In-principle Approval
A SEBI approval granted to an eligible AIF applicant before its trust or partnership deed is registered — the deed must then be registered within 6 months, and no investor money may be called until registration.
In plain language
Registering a trust deed under the Registration Act, 1908, or a partnership deed under the Limited Liability Partnership Act, 2008, can take a long time. If SEBI waited for that paperwork before doing anything, a new Category III AIF would sit idle for months.
The in-principle approval is SEBI's way around the delay. If SEBI is satisfied that an applicant meets the eligibility criteria of the SEBI (AIF) Regulations, it may grant in-principle approval even though the trust deed or partnership deed is not yet registered.
It is a green light to get ready, not to take money. The applicant can line up investors, but cannot touch their cash until the full Registration Certificate is in hand.
How it works
Two conditions attach to the approval
- The trust deed or partnership deed must be registered under the applicable law within 6 months from the date of in-principle approval.
- The applicant may accept commitments from investors but shall not call or accept money from them until it receives the Registration Certificate from SEBI.
Where it sits in fund-raising (Table 5.1)
| Step | Action |
|---|---|
| 1 | Form the fund and its constituents (trustee, custodian, fund accountant, RTA, advisors) |
| 2 | Apply for SEBI registration — file PPM and application (Form A) through a merchant banker |
| 3 | Receive in-principle approval; open bank, custody and demat accounts, register on SCORES, get SEBI login |
| 4 | Appoint distributors and take commitments, but not money |
| 5 | Obtain the Registration Certificate (Form B) after paying registration and application fees |
| 6 | First close — receive initial capital call money, start investing |
The fees behind Step 5. A non-refundable application fee of Rs 1 lakh and registration fees of Rs 15 lakh for a Category III AIF.
A different "in-principle approval". When a close-ended scheme lists its units, the stock exchange grants an in-principle approval for listing before SEBI approval and final listing. Same phrase, different approver and purpose.
A worked example
Illustrative figures. Kaveri Long-Short Trust applies to SEBI as a Category III AIF. Its trust deed has been executed but is still waiting for registration.
10 March 2026 — SEBI, satisfied on eligibility, grants in-principle approval.
Deadline to register the trust deed = 10 March 2026 + 6 months = 10 September 2026
April–June 2026 — distributors sign up investors. Commitments reach Rs 45 crore, comfortably above the Rs 20 crore minimum corpus. One investor, eager to start, sends Rs 2 crore by bank transfer. The manager must return it: no money may be accepted before the Registration Certificate.
20 August 2026 — the trust deed is registered, inside the 6-month window.
Registration. Kaveri pays the Rs 1 lakh application fee and Rs 15 lakh registration fee and receives its Registration Certificate in Form B.
First close. Only now does the manager issue the first capital call — say 30% of commitments:
30% × Rs 45 crore = Rs 13.5 crore called
Had the deed still been unregistered on 10 September 2026, Kaveri would have breached the condition of its approval.
Why NISM asks about it
Chapter 5 (Regulatory Framework) covers in-principle approval at 5.2.4 (Grant of Certificate of Registration) and places it as Step 3 of the fund-raising process in Table 5.1, with Step 4 spelling out "raise capital commitments, but not raise money". Expect the 6-month deadline and the commitments-yes-money-no rule as direct questions. Section 5.10 uses the same phrase for the stock exchange's approval when close-ended units are listed.
Common exam traps
- 6 months to register the deed — from the date of in-principle approval, not from the application.
- Commitments yes, money no. Calling or accepting money waits for the Registration Certificate.
- SEBI "may" grant it to eligible applicants; it is not automatic.
- It addresses the trust deed or partnership deed not yet being registered — not missing eligibility. The applicant must already meet the eligibility criteria.
- Form A is the application; Form B is the Registration Certificate.
- Listing in-principle approval is granted by the stock exchange, not SEBI, and comes before SEBI's listing approval.
Check yourself
1.After receiving in-principle approval from SEBI, a Category III AIF applicant:
- a)may accept commitments from investors but shall not call or accept money until the Registration Certificate is received
- b)may call and invest money immediately, as in-principle approval is equivalent to registration
- c)must complete the first close within 30 days
- d)is exempt from registering its trust deed or partnership deed
Show the answer
Answer: (a) may accept commitments from investors but shall not call or accept money until the Registration Certificate is received
In-principle approval exists because registering a trust deed or partnership deed may be time-consuming. After it, the applicant may start accepting commitments from its investors, but shall not call/accept money from such investors, until receipt of Registration Certificate from SEBI, and must ensure the Trust Deed or Partnership Deed is registered under the applicable law within 6 months from the date of in-principle approval. So option (d) has it backwards — the registration is deferred, not waived.
Where this is taught
- Series XIX-B · Chapter 5: Regulatory Frameworkintroduced here
- Series XIX-C · Chapter 17: Regulatory Frameworkintroduced here
- Series XIX-E · Chapter 15: Regulatory Frameworkintroduced here
- Series XIX-D · Chapter 14: Regulatory Frameworkintroduced here
Related terms
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Trust deedThe registered instrument, executed by the sponsor in favour of the trustees, that constitutes a mutual fund as a trust, names its first trustees and governs its operations under clauses SEBI prescribes.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Private placement memorandumThe offer document of a Category III AIF, filed with SEBI through a merchant banker at least 30 days before a scheme launches — and the document SEBI comments on but never approves.
- Capital CommitmentThe total amount an investor promises to contribute to a Category III AIF over the life of the fund — at least Rs 1 crore, or Rs 25 lakh for employees and directors of the AIF or its Manager.
- First CloseThe date an AIF scheme declares it has raised enough commitments to proceed — the point from which tenure, management fees and set-up cost amortisation all start running.