NISM Series XIX-A · Chapter 2: Alternative Investment Funds in India

L1 · Foundation

Foundation — How the Indian AIF industry grew

The 1980s origins in state industrial development corporations and PSU banks, and why the industry emerged late; the 1988 Venture Capital Guidelines with their untried-technology restriction and the 1996 SEBI regulations that removed it; the K. B. Chandrasekhar Committee and the dotcom-era funds; the growth phase from 2003 and the Warburg Pincus investment in Bharti Televentures; the sectoral broadening by 2007 and the arrival of buyouts with the KKR acquisition of Flextronics; the effect of the 2008 crisis and the subdued years to 2012; the consolidation and transformation phase from 2011 to 2019 with its eight trends; and the 2019 to 2025 shift to unit economics and exits.

20 min read · Worth 5% of the paper · Written from pages 28–40 of the official NISM workbook · Updated 18 September 2026

From venture capital guidelines to a full alternative investment industry

1. The modest beginnings

⚠️ "The evolution of alternative investments in India can be traced to THE MODEST BEGINNINGS IN VENTURE CAPITAL FINANCING IN THE 1980s MOSTLY THROUGH THE INITIATIVES OF STATE LEVEL INDUSTRIAL DEVELOPMENT CORPORATIONS, FINANCIAL INSTITUTIONS AND A FEW PSU BANKS".

1.1 The 1988 Guidelines and their restriction

1.2 The 1996 broad-banding

⚠️ "Though the framework... were put in place in 1996, THE TAX LAW WAS NOT INVESTOR FRIENDLY. Subsequently, TAX BREAKS WERE GIVEN TO VCFs AT FUND LEVEL AND THE SEBI REGULATIONS WERE ALSO REVISED FOLLOWING THE RECOMMENDATIONS OF THE K. B. CHANDRASEKHAR COMMITTEE IN 2000".

⚠️ "In the DOTCOM ERA OF 1997-2001, SEVERAL TECHNOLOGY VCFs WERE SET UP IN INDIA MODELLED AFTER THEIR SILICON VALLEY COUNTERPARTS".

2. The growth phase from 2003

⚠️ "In the growth phase that followed FROM 2003 WITH THE EMERGENCE OF A STRONG DOMESTIC CAPITAL MARKET AND THE IMPRESSIVE GROWTH OF CORPORATE INDIA, MANY VENTURE CAPITAL FUND AND PRIVATE EQUITY FUNDS EMERGED MAINLY WITH OFF-SHORE CAPITAL. Domestic institutions SUCH AS ICICI, UTI EVOLVED INTO FULL-FLEDGED PRIVATE EQUITY PLAYERS. However, THE REPRESENTATION OF DOMESTIC PRIVATE EQUITY WAS STILL SMALL".

⚠️ "From a business perspective, FROM 2001 ONWARDS, INDIAN INDUSTRY WAS ON A CONSOLIDATION DRIVE... Companies sought to grow NOT ONLY TO STAND UP TO COMPETITIVE MARKET FORCES IN THE DOMESTIC MARKET BUT TO ATTAIN GLOBAL SCALE OF OPERATIONS AS WELL".

2.1 Sectoral broadening

⚠️ "In the initial stages, though private equity was LARGELY CONFINED TO THE INFORMATION TECHNOLOGY SECTOR, BY THE END OF 2007, THE SECTORAL BIAS WAS LARGELY REMOVED", extending to "LARGE SCALE MANUFACTURING (SUCH AS PHARMACEUTICALS, AUTO-ANCILLARIES, FMCG), REAL ESTATE AND CONSTRUCTION, CORE SECTORS (LIKE CEMENT, STEEL, METALS) AND INFRASTRUCTURE", and to service sectors including "BANKING AND FINANCIAL SERVICES, LOGISTICS, E-COMMERCE, ENTERTAINMENT, HEALTHCARE, WELLNESS AND EDUCATION".

⚠️ "Private equity investors showed interest even in PROJECT FINANCING, AN AREA DOMINATED BY LARGE BANKS AND SPECIALISED FINANCIAL INSTITUTIONS".

3. Trends post-2008

⚠️ "The GLOBAL FINANCIAL CRISIS OF 2008 had its ripple effects... Several funds that HAD INVESTED IN THE BULLISH MARKETS PRIOR TO 2008 FOUND IT DIFFICULT TO SUSTAIN THEIR INVESTMENT VALUES. WEAK CAPITAL MARKET ADDED TO THEIR EXIT WOES DUE TO WHICH THEIR FOLLOW-ON FUND RAISING EFFORTS WERE ALSO QUITE UNSUCCESSFUL".

⚠️ "In the years following the global financial crisis, private equity sector in India SUFFERED DUE TO A PLETHORA OF SECTORAL AND MACROECONOMIC ISSUES INCLUDING THE SCARE OF REGRESSIVE TAXATION LAWS".

3.1 The eight trends of the consolidation and transformation phase

#	⚠️ Trend
1	⚠️ "The industry EVOLVED FROM A PREDOMINANTLY VENTURE CAPITAL AND PRIVATE EQUITY INDUSTRY INTO A FULL-FLEDGED ALTERNATIVE INVESTMENT FUND INDUSTRY SPANNING SEVERAL ALTERNATIVE ASSET MANAGEMENT FUNDS AND UHNIs / FAMILY OFFICES" — real estate and infrastructure being examples, along with foreign or domestic hedge funds registered under AIF Regulations
2	⚠️ "Global events such as BREXIT AND US-CHINA TRADE WAR NOTWITHSTANDING, PRIVATE EQUITY INFLOWS AND ACTIVITY REACHED RECORD LEVELS IN ASIA PACIFIC REGION WITH INDIA REGISTERING HIGHEST GROWTH IN 2017 AND 2018"
3	⚠️ "The SIGNIFICANT EMERGENCE OF DOMESTIC CAPITAL... The AIF industry CAUGHT THE FANCY OF THE ULTRA-RICH BILLIONAIRES OF INDIA. Several new fund houses set up or launched new AIFs to cater to THE VERY WEALTHY INDIAN INVESTOR COMMUNITY"
4	⚠️ "GOVERNMENT REFORMS WERE INTRODUCED TO PROVIDE TAX INCENTIVES TO START-UPS and recommendations were made by THE SEBI ALTERNATIVE INVESTMENT POLICY ADVISORY COMMITTEE IN ORDER TO IMPROVE THE TAX REGIME FOR CATEGORY I AIFs AND CATEGORY II AIFs TO ACCORD THEM A PASS-THROUGH STATUS", ensuring inflows from sovereign wealth funds, pension funds, foundations, insurance companies, banks, charitable organizations, family offices and HNIs
5	⚠️ New opportunities: "PRE-IPO FINANCINGS, SPECIAL SITUATIONS SUCH AS STRESSED ASSET AUCTIONS UNDER THE INSOLVENCY AND BANKRUPTCY CODE 2016, DEBT RESOLUTION REFINANCING WITH BANKS, M&A FINANCINGS AND CO-INVESTMENTS, REAL ESTATE DEBT FINANCINGS, MEZZANINE FUNDING, INFRASTRUCTURE DEBT AND EQUITY FUNDS"
6	⚠️ "THE EMERGENCE OF AIF SCHEMES WITH FOCUS ON LISTED MARKET SPACE IS A NEW PHENOMENON... akin to hedge funds THAT TAKE LONG-SHORT POSITIONS ON THE EQUITY, DEBT AND DERIVATIVE SEGMENTS. Some also focus on special situations SUCH AS MERGER ARBITRAGE, BUYBACKS, DE-LISTINGS, OPEN OFFERS UNDER THE TAKEOVER CODE, RIGHTS OFFERS AND HEDGING", alongside real estate debt funds and venture debt funds
7	⚠️ "THE EMERGENCE OF E-COMMERCE AND DIGITAL TECHNOLOGY START-UPS with cutting edge solutions... FINTECH, DIGITAL PAYMENTS, ARTIFICIAL INTELLIGENCE, INTERNET OF THINGS, MACHINE LEARNING, DATA ANALYTICS, CLOUD COMPUTING", bringing "ENORMOUS CAPITAL FROM OFF-SHORE AIFs AND SOVEREIGN WEALTH FUNDS"
8	⚠️ "The era 2019–2025 SAW THE INDIAN AIF INDUSTRY SHIFT FROM AGGRESSIVE CAPITAL EXPANSION TO A DISCIPLINED FOCUS ON UNIT ECONOMICS AND OPERATIONAL RESILIENCE. Following a period of market recalibration, THE SECTOR STABILIZED THROUGH 2025 BY PRIORITIZING A ROBUST EXIT LANDSCAPE AND SUSTAINABLE DEAL VALUE RECOVERY"

4. Why India suits AIF products

⚠️ "The ECONOMIC PROSPERITY OF THE ENTREPRENEURIAL CLASS AND CORPORATE EXECUTIVES CREATED SEVERAL HIGH-NET WORTH INVESTORS AND FAMILY OFFICES. Several NRIs also favour investing in Indian market... After SEBI ALLOWED NON-RESIDENT NON-INSTITUTIONAL INVESTORS TO TAP THE INDIAN MARKET AS FPIs, IT PROVIDED ADDITIONAL CLASS OF INVESTORS TO INVEST IN AIFs".

⚠️ "The NEW GENERATION OF DIGITAL ECONOMY ENTREPRENEURSHIP COUPLED WITH HIGH VALUATIONS OF START-UP COMPANIES IS PRODUCING WEALTHY AND SUPER-RICH CLASS IN INDIA MUCH FASTER THAN THE ERA OF GLOBALISATION DID IN THE 1990s AND THE FIRST DECADE OF THE 21ST CENTURY".

4.1 The enablers

Enabler	⚠️ Detail
⚠️ REGULATORY	⚠️ The AIF Regulations of 2012 "PROVIDED THE NECESSARY FRAMEWORK WHICH MADE ALTERNATIVE INVESTMENTS MARKETABLE, SAFE AND PREDICTABLE FOR THE PARTICIPANTS"
⚠️ THE FUND OF FUNDS	⚠️ "A 'FUND OF FUNDS' OF INR 10,000 CRORE FOR START-UPS WAS ESTABLISHED UNDER THE DEPARTMENT FOR PROMOTION OF INDUSTRY AND INTERNAL TRADE WHICH SHALL BE MANAGED BY SIDBI. The fund would INVEST IN SEBI REGISTERED AIFs WHICH, IN TURN, WOULD INVEST IN START-UPS", acting as "AN ENABLER TO ATTRACT PRIVATE CAPITAL IN THE FORM OF EQUITY, QUASI-EQUITY, SOFT LOANS AND OTHER RISK CAPITAL"
⚠️ NIIF	⚠️ "The Government of India also SET UP THE NATIONAL INFRASTRUCTURE INVESTMENT FUND IN 2015 TO INVEST IN INFRASTRUCTURE AND STRATEGIC ASSETS"
⚠️ SUPPLY SIDE	⚠️ "the emergence of the start-up phase brought in SEVERAL VALUE CREATORS IN SERVICES AND TECHNOLOGY ENABLED BUSINESS MODELS", with opportunities in CLEAN TECHNOLOGIES AND RENEWABLE
⚠️ REALTY	⚠️ "The realty sector thrives in India PRIMARILY DUE TO URBAN MIGRATION WHICH DRIVES THE DEMAND FOR MORE INVESTMENTS IN BOTH RETAIL AND COMMERCIAL URBAN REALTY"
⚠️ PRIMARY MARKET	⚠️ "The strong growth of the primary capital market WITH SEVERAL BLOCKBUSTER IPOs INCREASED THE SCOPE FOR FAVOURABLE PRIVATE EQUITY EXITS"
⚠️ THE IBC	⚠️ "The INTRODUCTION OF THE INSOLVENCY AND BANKRUPTCY CODE 2016 CREATED A NEW SPACE FOR SPECIAL SITUATION FUNDS TO STEP IN, LOOKING FOR SUITABLE OPPORTUNITIES IN DISTRESSED ASSET SECTOR PERTAINING TO OLD ECONOMY COMPANIES"
⚠️ THE SME SECTOR	⚠️ "with improved governance, regulations and management practices, THE SME SECTOR WHICH IS A SIGNIFICANT CONTRIBUTOR TO THE GROWTH STORY HAS IMMENSE POTENTIAL"

5. The current market

From 21 funds to 1,802, and to INR 15.74 lakh crore of commitments. Those two numbers are the most likely factual questions from this chapter.

Think of it like this

The licence that named only one trade

A municipal licence issued in 1988 permitted a shop to sell "electrical goods manufactured by new or untried methods". Almost nobody qualified, and the shopkeeper next door selling ordinary wire could not get one.

That was the Venture Capital Guidelines of 25 November 1988, which "PROVIDED A RESTRICTED SCOPE BY DEFINING VENTURE CAPITAL MAINLY TO INCLUDE ASSISTANCE... WHERE THE RISK ELEMENT IS COMPARATIVELY HIGH DUE TO A NEW OR UNTRIED TECHNOLOGY AND/OR THE ENTREPRENEURS BEING TECHNOCRATS OR FIRST GENERATION ENTREPRENEURS."

In 1996 the licence was rewritten to say simply "electrical goods". "The traditional concept of VC being technology risk capital WAS BROAD-BANDED BY SEBI IN 1996... WHICH DID AWAY WITH THE REQUIREMENT OF LOOKING FOR 'UNTRIED TECHNOLOGIES'. THE ENTIRE SPECTRUM OF PRIVATE CAPITAL INVESTMENT IN UNLISTED COMPANIES WAS THUS BROUGHT INTO THE AMBIT OF INSTITUTIONAL INVESTMENT."

One phrase removed, and an industry became possible.

The three shelves in a government stores

A ration shop has three shelves. The first holds subsidised goods the government wants people to buy — it is stocked deliberately and priced with support. The second holds ordinary goods at ordinary prices. The third holds items sold to those who know what they are doing, with no protection and no subsidy.

That is exactly how the three AIF categories work.

Category I covers funds in sectors "WHICH THE GOVERNMENT OR REGULATORS CONSIDER AS SOCIALLY OR ECONOMICALLY DESIRABLE" — venture capital, SME, social impact, special situation, infrastructure funds and the CDMDF.

Category II is the residual shelf: "an AIF THAT DOES NOT FALL IN CATEGORY I AND III AND WHICH DOES NOT UNDERTAKE LEVERAGE OR BORROWING OTHER THAN AS PERMITTED" — private equity and debt funds "FOR WHICH NO SPECIFIC INCENTIVES OR CONCESSIONS ARE GIVEN."

Category III is the third shelf: "EMPLOYS DIVERSE OR COMPLEX TRADING STRATEGIES AND MAY EMPLOY LEVERAGE."

Ask "does the government want this to happen?" and "does it borrow at fund level?" — and the shelf answers itself.

The seed merchant and the orchard financier

A seed merchant lends to a farmer who has not yet ploughed. He may take part of the crop, part of the land's value, or a promise repayable in grain — whatever fits, because nothing is certain yet.

A financier lending to an established orchard asks for a share of the orchard, because the trees exist and can be valued.

That is why the definitions differ. A VCF invests "primarily in UNLISTED SECURITIES of start-ups, emerging or early-stage venture capital undertakings" — the word securities giving "LATITUDE TO STRUCTURE THE INVESTMENTS APPROPRIATELY", covering "equity or debt or preference capital or other convertible structures."

A PE Fund invests "primarily in EQUITY OR EQUITY LINKED INSTRUMENTS OR PARTNERSHIP INTERESTS" — because "BEING LATER STAGE INVESTORS, PE FUNDS ARE IN A BETTER POSITION TO TAKE EQUITY RISKS IN INVESTEE COMPANIES."

The instrument follows the stage.

The buffer stock the government keeps for a bad harvest

The Food Corporation buys grain in good years and releases it when prices spike. It is not trying to make money; it exists so that the market does not seize up.

The Corporate Debt Market Development Fund is the same idea for bonds. It is "a CLOSE-ENDED AIF FORMED AS A TRUST AND WITH A 15-YEAR TENURE FROM THE DATE OF ITS FIRST CLOSING", whose units go only to "ASSET MANAGEMENT COMPANIES AND SPECIFIED DEBT-ORIENTED SCHEMES OF MUTUAL FUNDS."

Its purpose is "TO PURCHASE CORPORATE DEBT SECURITIES FROM DEBT-ORIENTED MUTUAL FUND SCHEMES DURING PERIODS OF MARKET DISLOCATION AS MAY BE DECIDED BY SEBI."

And like the buffer stock, in normal times it sits quietly: "During such periods when there is no market dislocation, THE FUND WILL INVEST IN LIQUID AND LOW-RISK DEBT INSTRUMENTS."

Which is why it sits in Category I — it exists for "the broader economic objective of development of corporate bond market... TO ACT AS A BACKSTOP FACILITY DURING TIMES OF MARKET STRESS."

The old shop licence with a transfer window

A market authority allows shops holding old licences to convert to the new system — but only until a stated date, and a converted shop may not open a new branch afterwards.

That is the Migrated Venture Capital Fund — a fund "PREVIOUSLY REGISTERED AS A VENTURE CAPITAL FUND UNDER THE SEBI (VENTURE CAPITAL FUNDS) REGULATIONS, 1996 AND SUBSEQUENTLY REGISTERED UNDER THE SEBI (AIF) REGULATIONS, 2012 AS A SUB-CATEGORY OF VENTURE CAPITAL FUND UNDER CATEGORY I AIF."

The window closes: "the facility of migration is AVAILABLE TILL JULY 19, 2025 ONLY."

And afterwards the restriction bites: "migrated VCFs are NOT PERMITTED TO LAUNCH ANY NEW SCHEMES", though existing schemes may be extended up to 2 years with approval of two-thirds of unit holders by value, and schemes whose liquidation period had expired get an additional liquidation period till July 19, 2026.

The wedding hall booked by twelve families together

Twelve families in a neighbourhood pool money to build a community hall. Each contributes what they can; nobody is asked for a minimum; and no family that will personally use the hall for a business is allowed to fund that particular booking.

That is an angel fund — "a sub-category fund under Category I AIF that RAISES FUNDS FROM ACCREDITED INVESTORS."

The rules match the picture. "An angel fund SHALL ON-BOARD AT LEAST FIVE ACCREDITED INVESTORS BEFORE DECLARING ITS FIRST CLOSE." "NO MINIMUM VALUE OF INVESTMENT SHALL BE APPLICABLE FOR INVESTMENT IN AN ANGEL FUND BY AN ANGEL INVESTOR." But the investee side is bounded: "Investment made by an angel fund in any investee company SHALL NOT BE LESS THAN Rs 10 LAKH AND SHALL NOT EXCEED Rs 25 CRORE."

And the conflict rule: "Angel funds SHALL NOT ACCEPT CONTRIBUTION FOR INVESTMENT IN AN INVESTEE COMPANY, FROM THOSE ANGEL INVESTORS WHO ARE A RELATED PARTY TO SUCH INVESTEE COMPANY."

Key terms in this chapter

Angel Fund: A sub-category fund under Category I AIF that raises funds from accredited investors. It must on-board at least five accredited investors before first close, faces no minimum investment from an angel investor, and must invest between Rs 10 lakh and Rs 25 crore in any investee company.
Angel Investor: An accredited investor, or key management personnel of an angel fund or its manager, who invests in an angel fund.
Category I AIF: An AIF investing in start-up or early-stage ventures, social ventures, SMEs, infrastructure or other sectors the government or regulators consider socially or economically desirable, including venture capital, SME, social impact, special situation and infrastructure funds and the CDMDF.
Category II AIF: An AIF that falls in neither Category I nor Category III and does not undertake leverage or borrowing other than as permitted — typically private equity, debt and pre-IPO funds for which no specific incentives or concessions are given.
Category III AIF: An AIF employing diverse or complex trading strategies which may employ leverage including through investment in listed or unlisted derivatives, such as hedge funds and funds trading for short term returns.
Corporate Debt Market Development Fund (CDMDF): A close-ended Category I AIF formed as a trust with a fifteen-year tenure from first closing, whose units go to AMCs and specified debt-oriented mutual fund schemes, purchasing listed investment-grade corporate debt of up to five years residual maturity during market dislocation as a backstop facility.
Debt Fund: An AIF investing primarily in debt securities of listed or unlisted investee companies or in securitised debt instruments. Private debt is alternative because of its illiquidity and because traditional investors do not commonly hold it.
Equity Linked Instruments: Instruments convertible into equity shares, share warrants, preference shares, and debentures compulsorily or optionally convertible into equity.
Fund of Funds for Start-ups: The INR 10,000 crore fund established under the Department for Promotion of Industry and Internal Trade and managed by SIDBI, which invests in SEBI-registered AIFs that in turn invest in start-ups.
Infrastructure Fund: An AIF investing primarily in unlisted securities, partnership interest, listed debt or securitised debt instruments of investee companies or SPVs engaged in or formed for operating, developing or holding infrastructure projects.
Insolvency Resolution: The process of providing capital for heavily indebted companies to turn around, or helping their acquisition by new owners through auctions conducted under the Insolvency and Bankruptcy Code, 2016.
K. B. Chandrasekhar Committee: The committee whose recommendations in 2000 led to a revision of the SEBI venture capital regulations, alongside tax breaks given to VCFs at fund level.
Leveraged Loan: Subordinate debt financing provided to companies that already carry high senior debt — loans secured on assets with first claim on cash flow — on their balance sheet.
Migrated Venture Capital Fund: A fund previously registered under the SEBI (Venture Capital Funds) Regulations, 1996 and subsequently registered under the AIF Regulations as a sub-category of venture capital fund under Category I. Migration was available till 19 July 2025 and such funds may not launch new schemes.
National Infrastructure Investment Fund: The fund set up by the Government of India in 2015 to invest in infrastructure and strategic assets.
Private Equity Fund: An AIF investing primarily in equity or equity linked instruments or partnership interests of investee companies according to the fund's stated objective, mostly in later stage financing of businesses with an established model needing to scale.
SEBI (Venture Capital Fund) Regulations, 1996: The regulations that broad-banded venture capital by removing the untried technology requirement, bringing the entire spectrum of private capital investment in unlisted companies into the ambit of institutional investment.
SME Fund: An AIF investing primarily in unlisted securities of SMEs, or securities of SMEs listed or proposed to be listed on an SME exchange or SME segment, SME taking its meaning from the MSMED Act, 2006.
Social Impact Fund: An AIF investing primarily in securities, units or partnership interest of social ventures or securities of social enterprises, satisfying the social performance norms laid down by the fund, and aligning with the Social Stock Exchange framework.
Social Venture: A trust, society, company, venture capital undertaking or limited liability partnership formed with the purpose of promoting social welfare, solving social problems or providing social benefits.
Special Situation Assets: Stressed loans acquired by ARCs or RBI-permitted entities under a resolution plan; security receipts issued by an RBI-registered ARC; securities of companies whose stressed loans are available for acquisition; securities of companies whose borrowings back security receipts or are under insolvency resolution; and securities of companies with disclosed defaults continuing at least ninety calendar days.
Special Situation Fund: A Category I AIF investing in special situation assets, which may act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016.
Specified AIF: A fourth category of AIF inserted by SEBI, for funds that do not fall under Categories I, II or III.
Venture Capital Fund (VCF): An AIF investing primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, services, technology or intellectual property based activities or a new business model. It includes a migrated venture capital fund.
Venture Capital Guidelines, 1988: The Government of India guidelines of 25 November 1988 that gave venture capital a restricted scope, confining it to enterprises where risk was high due to new or untried technology or because the entrepreneurs were technocrats or first generation entrepreneurs.
Venture Capital Undertaking: A domestic company which is not listed on a recognised stock exchange at the time of making the investment.
Venture Debt Fund: A fund financing an advanced stage of venture capital through mezzanine financing — debt with some equity upside such as attached warrants.

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Original explanatory writing based on the official NISM workbook for Series XIX-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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