NISM Series XIX-E · Chapter 15: Regulatory Framework

L1 · Foundation

Getting In the Door - Registration, Categories and Accredited Investors

Why SEBI regulates AIFs and what non-compliance costs, the four categories, the permitted legal structures, the registration criteria and in-principle approval, the sponsor commitment for Category III, open-ended against close-ended funds, listing of close-ended units, and the accredited investor framework including LVFs and AI-only Funds.

24 min read · Worth 10% of the paper · Written from pages 388–452 of the official NISM workbook · Updated 18 September 2026

Getting In the Door - Registration, Categories and Accredited Investors

This chapter is the rulebook. Most of it is numbers and conditions, and almost every one of them can be tested. Read it once for the shape, then use L3 to drill the figures.

A. Why the SEBI (AIF) Regulations, 2012 exist

SEBI is a statutory regulatory body entrusted with the responsibility to regulate the Indian Capital Markets. It monitors and regulates the securities market and protects the interests of investors by enforcing rules and promoting the development of the market.

SEBI introduced the SEBI (Alternative Investment Funds) Regulations in 2012 to regulate pooled investment funds in India - venture capital funds, angel funds, private equity funds, infrastructure funds, debt funds, social venture funds and hedge funds.

What non-compliance costs

The penalty is set out vide section 15EA of the SEBI Act:

Element	Amount
Minimum penalty	₹1 lakh
Can extend to	₹1 lakh for each day of non-compliance
Maximum	₹1 crore or three times the amount of gains made out of such non-compliance, whichever is HIGHER

15.1.1 Who must register

All existing and proposed AIFs that are domiciled in India by virtue of being incorporated in India are subject to COMPULSORY registration with SEBI.

Existing schemes may complete their agreed tenure, but shall not raise any fresh monies other than commitments already made till registration is granted.
Funds registered as venture capital funds under the SEBI (Venture Capital Funds) Regulations, 1996 that wish to migrate may seek registration as a migrated venture capital fund, subject to approval of two-thirds of their investors by value of their investment, within July 19, 2025.

The four categories

Category	What it does	Workbook examples
Category I	Invests in start-ups, early-stage ventures, social ventures, SMEs, infrastructure or other sectors which the government and regulators consider socially or economically desirable	Venture Capital Funds, Social Impact Funds, SME Funds, Angel Funds, Infrastructure Funds, Special Situation Funds, Corporate Debt Market Development Fund
Category II	Prohibited from taking leverage or borrowing, except as prescribed by SEBI. Does not fall in Category I or III	Private Equity Funds, Debt Funds
Category III	Uses diverse or complex trading strategies and may employ leverage, including through investment in listed and unlisted derivatives, to make short-term profits	Hedge Funds, or funds which trade with a view to make short term returns
Specified AIF	SEBI may specify regulations for funds that do not fall under any of the three categories	-

The permitted legal structures

A Company formed under the Companies Act, 2013
A Trust formed under a Trust Deed, duly registered under the Registration Act, 1908
A Limited Liability Partnership under a Partnership Deed filed with the Registrar under the LLP Act, 2008
A Body Corporate established under the laws of the Central or State Legislature

A proprietorship is not on the list. Neither is an ordinary partnership firm.

15.1.2 What SEBI examines before registering

The constitution document permits AIF activity - the Memorandum of Association for a company, the Trust Deed for a trust (registered under the Indian Trusts Act, 1882 and the Registration Act, 1908), or the Partnership Deed for an LLP. Registration of these documents is compulsory for every applicant.
AIFs are prohibited from making an invitation to the public to subscribe to their units, and this prohibition must be written into the memorandum and articles, trust deed or partnership deed.
The applicant, sponsor and manager must be "fit and proper" under Schedule II of the SEBI (Intermediaries) Regulations, 2008: (i) integrity, reputation and character; (ii) no history of restraint orders and convictions; (iii) financial competence based on net worth and solvency; (iv) no history of being a wilful defaulter.
The key investment team of the manager must have:
- (a) At least one key personnel with the relevant NISM certification. The workbook lists NISM-Series-XIX-C or XIX-D for Category I and/or II managers, and NISM-Series-XIX-C or XIX-E for Category III managers. If the certification expires, a fresh certification must be obtained. This does not apply to AI-only Funds.
- (b) At least one key personnel with a professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking, from a recognised Indian or foreign university, or a CFA charter. Both (a) and (b) may be met by the same person.
The manager or sponsor has the necessary infrastructure and manpower.
The applicant has clearly described the investment objective, targeted investors, proposed corpus, investment style or strategy and proposed tenure.
Whether the applicant, or any entity set up by the sponsor or manager, has earlier been refused registration by SEBI.

15.1.3 Disclosures at application

The sponsor or manager must appoint a SEBI-registered Custodian for safekeeping of securities or goods of the AIF, and give SEBI the details, BEFORE the date of the first investment of the scheme.

The application covers, in the prescribed format:

Block	What is disclosed
General information	Contact details, legal structure, category sought, open-ended or closed-ended, fund infrastructure, draft Placement Memorandum, previous registrations with SEBI, RBI or others
Applicant details	Separate lists for a trust, a company or body corporate, and an LLP - in each case whether the deed permits AIF activity and prohibits public invitation
Sponsor and Investment Manager details	Structure, qualifications, shareholding, identity proof, past experience managing capital pools, financial statements for the previous year, earlier AIFs or VCFs
Business plan	Objective and strategy, target investors, target sectors, proposed corpus, proposed fees, tenure, proposed use of leverage
Regulatory action	Litigation, orders for violating securities laws, earlier refusal or suspension of registration
Declaration	Fit and proper; will contribute the sponsor commitment - 5 per cent of the corpus or ₹10 crore, whichever is LOWER, for a Category III AIF; will comply with investment conditions

15.1.4 Conditions of registration

Abide by the SEBI Act and the AIF Regulations
Carry on no activity other than permitted activities
Inform SEBI in writing forthwith if information submitted is false or misleading, or has materially changed
A fund registered in one category cannot change its category, except with SEBI approval

15.1.5 In-principle approval

Registering a trust deed under the Registration Act, 1908, or an LLP partnership deed, may be time-consuming. So SEBI may grant an "in-principle" approval even if the deed is not yet registered.

After in-principle approval:

The deed must be registered within 6 MONTHS of the in-principle approval.
The applicant MAY accept COMMITMENTS from investors, but shall NOT call or accept MONEY until the Registration Certificate is received.

15.2 Sponsor or manager commitment - Category III

Continuing interest of not less than 5 per cent of the corpus or ₹10 crore, whichever is LOWER.
It must be an INVESTMENT in the scheme - NOT a waiver of management fees.
Each employee or director of the fund or of the manager who invests individually must put in not less than ₹25 lakh.
The manager or sponsor must disclose its investment interest to investors.

15.3 Open-ended and close-ended

	Open-ended	Close-ended
How money comes in	Capital contributed on admission; further contributions from time to time	Capital commitments, drawn by "Capital Calls" over the "Commitment Period"
Commitment period	-	Usually the first three years of the fund tenure
Getting money out	Redemption at pre-defined intervals - quarterly, half-yearly or yearly	No redemption before winding-up. Exiting after the lock-in in the PPM means an exit load

Category III schemes may be either open-ended or close-ended, as structured at the time of registration.

Listing of close-ended units

Units of a close-ended scheme are eligible for listing on a recognised stock exchange.
Minimum tradable lot: ₹1 crore.
Listing only after FINAL close.
Units of ANGEL FUNDS shall NOT be listed.
Listing is VOLUNTARY.

The four steps: (I) the AIF applies to the exchange with documents and fees; (II) the exchange grants in-principle approval; (III) the AIF seeks SEBI approval; (IV) the exchange grants final approval and lists the units.

The four benefits: an easy exit, subject to KYC; price discovery through demand and supply; timely view of NAV; liquidity in the AIF industry.

15.4 The Accredited Investor framework

Accredited Investors (AIs) may avail (a) flexibility in the minimum investment amount and (b) concessions from specific regulatory requirements, subject to conditions.

Who qualifies

Individuals, HUFs, family trusts, sole proprietorships and partnerships - any ONE of:

Route	Income	Net worth	Of which in financial assets
1	At least ₹2 crore a year	-	-
2	-	At least ₹7.5 crore	Not less than ₹3.75 crore
3	At least ₹1 crore a year	AND at least ₹5 crore	Not less than ₹2.5 crore

Special rules:

The PRIMARY RESIDENCE of the individual, Karta or sole proprietor is NOT counted in net worth.
Parents and children as joint holders: at least ONE must independently qualify.
Spouses as joint holders: their COMBINED income or net worth may qualify.
A partnership firm under the Indian Partnership Act, 1932: EACH partner must independently qualify.

Body corporates and trusts:

Entity	Test	Net worth formula
Body corporate	Net worth at least ₹50 crore	(Capital + Free Reserves) - (Accumulated Losses + Deferred Expenditure not written off)
Trust (other than a family trust)	Net worth at least ₹50 crore	(Book value of all assets other than intangibles) - (Book value of total liabilities)

These are judged on financial information as per the statutory audit, or as per audit by a statutory auditor as on a date during the financial year of application.

Foreign investors are tested on the rupee equivalent of income or net worth. Foreign entities in any other structure are treated like body corporates.

Deemed accredited investors - no certificate needed

Central Government and State Governments
Developmental agencies set up under them
Funds set up by them
Qualified institutional buyers under the ICDR Regulations, 2018
Category I foreign portfolio investors
Sovereign wealth funds and multilateral agencies
Any other entity specified by SEBI

The Accreditation Agency

An Accreditation Agency is a subsidiary of a recognised stock exchange, a subsidiary of a depository, or any other entity SEBI specifies. Applicants must be fit and proper, not wilful defaulters, and have no convictions or restraint orders.

The certificate carries: a unique accreditation number, the agency's name, the applicant's PAN, and validity with a start and end date. Accreditation is granted solely on KYC and financial information, and the certificate carries a disclaimer that it does NOT exempt intermediaries and pooled vehicles from their own due diligence.

Validity:

Situation	Valid for
Meets the criteria for the preceding one year	2 years
Meets the criteria in EACH of the two preceding financial years	3 years
Newly incorporated, no prior-year financials, meets net worth on application date	2 years

Using the benefits, and giving them up

To avail benefits, the AI submits the certificate and an undertaking that it consents, can bear the financial risk, has the knowledge to understand the product, and knows the product may not have the same regulatory oversight. The AIF must independently verify accreditation with the agency, and must disclose the concessions before signing.

Withdrawing consent:

An AI who took a lower ticket size must top up to the regulatory minimum within the time in the client agreement.
Investments already made with concessions are "grandfathered". New transactions follow the normal rules.
Investors in an LVF, or in a Category III AIF launched exclusively for AIs where concessions were availed, CANNOT withdraw consent.

15.4.4 LVFs and AI-only Funds

	Large Value Fund for Accredited Investors (LVF)	Accredited Investors only Fund (AI-only Fund)
Definition	Every investor (other than manager, sponsor and their employees or directors) is an AI AND invests not less than ₹25 crore	Every investor (other than manager, sponsor and their employees or directors) is an AI
Name suffix	"LVF"	"AI-only Fund" or "AIOF"
Relationship	An LVF is a type of AI-only Fund	Includes LVFs

An investor who is an AI at on-boarding stays an AI for the life of the scheme, even if the status lapses.
Converting an existing scheme needs POSITIVE consent from ALL investors. After conversion, the name change goes to SEBI within 15 days and to the Depositories within 15 days.
In an AI-only Fund, the MANAGER carries out the trustee's responsibilities.

Think of it like this

In-principle approval is the builder taking bookings before the occupancy certificate

A builder in Pune may take signed booking forms while the paperwork is pending, but a careful buyer does not hand over the full price until the occupancy certificate is in hand. SEBI's in-principle approval works the same way. The fund may collect commitments from investors, but it may not call or accept money until the Registration Certificate arrives. And the deed must be registered within 6 months, just as the builder cannot keep the paperwork pending forever.

Sponsor commitment is the restaurant owner eating from his own kitchen

You trust a dhaba more when the owner's family eats the same dal. A Category III sponsor must keep at least 5 per cent of the corpus or ₹10 crore, whichever is lower, in the fund. It must be real money invested in the scheme. Waiving his fee does not count, because that is like the owner skipping his salary instead of eating the food - he risks nothing if the dal goes bad.

Open-ended and close-ended are the local train and the chartered bus

On a Mumbai local you can get off at set stations - that is the open-ended fund, with redemption at fixed intervals such as quarterly or yearly. A chartered bus to a wedding leaves with a fixed group, collects fares as it goes along (capital calls), and nobody gets their money back until the trip ends. If you jump off early, you pay a penalty. That is the close-ended fund and its exit load.

Accreditation is the club membership card, not a safety certificate

A gymkhana card shows you met the entry test. It does not mean the club has checked whether you can swim before you dive. The accreditation certificate is the same. It is granted only on KYC and financial information. The certificate says so openly - it does not exempt the fund from doing its own due diligence when on-boarding you.

Joint holders are two people on one scooter licence test

If a father and son apply together, one of them must pass the test on his own - their marks cannot be added. Husband and wife are treated as one household, so their combined income or net worth counts. And in a partnership firm every partner sits the test separately. Remember the three cases by who shares a kitchen: spouses pool, parents and children do not, partners never do.

Key terms in this chapter

Accreditation Agency: A subsidiary of a recognised stock exchange or of a depository, or any other entity SEBI specifies, which checks applicants and issues accreditation certificates valid for 2 or 3 years.
Accredited Investor: A person granted a certificate of accreditation by an accreditation agency on income or net worth criteria, who may get flexibility in minimum investment and concessions from some regulatory requirements.
AI-only Fund: An AIF or scheme in which every investor, other than the manager, sponsor and their employees or directors, is an accredited investor. It includes LVFs, may extend tenure up to 5 years, and its manager carries out the trustee's duties.
Category III AIF: An AIF that uses diverse or complex trading strategies and may use leverage, including through listed and unlisted derivatives, to make short-term profits. Hedge funds are the standard example.
Commitment period: The period over which a close-ended fund calls committed capital from investors through capital calls - usually the first three years of the fund tenure.
Credit Default Swap: A credit derivative in which the protection seller pays the buyer on a credit event of a reference entity, in return for periodic premiums until maturity or the credit event, whichever is earlier.
Downstream investment: Investment by an Indian investment vehicle in an Indian company. For an AIF it counts as indirect foreign investment only if the sponsor, manager or investment manager is not Indian owned and controlled.
Evergreening of liabilities: Using AIF money in an investee company to repay obligations owed to the manager, sponsor or their associates. The workbook calls it prohibited and unethical.
FATCA and CRS: FATCA is the US reporting law for US persons, under an India-US agreement signed on July 9, 2015. CRS is the OECD framework India signed from June 3, 2015. AIFs obtain a GIIN and report investor information under Rules 114F to 114H.
FDI and FPI: Foreign Direct Investment is strategic investment of not less than 10 per cent of post-issue fully diluted capital. Foreign Portfolio Investment is not more than 10 per cent of a listed company's capital and needs SEBI registration.
Final close: The end of fund-raising for a scheme, with its period set in the PPM. A close-ended AIF cannot accept more investors after final close.
First close: The first point at which the fund closes a round of commitments. Corpus must be at least ₹20 crore, and it must be declared within 12 months of the scheme becoming eligible to launch. For open-ended Category III schemes it is the close of the Initial Offer Period.
Fit and proper person: The test in Schedule II of the SEBI (Intermediaries) Regulations, 2008: integrity, reputation and character; no history of restraint orders or convictions; financial competence based on net worth and solvency; and no history of being a wilful defaulter.
In-principle approval: Approval SEBI may grant before the trust deed or LLP deed is registered. The deed must be registered within 6 months, and the fund may accept commitments but not money until the Registration Certificate arrives.
Investable funds: The base on which concentration limits are measured. A Category III AIF may invest up to 10 per cent of investable funds in one company; for listed equity it may use NAV instead.
Large Value Fund for Accredited Investors (LVF): An AIF or scheme in which each investor, other than the manager, sponsor and their employees or directors, is an accredited investor and invests not less than ₹25 crore. A Category III LVF may put up to 20 per cent of investable funds in one company.
Leverage (Category III): Total exposure - long plus short positions after permitted offsetting - divided by NAV. It must not exceed 2 times NAV and is calculated at scheme level.
Money laundering: Converting money obtained from criminal activity into apparently legitimate money by concealing its criminal origin. AIFs must keep records of cash transactions above ₹10 lakh and cross-border wire transfers above ₹5 lakh.
Non-debt instruments: Under FEMA, instruments such as equity, LLP capital, units of AIFs, REITs and InvITs, MF and ETF units investing more than 50 per cent in equity, the equity tranche of securitisation, and property. The Central Government specifies transactions in them.
Pari-passu rights: The principle that differential rights to select investors must not harm others, give control, or alter others' rights, and must be disclosed in the PPM. It does not apply to AI-only Funds.
Person resident in India (FEMA): Includes a person residing in India for more than 182 days in the preceding financial year (subject to intention exclusions), and any person or body corporate registered or incorporated in India. FEMA looks at intention; income tax looks at physical stay.
Priority distribution model: A structure in which one class of investors bears more loss than its pro-rata share because another class is paid first. No AIF scheme may adopt it.
Regulatory sandbox: A live testing environment for new products, processes, services or business models on a limited set of customers. An AIF may be exempt from the AIF Regulations for up to 12 months to test there.
SEBI (AIF) Regulations, 2012: The regulations SEBI introduced in 2012 to regulate pooled investment funds in India, such as venture capital, angel, private equity, infrastructure, debt, social venture and hedge funds. Non-compliance carries a penalty of at least ₹1 lakh, up to ₹1 lakh a day, capped at ₹1 crore or three times the gains, whichever is higher.
Soft dollar arrangement: Using clients' money to pay for third-party or proprietary research. Sponsors should avoid such arrangements with distributors, as they add hidden cost for investors and create a conflict of interest.
Sponsor commitment (Category III): A continuing interest of not less than 5 per cent of the corpus or ₹10 crore, whichever is lower. It must be an investment in the scheme, not a waiver of management fees.
Structured digital database (PIT): An in-house, non-outsourced, time-stamped record of what UPSI was shared, by whom and with whom (with PAN), kept for at least 8 years.
Ultimate Beneficial Owner: The natural person who ultimately owns or controls an entity investing in the AIF - identified at 25 per cent for companies and trusts, and 15 per cent for partnership firms and unincorporated associations.

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

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