Alternative Investment Funds

September 9, 2025, the Securities and Exchange Board of India (SEBI) issued a circular titled “Framework for AIFs to make co-investment within the AIF structure under SEBI (Alternative Investment Funds) Regulations, 2012”. The goal: make it easier and more transparent for investors and fund managers to do co-investment alongside the main AIFs.

Here’s what the framework means, what rules it introduces, who it applies to, and what to watch out for.

What is “co-investment” & why this change

  • Co-investment means when an investor puts money directly into a company or project in which an AIF (Alternative Investment Fund) is investing. So rather than just investing through the AIF, the investor participates along with the AIF in a specific deal.
  • Previously, co-investment by investors of AIFs was allowed only via the PMS route (Portfolio Management Services) under SEBI’s PMS Regulations. That route had limitations (for example, restrictions when investing in unlisted companies, disclosure norms, etc.).

The new change allows another route: a CIV scheme (Co-Investment Vehicle scheme), which is a separate scheme within the AIF itself.

Who is covered

  • The rules apply to Category I and Category II AIFs.
  • Only accredited investors of a scheme of these AIFs are eligible to participate through a CIV scheme.

Key features & requirements

Here are the principal operational rules SEBI has prescribed:

  1. Choice of route
    The manager of an AIF may offer co-investment through either the PMS route or the CIV scheme, depending on which is appropriate.
  2. Shelf Placement Memorandum (PPM)
    Before offering co-investment under CIV, the manager must file a “shelf PPM” with SEBI. This document should explain: the terms of co-investment, governance, regulatory framework, how the co-investment will work, etc.
  3. Separate legal/accounting structure for each CIV scheme
    Each CIV scheme must have its own bank account and its own demat account. Its assets must be “ring-fenced” (i.e., separately held, not mixed with other CIVs or with the main AIF scheme).
  4. Limit on how much an investor can co-invest vs their investment via the AIF scheme
    The framework caps the co-investment (via CIV schemes) by an investor in any company to three times their investment in that same company made through the main AIF scheme.

However, there are exceptions: investors such as multilateral or bilateral development financial institutions, state industrial development corporations, sovereign wealth funds, government-controlled entities, etc., are not subject to this cap.

  1. Restrictions on who can co-invest
    If an investor has been excused, excluded, or has defaulted in contributing to an investment made by the AIF in a company, that investor cannot co-invest via a CIV in that company.
  2. No leverage / borrowing
    A CIV scheme is not allowed to borrow funds or employ leverage, directly or indirectly. This avoids excessive risk.
  3. Same terms & exit timing
    1. The terms of co-investment (entry price, rights, etc.) offered to the CIV scheme must not be more favourable than those offered to the AIF in the same investee company.
    2. The exit timing of the CIV scheme co-investment (in a company) must be co-terminus with the exit of the AIF scheme from that company (i.e., they should exit at the same time).
  4. Sharing of costs and profits
    1. Investors in the CIV scheme will have rights and share in distributions in proportion to their contribution. Some extra returns (carried interest or similar) may go to the sponsor or manager as agreed.
    2. Any expenses related to the co-investment are to be shared proportionately between the main AIF scheme and the CIV scheme, based on how much each has invested.
  5. Safeguards & compliance
    1. SEBI requires certain implementation standards to be developed by the Standard Setting Forum of AIFs (SFA) in consultation with SEBI. These standards will aim to ensure the co-investment facility is used properly, for bona fide reasons, and not misused.
    2. The AIF (manager/sponsor/trustee) must include compliance with the rules of this circular in their Internal “Compliance Test Report”.

What are the benefits, and what to watch out for

Benefits

  • More flexibility for accredited investors: they now have a direct way to co-invest within the regulated AIF structure, not just via PMS.
  • Clearer governance and transparency: separate accounts, ring-fencing, shelf PPM filings, ensuring that the terms are not preferential for co-investors over AIF investors.
  • Easy structure for co-investment: avoids some of the complications of the PMS route.
  • Inline interests: since exit timing and terms must be consistent, investors through CIV are more likely to share risk and rewards similarly with the main AIF scheme.

Potential risks/things to carefully consider

  1. For fund managers, more compliance and monitoring are needed: the CIV schemes must maintain separation, ensure disclosures, and enforce restrictions (e.g., no borrowing).
  2. For co-investors, they cannot exit earlier than the AIF’s exit in that investee company — this can reduce flexibility.
  3. The 3× cap could limit how much can be co-invested relative to the AIF contribution, unless you’re an exempted institution.
  4. Investors who fail to honor commitments in the AIF (or are excluded/defaulted) lose the right to co-invest in that company.
  5. True drafting of the shelf PPM and operationalizing the CIV scheme is important to ensure compliance and avoid regulatory issues.

Effective date & enforcement

The circular becomes effective immediately from the date of issue. Managers of AIFs are expected to comply with this framework forthwith.

 

Legal & regulatory context

This change amends SEBI’s AIF Regulations, 2012, in particular via Regulation 17A, which provides for co-investment through CIV schemes.

It is also part of SEBI’s ongoing efforts to make doing business in the alternative investment space easier, more transparent, and more aligned with global practices.

Conclusion

SEBI’s new framework for co-investment within the AIF structure is a major step toward giving accredited investors more direct participation in deals, while ensuring that safeguards protect investors, fund managers, and the integrity of the system.

For anyone involved in AIFs — whether as manager, sponsor, trustee, or investor — this framework means closer attention needs to be paid to structuring, documentation (especially shelf PPMs), compliance, and governance.

If you like, I can send you a checklist that fund managers or company secretaries can use to ensure compliance with the new framework. Want me to prepare that? 

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