Foundation — Registration, commitment and tenure under the AIF Regulations

Why this chapter carries 10 per cent

Chapter 4 is one of the two heaviest chapters in this workbook — 10 marks out of 100. It is also the chapter where the examiner can be most precise, because almost every sentence contains a number: a percentage, a rupee figure, a number of days, a number of investors, a fraction of unit holders. You cannot argue with a number. You either remember that a scheme needs a corpus of INR 20 crore or you do not.

So read this chapter differently from the earlier ones. In Chapter 1 you were building intuition. Here you are memorising a rulebook — the SEBI (Alternative Investment Funds) Regulations, 2012, plus the parts of the Foreign Exchange Management Act, 1999 (FEMA) that touch AIFs.

A word of encouragement before we start. Indian regulation looks intimidating because it is written in long sentences with many provisos. But underneath, SEBI is doing something very simple. It is saying: this is a private, illiquid, risky product sold to rich people. So I will not check what you invest in. I will check who you are, whether you have put your own money in, whether you told your investors the truth, and whether you stayed inside a few concentration limits. Everything in this chapter is one of those four ideas dressed in legal clothing.

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4.1.1 Who must register

On and from the commencement of these Regulations, all existing and proposed AIFs that are domiciled in India by virtue of being incorporated in India are subject to compulsory registration with SEBI.

Read that carefully. The trigger is domicile in India by virtue of being incorporated in India. A fund registered in Singapore that invests in India is not an AIF — it comes in through the FVCI or FPI or FDI route, which we cover in the second half of this chapter.

What about funds that already existed when the Regulations came in 2012?

• Existing schemes will be allowed to complete their agreed tenure — nobody was forced to wind up mid-life.
• However, such funds shall not raise any fresh monies other than commitments already made — they could draw down what was already committed, but could not go out and sell new units.

And funds registered under the old SEBI (Venture Capital Funds) Regulations, 1996? They may migrate. The funds, registered as venture capital fund under SEBI (Venture Capital Funds) Regulations, 1996, desirous of migrating to SEBI (AIF) Regulations may seek registration under SEBI (AIF) Regulations as migrated venture capital fund subject to approval of two-thirds of their investors by value of their investment within July 19, 2025.

Three things to note in that sentence, because each is examinable:

1. The resulting registration is called a migrated venture capital fund — a specific label, not just "Category I".
2. The consent threshold is two-thirds of investors by value of their investment. Notice "by value" — this is not one-investor-one-vote. An investor with Rs 50 crore committed carries fifty times the weight of one with Rs 1 crore.
3. There was a deadline: July 19, 2025.

AIFs may seek registration as Category I or II or III as appropriate to their investment strategy. In addition, AIFs can seek registration as Specified AIF, for which SEBI shall lay out detailed regulations.

The application is made in Form A as specified in the SEBI (AIF) Regulations accompanied by a non-refundable application fee. Remember the two words Form A and non-refundable — if SEBI says no, the fee does not come back.

A quick reminder of what the categories mean, since this chapter assumes it:

• Category I funds are venture capital funds which are generally perceived to have positive spill over effects on economy and for which SEBI or the Government of India or other regulators in India might consider providing incentives or concessions.
• Category II AIFs are funds which do not satisfy the requirements of Category I and Category III and which do not undertake leverage or borrowing other than to make day-to-day operational requirements. Such Category II AIFs include private equity funds or debt funds.

Category II is defined negatively — it is the residual box. Whatever is not Category I and not Category III falls here. This is why most private equity and most private credit funds in India are Category II.

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4.1.2 Registration criteria and documentation — the seven checks

SEBI decides on the eligibility and registration of an AIF by examination of the given documents and criteria for eligibility. There are seven. Learn them as a checklist, because the exam loves to insert a fake eighth or misstate one.

Check 1 — the constitutional document must permit the activity. The Memorandum of Association in case of a company (registered under the Companies Act or any Central / State Act); or the Trust Deed in case of a Trust (registered under the Indian Trusts Act, 1882 and the Registration Act, 1908); or the Partnership Deed in case of a limited liability partnership (registered under the Limited Liability Partnership Act, 2008) permits it to carry on the activity of an AIF. And SEBI may stipulate additional information requirements and filing of other documents in individual cases.

Notice the three legal vehicles and the three statutes that govern them. A trust needs two statutes — the Indian Trusts Act, 1882 and the Registration Act, 1908.

Check 2 — a public-offer prohibition must be written in. AIFs are prohibited from making an invitation to the public to subscribe to its units. Accordingly, such prohibition should be included in the memorandum and articles of association / or trust deed / or partnership deed of the applicant.

This is subtle and worth pausing on. It is not enough that the law forbids a public offer. The fund's own constitutional document must contain the prohibition. SEBI wants the restriction baked into the entity, so that a later breach is also a breach of the trust deed.

Check 3 — fit and proper. The applicant, Sponsor and Manager are fit and proper persons based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008. Note the source: Schedule II of the SEBI (Intermediaries) Regulations, 2008 — not the AIF Regulations themselves. And note that three parties are tested: the applicant, the sponsor and the manager.

Check 4 — the key investment team certification requirement. This is the check most likely to appear in your paper, because you are sitting for one of the very certifications it names.

(a) At least one key personnel, amongst the associated persons functioning in the key investment team of the Manager of the Category I and/or Category II AIF, shall have either the NISM-Series-XIX-C: Alternative Investment Fund Managers Certification Examination or NISM-Series-XIX-D: Category I and II Alternative Investment Fund Managers Certification Examination, as the relevant certification as specified by SEBI. In case of expiry of the validity of such certification, the personnel shall obtain fresh certification to ensure compliance with certification norms.

(b) at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking from a university or an institution recognised by the Central or any State Government or a foreign university or a CFA charter from CFA Institute or any other qualification as may be specified by SEBI; provided that both the requirements, as stated in 4(a) and 4(b), are fulfilled by the same key personnel.

The sting is in the proviso. It would be much easier if one person had the NISM certificate and a different person had the degree. SEBI does not allow that: both the requirements... are fulfilled by the same key personnel. One human being must hold both the qualifying degree (or CFA charter) and the NISM XIX-C or XIX-D certification.

Check 5 — infrastructure. The Manager or Sponsor has the necessary infrastructure and manpower to effectively discharge its activities.

Check 6 — clarity of the proposition. The applicant has clearly described at the time of registration the investment objective, the targeted investors, proposed corpus, investment style or strategy and proposed tenure of the fund or scheme. Five items — objective, targeted investors, proposed corpus, style or strategy, tenure.

Check 7 — past refusals. Whether the applicant or any entity established by the Sponsor or Manager has earlier been refused registration by SEBI. Note the width: not just the applicant, but any entity established by the Sponsor or Manager. You cannot get refused under one name and reappear under another.

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4.1.3 Conditions for registration — what you promise for life

Registration is not a one-time hurdle. Four conditions run continuously:

1. The AIF shall abide by the provisions of the Act and the SEBI (Alternative Investment Funds) Regulations, 2012.
2. The AIF shall not carry on any other activity other than permitted activities.
3. The AIF shall forthwith inform SEBI in writing, if any information or particulars previously submitted to SEBI are found to be false or misleading in any material particular or if there is any material change in the information already submitted.
4. An AIF which has been granted registration under a particular category cannot change its category subsequent to registration, except with the approval of SEBI.

Condition 3 uses the word forthwith — immediately, not at the next quarterly filing. Condition 4 is the one candidates get wrong: category change is not impossible, it is not permitted without SEBI's approval. If an option says "an AIF can never change its category", it is wrong.

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4.1.4 Sponsor / Manager commitment — skin in the game

You met this idea in Chapter 3. Here is the regulation itself:

1. The Manager or Sponsor of Category I and/or II AIFs shall have a continuing interest in the AIF (in each scheme where there are multiple schemes in the fund) of not less than 2.5% of the corpus or INR 5 crore whichever is lower, in the form of investment in the AIF and such interest shall not be through the waiver of management fees proposed to be earned by managing the fund.
2. The contribution of each employee or director of the fund or employee or director of the investment manager in the corpus shall not be less than INR 25 lakh if they choose to participate as investors in the fund in individual capacity.
3. The Manager or Sponsor shall disclose their investment interest in the AIF to the investors.

Four traps live in point 1:

• It is 2.5% or INR 5 crore, whichever is LOWER — so the rupee figure is a cap, not a floor. The commitment stops growing once the corpus crosses Rs 200 crore.
• It is per scheme, not per fund — in each scheme where there are multiple schemes in the fund.
• It must be in the form of investment in the AIF — real cash units.
• It shall not be through the waiver of management fees. Writing off fees you would have earned is not skin in the game, because you never had that money at risk.

Point 2 gives you the INR 25 lakh figure for employees and directors — a concession from the general Rs 1 crore minimum, and one of the most frequently examined numbers in the chapter.

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4.1.5 Co-investments — the 2025 overhaul

Co-investment means investment made by a Manager or Sponsor or investor of Category I AIFs and Category II AIFs in investee companies where such Category I AIF and Category II AIF make investment.

Two channels exist: Co-investment by investors of Category I AIF and Category II AIF is available through a co-investment scheme launched under these regulations or a Co-investment Portfolio Manager as specified under the SEBI (Portfolio Managers) Regulations, 2020.

The governing principle, whichever channel is used, is no better terms for the co-investor:

The terms of Co-investment in an investee company by a Manager or Sponsor or co-investor, shall not be more favourable than the terms of investment for the Category I AIF or Category II AIF. In addition, the terms of exit from the Co-investment in an investee company, including the timing of exit, shall be identical to the terms applicable to that of exit of the Category I AIF or Category II AIF.

Note the two different words. Entry terms must be not more favourable — they may be worse or equal, never better. Exit terms, including timing, must be identical. You may not sneak out of a deal a month before the fund does.

The co-investment scheme route, introduced in September 2025, comes with its own conditions. Co-investment scheme means a scheme of a Category I or Category II AIF, which facilitates co-investment to investors of a particular scheme of an AIF, in unlisted securities of an investee company where the scheme of the AIF is making investment or has invested. A shelf placement memorandum shall be filed with the SEBI, through a merchant banker along with the fee as specified.

The conditions:

• Only accredited investors of the Category I or Category II Alternative Investment Fund shall be eligible to invest in a co-investment scheme.
• Each co-investment scheme shall invest in only one Investee Company.
• A separate co-investment scheme shall be launched for each co-investment, per the shelf placement memorandum; the fee for filing shelf placement memorandum for launching Co-investment schemes is ₹1,00,000.
• A co-investment scheme shall not invest in units of AIFs.
• The timing of exit must be identical to the AIF's exit.
• The Manager shall not provide advisory services to any investor other than the investors of a co-investment scheme or clients of a Co-investment Portfolio Manager.
• The co-investment scheme shall be wound up on exit from the co-investment — it dies with the deal.

Remember the phrase one scheme, one company. And remember that the co-investment scheme is only for accredited investors, and only in unlisted securities.

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4.1.6 Tenure of fund and schemes

1. Tenure of a scheme refers to the duration of the scheme from the date of first close till last date of the term as specified in the fund documents.
2. Category I and Category II AIFs shall be close ended and the tenure of fund (if there is only one scheme under it) or each scheme therein shall be determined at the time of application to SEBI subject to a minimum tenure of three years. And: The trust or incorporated entity may have a different term as per its incorporation documents but each scheme of the AIF (in Category I and II) needs to be close ended for a defined term.
3. Extension of the tenure of the close ended AIF may be permitted up to 2 years, subject to approval of two-thirds of the unit holders by value of their investment in the AIF. However, Accredited Investors only fund may be permitted to extend its tenure upto 5 years, subject to the approval of two-thirds of the unit holders by value of their investment in the Accredited Investors only fund.
4. In the absence of consent of unit holders or upon expiry of the extended tenure, the AIF shall be wound up as per SEBI (AIF) Regulations.

Three numbers to lock in: minimum tenure 3 years; extension up to 2 years ordinarily; up to 5 years for an Accredited Investors only fund. In both extension cases the consent threshold is two-thirds of unit holders by value.

Also note where the tenure clock starts: from the date of first close, not from the date of registration and not from the final close.

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4.1.7 Accredited investors — the eligibility ladder

SEBI's Accredited Investor framework says, in effect: if you are demonstrably rich and financially capable, I will relax some rules for you, because you can look after yourself. As per the framework, the AIs may avail (a) flexibility in minimum investment amount and (b) concessions from specific regulatory requirements applicable to investment products, subject to specific conditions.

Accredited Investors means any person who is granted a certificate of accreditation by an accreditation agency, on these criteria:

A. Individual, HUF, Family Trust, Sole Proprietorship or Partnership — any one of three tests:

• annual income should be at least INR 2 crores; or
• net worth should be at least INR 7.5 crore, out of which not less than INR 3.75 crores should be in the form of financial assets; or
• annual income should be at least INR 1 crore and minimum net worth to be INR 5 crore, out of which not less than INR 2.5 crore should be in the form of financial assets.

Notice the pattern. In the pure net-worth test, half must be financial assets (3.75 of 7.5). In the combined test, again half must be financial (2.5 of 5). SEBI does not want somebody accredited purely because they own land.

That thought continues: In case of accreditation of Individual investors, HUFs and sole proprietorships, the value of the primary residence of the Individual, Karta of the HUF, or the Sole Proprietor, as the case may be, shall not be considered for calculation of net worth. Your own house does not count. You cannot sell it and still live in it.

For joint holders:

• If joint holders are parent(s) and child(ren), at least one person should independently fulfil the eligibility criteria for accreditation.
• If joint holders are spouses, their combined income/net worth should fulfil the eligibility criteria for accreditation.

Spouses get to add their numbers. Parent and child do not — one of them must qualify alone. Remember the difference; the exam has asked it.

• In case of a partnership firm set up under the Indian Partnership Act, 1932, each partner should independently meet the eligibility criteria for accreditation. Every single partner, individually.
• In case of foreign investors seeking accreditation, the eligibility should be determined based on the rupee equivalent of their income and/or net worth.

There is also a bridging provision. Pending receipt of certificate from an accreditation agency, based on the investment manager's assessment of the investor's eligibility criteria, the investment manager may execute the contribution agreement, and initiate related operational procedures, but: (a) Any commitment made by such investor shall not be included in calculation of corpus of the scheme until such investor obtains accreditation certificate... (b) Schemes of AIFs shall receive funds from such investors only after they obtain accreditation certificate. Paperwork may start; corpus counting and money movement may not.

B. Body Corporates and Trusts — In case of a body corporate, net worth is at least INR 50 crore, where Net Worth = (Capital + Free Reserves) – (Accumulated Losses + Deferred Expenditure not written-off). In case of a trust, other than a family trust, net worth is at least INR 50 crore, where Net Worth = (Book Value of all Assets, other than intangible assets) – (Book Value of total liabilities).

Two different formulas for the same rupee figure. A body corporate works from capital and reserves; a trust works from assets and liabilities. And a family trust is judged on the individual ladder in part A, not on the Rs 50 crore corporate test.

Eligibility is proved by Financial information as per the statutory audit; or Financial information as per audit by a statutory auditor, as on a date during the financial year in which the application is made for accreditation.

Deemed accredited investors — no certificate needed at all:

• Central Government and the State Governments
• Developmental agencies set up under the aegis of the Central Government or the State Governments
• Funds set up by the Central Government or the State Governments
• Qualified institutional buyers as defined under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
• Category I foreign portfolio investors
• Sovereign wealth funds and multilateral agencies
• Any other entity as may be specified by SEBI from time to time

Note Category I FPIs only — a Category II FPI is not deemed accredited.

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4.1.7 continued — accreditation agencies and validity

'Accreditation Agency' means a subsidiary of a recognized stock exchange or a subsidiary of a depository or any other entity as may be specified by SEBI. So it is not SEBI itself and not the fund manager — it is a subsidiary of an exchange or a depository.

The applicants should be "fit and proper" to participate in the securities market and not be wilful defaulters or have convictions or restraint orders against them.

The agency should issue an "Accreditation Certificate" to eligible accredited investors, bearing a unique accreditation number, name of the Accreditation Agency, PAN of the applicant and validity of the accreditation with a start date and an end date. Four contents plus a start and end date. Accreditation shall be granted solely based on the KYC and the financial information of the applicants.

Every certificate carries this disclaimer: "The assessment of the applicant for accreditation is solely based on the applicant's KYC and financial information and does not in any manner exempt market intermediaries and pooled investment vehicles from carrying out necessary due diligence of the accredited investors at the time of on boarding them as their clients." Accreditation is not a substitute for KYC by the fund.

Validity — learn all three cases:

The agencies are responsible for verification of documents submitted by the applicants; timely processing of applications... and issuance of Accreditation Certificate; maintaining data of accredited investors; verification of accreditation status; maintaining confidentiality of investor information; any other responsibilities as may be specified by SEBI.

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Large value funds and AI-only schemes

"Large value fund for accredited investors" means an AIF or scheme of an AIF in which each investor (other than the Manager, Sponsor, employees or directors of the Fund or employees or directors of the Manager) is an accredited investor and invests not less than INR 25 crores.

Two conditions together: every investor accredited, and each investing at least Rs 25 crore. The carve-out for the manager, sponsor, employees and directors matters — their smaller contributions do not spoil the LVF status.

AI only schemes are newer: a separate category of AIF schemes, limited exclusively to Accredited Investors only (AI-only schemes), that offers scheme specific regulatory flexibilities in terms of less compliance around investor protection and extending additional relaxations and operational flexibilities to Large Value Funds (LVFs) for accredited investors.

Naming is mandatory: Any new scheme proposed to be launched as an AI only scheme or LVF shall have the words 'AI only fund' or 'LVF' added to the scheme name at the end, respectively. At the end of the name, so an investor reading the scheme name knows at once.

Migration is allowed but demanding: existing eligible AIFs/Schemes of AIFs may convert/migrate to AI only schemes/LVF schemes subject to obtaining positive consent from all the investors and meeting the respective conditions. Note positive consent from ALL the investors — not two-thirds, not 75 per cent, and not silence-means-yes. And the tenure of an AI only scheme shall be extended maximum by 5 years (inclusive of tenure extended, if any, prior to conversion).

One kind provision closes the section: if an investor is an AI at the time of on boarding into an AIF scheme, he/she shall be reckoned as an AI through the life of the scheme, even if he/she were to lose such status in the interim. Once in, always in — for that scheme. A businessman whose income collapses in year four does not have to exit.

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The four consent thresholds — memorise this table

This chapter contains four different voting thresholds. Candidates mix them up constantly. Fix them now:

The pattern is worth understanding, not just memorising. Two-thirds governs decisions about the fund's own life and direction. 75 per cent governs related-party transactions, where the conflict of interest is sharper. Unanimity governs a change that strips investors of protections.