Liquidation Period
The 1-year period following expiry of an AIF scheme's tenure or extended tenure, for fully liquidating its assets and distributing the proceeds to investors.
In plain language
A close-ended Category III AIF has a fixed life. When the tenure — including any permitted extension — runs out, the fund does not get to keep holding its portfolio. It must sell up and pay investors.
The time it gets to do that is the liquidation period: in the workbook's words, "a period of 1 year following the expiry of tenure or extended tenure of the Category III AIF scheme, for fully liquidating the asset of such existing AIF scheme". The proceeds are distributed to investors after satisfying all liabilities.
Some assets — thinly traded or unlisted holdings especially — may still be unsold when the year ends. For those, the regulations provide two routes, both needing investor approval: distribute them in specie, or enter a dissolution period.
How it works
When a fund is wound up (5.17)
- The tenure in the PPM is over;
- the trustee or trustee company thinks winding up is in investors' interest;
- 75% of investors by value pass a resolution to wind up; or
- SEBI directs it.
From the date winding up is intimated to SEBI and investors, no further investments may be made.
Before the liquidation period: tenure extension. A close-ended Category III AIF may extend tenure by up to 2 years (two 1-year extensions) with approval of two-thirds of investors by value. A Large Value Fund for Accredited Investors may extend up to 5 years with two-thirds approval. Without consent, the fund is wound up.
During the liquidation period: unsold investments. For investments not sold due to lack of liquidity, the AIF may, with approval of at least 75% of investors by value:
- distribute them in specie to investors; or
- enter a dissolution period, subject to SEBI's conditions.
Other rules
- No AIF may launch a new liquidation scheme after 25 April 2024.
- Divestment proceeds pending distribution may sit in liquid mutual funds, bank deposits, T-bills, TREPS, commercial papers or certificates of deposit.
- The Compliance Test Report asks whether a fund that did not extend tenure fully liquidated within 1 year of tenure expiry.
- On winding up, the Certificate of Registration is surrendered to SEBI.
- Migrated VCF schemes whose liquidation period had expired without winding up were given an additional liquidation period till 19 July 2026.
A worked example
Workbook dates — Fund LMN (Chapter 5). 5-year tenure from first close on 15 November 2023; tenure ends 14 November 2028. Net assets on that date: Rs 600 crore.
Path 1 — no extension approved
Tenure ends 14 Nov 2028
Liquidation period 15 Nov 2028 → 14 Nov 2029 (1 year)
Path 2 — both extensions approved
Each needs investors holding at least two-thirds by value:
2/3 × Rs 600 crore = Rs 400 crore of units must approve
Extended tenure ends 14 Nov 2030
Liquidation period 15 Nov 2030 → 14 Nov 2031
Illustrative extension. By 14 November 2031 LMN has sold everything except unlisted shares valued at Rs 12 crore. Investors holding Rs 470 crore of Rs 600 crore of units vote to distribute them in specie:
Approval = 470 ÷ 600 = 78.3% ≥ 75% → in-specie distribution permitted
Had only Rs 420 crore voted yes (70%), the 75% threshold would not be met for either in-specie distribution or a dissolution period.
Why NISM asks about it
Chapter 5 (Regulatory Framework) defines the liquidation period in 5.17 (Winding-up), with the in-specie and dissolution-period routes and the April 2024 bar on new liquidation schemes; 5.7 sets tenure extensions and 5.19 puts the 1-year liquidation check in the Compliance Test Report. Chapter 2 gives migrated VCFs their additional liquidation period. Expect the 1-year figure, the two-thirds versus 75% approvals, and the order of events.
Common exam traps
- 1 year, starting after the tenure or extended tenure expires — not after the original tenure if extensions were approved.
- Two-thirds by value extends tenure; 75% by value approves in-specie distribution or a dissolution period, or a winding-up resolution.
- Liquidation period is not the dissolution period. The dissolution period, if approved, follows the liquidation period.
- No new liquidation schemes after 25 April 2024.
- No further investments once winding up has been intimated to SEBI and investors.
- Dated rule. The migrated VCF additional liquidation period ran till 19 July 2026 — already past as of this writing; learn it as the workbook states it.
Where this is taught
- Series XIX-B · Chapter 5: Regulatory Frameworkintroduced here
- Series XIX-C · Chapter 15: Fund Monitoring, Reporting and Exitintroduced here
- Series XIX-E · Chapter 13: Fund Monitoring, Reporting and Exitintroduced here
- Series XIX-D · Chapter 12: Fund Monitoring, Reporting and Exitintroduced here
Related terms
- Venture Capital FundA Category I AIF that invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings, and includes migrated venture capital funds.
- Compliance Test ReportThe annual self-certification an AIF manager prepares in SEBI's prescribed format, testing the fund against the AIF Regulations and routed through the sponsor and trustee for comment.
- Dissolution PeriodThe period after an AIF scheme's liquidation period, entered with 75%-by-value investor approval, to sell unliquidated investments — ending in mandatory in-specie distribution of whatever remains.
- In-specie DistributionDistributing an AIF's unsold investments themselves, rather than cash, to investors — allowed in the liquidation period with 75%-by-value approval and mandatory at the end of a dissolution period.
- Large Value Fund for Accredited InvestorsAn AIF or scheme in which every investor other than the manager, sponsor and their employees or directors is an accredited investor committing at least Rs 25 crore — with lighter regulation.
- Liquidation SchemeA close-ended AIF scheme launched only to liquidate unsold investments of existing schemes whose tenure has expired. SEBI has barred new liquidation schemes after 25 April 2024.
- Lock-in PeriodThe stretch of time after an investor commits money to a Category III AIF during which they cannot redeem — not fixed by SEBI, but 2 years is common practice.
- Inoperative FundA SEBI-granted status for an AIF scheme holding money beyond its fund life that wants to surrender registration, or keeping registration only for pending litigation — no new schemes, no management fees.
- Information MemorandumIn AIF due diligence, the investee company's own document of representations and forecasts; separately, the document an AIF scheme files with SEBI through a merchant banker to enter a dissolution period.
- Working daysFor AIF filings and reporting, all days excluding Saturdays, Sundays and public holidays on which the concerned SEBI office is closed for business, as published on SEBI's website.
- Secondaries marketThe sale of an existing investor's fund units or partnership interest to co-investors or outside buyers, usually at a negotiated discount to net asset value.
- Corporate liquidation exitThe least preferred, worst-case way for an AIF to exit a portfolio company: a long statutory process that returns only salvage value, if any, unless preference rights or debt give priority.