Inoperative Fund

Some AIF schemes cannot close cleanly when their life ends. Money may have to be retained — against a tax dispute, an indemnity, an unresolved claim. Or the scheme may have distributed everything but still be a party to a court case it expects to win.

Keeping full registration going in that state means full compliance costs for a fund that is no longer really operating. The Inoperative Fund status is SEBI's answer: a scheme applies for it, stops behaving like a live fund, and in return is exempted from a list of routine requirements.

The deal cuts both ways. An inoperative fund cannot launch new schemes and cannot charge management fees, and the money it holds must be parked in safe, liquid instruments until it is paid out.

Who can apply (section 13.5.1). Schemes of an AIF:

1. with retained amount beyond the permissible fund life, that intend to surrender their registration; or
2. without any retained money beyond the permissible fund life, that intend to continue registration solely in anticipation of a favourable outcome of pending litigation.

Conditions once tagged:

• no new schemes;
• no management fees;
• retained money invested only in liquid mutual funds, bank deposits or other high-quality liquid assets — treasury bills, TREPS, commercial papers, certificates of deposit — until distributed;
• an annual status report on retained amount and outstanding liabilities to SEBI and investors, on the SEBI Intermediaries Portal, within 30 calendar days from the end of March each financial year.

Exemptions (the workbook's table):

Valuation is not dropped entirely: it is reported to investors in the annual retention status report, and the updated NAV goes to depositories within 30 calendar days from the end of March.

The fund and amounts are illustrative; the rules and deadlines are the workbook's.

A Category II AIF scheme reaches the end of its permissible life. It has distributed everything except Rs 6 crore, retained against a disputed tax demand on one exit. It wants to surrender registration once the dispute ends, and applies for Inoperative Fund status, which SEBI grants on 10 August.

What changes on 10 August:

• The Rs 6 crore sits in treasury bills and a liquid mutual fund — not in a new unlisted deal.
• The manager stops charging a management fee. At a notional 2% on the retained Rs 6 crore, that is Rs 12 lakh a year it gives up.
• The custodian requirement, NISM certification requirement for the investment team, periodic investment disclosures and routine valuation requirement fall away from that date.

What changes later:

• The Limited Quarterly Activity Report stops from the October–December quarter, the quarter after tagging.
• The PPM audit, Compliance Test Report and Annual Activity Report stop from the next financial year.

What it still owes: by 30 April of each year — 30 calendar days after 31 March — an annual status report on the retained Rs 6 crore and outstanding liabilities, to SEBI and investors, with the valuation and updated NAV reported to depositories within the same window.

Chapter 13, section 13.5.1 (Inoperative Funds), within 13.5 on winding up, gives both eligibility scenarios, the conditions and the table of exemptions. The workbook traces it to a SEBI circular dated June 16, 2026. Expect "which scheme can apply for inoperative status", "what can an inoperative fund not do", and the 30-calendar-days-from-end-of-March deadline.

• Two scenarios only: retained money beyond fund life plus an intent to surrender, or no retained money plus registration kept solely for pending litigation.
• No new schemes and no management fees once tagged.
• Retained money goes into liquid, high-quality instruments — not new investments.
• The status report is annual, due within 30 calendar days from the end of March — not quarterly.
• Exemptions start on different dates. Custodian, NISM certification, periodic disclosures and valuation go from the date of the status; LQAR from the next quarter; most others from the next financial year.
• Workbook label slip: the exemption table in Chapter 13 is captioned "Table 12.1". It is the Chapter 13 table.