the key legal points you must follow (Do’s) and the common pitfalls to avoid (Don’ts) when applying for / setting up a Category I AIF in India. I cite the primary SEBI sources and recent SEBI circulars for the most important rules so you can rely on them for formal compliance.

Do’s (must / strongly recommend)

  1. Pick the correct AIF form & category and state the strategy clearly in the charter / PPM.
    Category I covers venture capital, SME funds, social venture funds, infrastructure funds, and other economically/socially desirable sectors — describe investment policy precisely in the trust deed / AoA / LLP agreement and PPM.
  2. Meet the minimum corpus and sponsor contribution requirements before filing.
    • Minimum corpus: generally ₹20 crore per scheme (angel funds historically different; check the specific angel-fund rules if applicable).
    • Sponsor/manager continuing interest: at least 2.5% of corpus or ₹5 crore, whichever is lower (Category I & II). Ensure this commitment is documented.
  3. Confirm ‘fit and proper’ status for applicant, sponsor, and manager.
    Ensure all required persons meet the Schedule II / “fit & proper” criteria (no disqualifying convictions, insolvency issues, regulatory bars, etc.). Disclose litigation and material adverse events fully in Form A.
  4. File the correct SEBI application and pay fees (Form A / online SI Portal).
    Use the SEBI AIF registration route (fresh registration via SEBI portal), attach the First Schedule information, PPM draft, charter documents, KMP list, compliance systems, etc., and pay the prescribed application fee. Keep supporting KYC/KMP documents ready.
  5. Appoint required roles and internal controls before the first investment.
    • Designate a Compliance Officer (not the CEO), appoint KMPs, set up accounting/valuation policies, and internal AML/KYC processes. SEBI expects governance and compliance systems to be in place.
  6. Appoint a custodian timely (before the first investment) and hold securities in dematerialised form as required.

SEBI extended the mandatory custodian requirement — Category I (and II) schemes with a corpus ≤ ₹500 crore must appoint a custodian if they hold investments; all schemes must follow the timelines in the circular. Appoint a SEBI-registered custodian before the first investment where applicable. Also, ensure demat requirements are complied with.

  1. Follow investment limits & diversification rules in the regulations.
    Category I AIFs must comply with the general investment conditions — e.g., no more than 25% of investible funds in a single investee company (subject to specified exceptions/large value funds). Document how investible funds are calculated and keep records.
  2. Prepare a complete, accurate Placement/Private Placement Memorandum (PPM).
    The PPM must contain the information mandated by SEBI (risk factors, fee structure, investment policy, conflicts, valuation policy, sponsor interest, lock-ins, exit policy, investor eligibility, etc.). File / take PPM on record as required by SEBI guidance.
  3. Comply with investor eligibility & limits (no public offer / private placement only).
    AIFs are privately pooled vehicles — do not solicit the public. Ensure only permitted/sophisticated investors are admitted, and limits on investor numbers (e.g., 1,000 for schemes other than angel funds) are respected.
  4. Put post-registration compliance systems in place (reporting, audits, valuations).
    Regular reporting to SEBI, periodic audits, investor statements, valuations as per SEBI norms, event reporting (change in control, sponsor/manager change), and timely filings (annual/quarterly) are mandatory. Keep templates and timelines ready.

Don’ts (common legal/regulatory pitfalls — avoid these)

  1. Don’t start making investments before appointing the custodian (where required).
    SEBI’s circular requires custodian appointment prior to first investment in many Category I/II schemes — breach risks, sanctions, and investor complaints.
  2. Don’t misstate or omit material facts in Form A / PPM.

Misrepresentations (about track record, sponsor resources, conflicts, litigation, related-party transactions) will lead to rejection, penalties, or later enforcement action. Full, contemporaneous disclosures are required.

  1. Don’t breach the diversification / single-investee limits (25%).

Investing more than permitted in one company without lawful exception/investor approvals will breach Regulation 15 and invite remedial action. Plan allocations to avoid accidental concentration.

  1. Don’t publicly solicit or market like a mutual fund.

AIFs must not make a public offer; keep fundraising by private placement only, and follow the PPM and placement process strictly. Public solicitations are regulatory violations.

  1. Don’t permit undisclosed related-party or preferential co-investments that favour the manager/sponsor.

Co-investment and related-party transactions must be on arm's-length terms and fully disclosed in PPM/board minutes and to investors. Preferential terms can invite enquiry.

  1. Don’t allow investor onboarding without KYC/AML/Source-of-Funds checks.

SEBI and AML rules require robust KYC/AML for investors — lax processes risk penalties and reputational damage. Keep the KYC due diligence checklist documented.

  1. Don’t use leverage (borrowing) for Category I AIFs except as expressly permitted/temporary.

Category I/II are generally not permitted to leverage — read the borrowing rules carefully before approving any financing arrangement.

  1. Don’t ignore approvals needed for investors from countries sharing a land border with India.
    SEBI has required a tighter review of some foreign investors (e.g., certain countries require Government approval). Check investor origin and get approvals where required.

Practical pre-filing checklist (documents/confirmations to have ready)

  • Draft/clean copy of charter (trust deed / LLP agreement / AoA) with SEBI-compliant clauses.
  • Draft Placement Memorandum (PPM) covering all SEBI-mandated disclosures.
  • Form an information pack: sponsor, manager, KMPs, financials, litigation, beneficial owners, group chart.
  • Evidence of minimum corpus (subscription commitments/bank statements/escrow arrangements).
  • Evidence of sponsor/manager continuing interest (amount paid / commitment letter).
  • Compliance manual: KYC/AML, valuation policy, conflicts policy, investment approval process, investor grievance redressal.
  • Custodian appointment letter/plan to appoint (as per SEBI circular) and demat arrangements.

Key legal provisions/circulars you should read first (primary sources)

  1. SEBI (Alternative Investment Funds) Regulations, 2012 — consolidated page (SEBI site; last consolidated amendments listing).
  2. SEBI circular/amendment on custodian appointment & demat holdings (Jan 12, 2024, and related amendments) — mandatory appointment details and timelines.
  3. SEBI FAQs / Master Circulars on AIF registration (Form A / PPM guidance) — practical filing guidance.
  4. Regulation 15 (investment conditions) and sponsor/manager contribution clauses — diversification, sponsor commitment, and borrowing constraints.

Short legal tips (to reduce enforcement/approval risk)

  • Keep contemporaneous minutes and approvals for every material decision (investments > threshold, related-party).
  • Maintain separate bank accounts and strict segregation of sponsor/manager funds vs. AIF funds.
  • Ensure an independent valuation policy and an independent audit trail for NAV and investor reporting.
  • If accepting foreign investors, run sanctions / source-of-fund checks and confirm whether government approvals are required (land-border test).