SEBI has recently brought forward landmark reforms to the Alternative Investment Funds (AIF) regulatory framework, set out in the Second Amendment Regulations, 2025 (September 8, 2025) and a detailed circular on September 9, 2025, introducing Co-Investment Vehicle (CIV) schemes within the AIF structure. These developments significantly enhance the operating landscape for Category I and II AIFs, transition Angel Funds as a distinct Category I sub-category, and formalize structured co-investments for accredited investors, fostering a more flexible, transparent, and efficient private capital ecosystem.
Overview of Key Amendments & Additions
- Definitions and Structural Clarifications (Regulation 2(1))
- ‘Co-investment’ is now explicitly defined as parallel investments by AIF managers, sponsors, or investors in unlisted securities alongside the AIF fund.
- Introduction of “Co-investment Schemes” facilitates structured co-investment within AIFs, supported by “Shelf Placement Memoranda” for streamlined multi-scheme launches.
- Angel Funds are decoupled from Venture Capital Fund definitions and recognized directly under Category I, simplifying compliance while broadening operational flexibility.
- Clear Categorization of Angel Funds (Regulation 3(4)(a))
- Angel Funds explicitly listed as a distinct Category I sub-category, improving regulatory clarity and focusing their mandate on early-stage investments.
- Removal of Prior Co-Investment Term Restrictions (Regulation 15(1)(b))
- Elimination of earlier restrictive clauses on co-investment terms governing sponsors/managers, shifting to the new comprehensive co-investment regime ensuring aligned, fair co-investment conditions.
- New Co-Investment Scheme Framework (Regulation 17A & Sept 9 Circular)
- Co-investments by investors in Category I/II AIFs must be made through dedicated co-investment schemes or Co-Investment Portfolio Managers, limited exclusively to accredited investors.
- Each CIV scheme focuses on a single investee company and prohibits investing in other AIF units.
- Terms of co-investments, including exit and valuation, must not be more favorable to co-investors than the AIF’s own terms, ensuring fairness and preventing preferential treatment.
- Shelf placement memoranda must be filed through merchant bankers for each CIV scheme, reinforcing transparency and regulatory oversight.
- The CIV operates under the same AIF regulations, exempted from several standard requirements such as minimum corpus, diversification, and certain lock-in provisions, enabling nimble parallel investing.
- The CIV scheme assets are ring-fenced, with separate bank and demat accounts segregated from the main fund, enhancing investor protection and reporting clarity.
- Angel Fund Transformations (Chapter III-A Updates)
- Angel Funds transition from scheme-based to fund-level structure within Category I, discontinuing new scheme launches to reduce structural complexity.
- Fundraising open exclusively to accredited investors, minimum investment thresholds removed to foster inclusivity, and onboarding minimums introduced for credibility.
- Investment limits revised (₹10 lakh minimum up to ₹25 crore maximum) with lock-in periods and requirements for multiple accredited investor contributions per deal, balancing investor protection with operational flexibility.
- Stringent controls on related party investments and transparency-enhancing obligations on disclosures and approvals ensure integrity.
- Advisory and Fee Modifications
- Advisory services restricted solely to clients of Co-Investment Portfolio Managers or CIV investors, mitigating conflicts of interest.
- Filing and registration fees introduced/updated, including ₹1 lakh fees for shelf placement memoranda and Angel Fund refiling, aligning costs with enhanced regulatory controls.
Additional Insights from September 9 Circular
- Co-investments limited to accredited investors with strict eligibility.
- Managers must file a separate shelf placement memorandum for each CIV scheme, with merchant banker facilitation.
- Investors in CIVs hold pro-rata rights and returns, except for arrangements on carried interest paid to sponsors/managers or employees.
- CIV schemes expressly barred from leverage or borrowing, preserving fund stability.
- Expenses associated with co-investment are shared proportionally between the main AIF scheme and CIV scheme.
- CIV investments must avoid indirect exposure to companies investors cannot own directly, maintaining regulatory consistency.
- Trustees or sponsors of AIFs must include compliance relating to CIV schemes in their annual Compliance Test Reports.
What This Means for Investors and Fund Managers
These regulatory reforms and the introduction of CIV schemes offer numerous benefits:
- Increased Flexibility: CIV schemes provide investors the option to co-invest selectively alongside the main AIF without mandatory full fund exposure.
- Regulatory Simplification: Single regulatory framework under SEBI’s AIF Regulations streamlines operations, reducing the burdens of parallel PMS registrations previously required.
- Transparency and Segregation: Separate scheme accounts and mandatory disclosures improve asset clarity and investor confidence.
- Fee Efficiency: CIV schemes often feature lower fees and aligned carried interest structures compared to prior co-investment routes.
- Aligned Interests & Governance: Matching exit timing and investment terms promote fairness and smoother governance.
- Angel Fund Clarity: Clear definitions and operational rules boost the ecosystem for early-stage investments.
- Investor Protections: Accredited investor restrictions, prohibition on related party contributions, and standardized documentation reduce potential conflicts and enhance trust.
Conclusion
SEBI’s Second Amendment and accompanying CIV circular mark a watershed moment in India’s alternative investment regulatory landscape. By formalizing co-investment schemes, restructuring Angel Funds, and introducing practical operational flexibilities, SEBI fosters a more vibrant, transparent, and investor-friendly market—supporting India’s growth as a global private capital hub.
Disclaimer: The information published in the above newsletter is collected from various sources in electronic medium and analyzed by the firm. The reader is advised to consult the attorney qualified in their jurisdiction, before acting on any information contained in this newsletter. India Juris excepts no liability what so ever in this regard.
