NISM Series XIX-C · Chapter 17: Regulatory Framework

L1 · Foundation

Foundation — Registration, structure and the shape of an AIF

The four registration categories and the permissible legal structures, the eligibility documents including the certification requirement for the key investment team, the conditions of registration, in-principle approval, sponsor and manager commitment, open versus close-ended funds and the listing of close-ended schemes.

24 min read · Worth 13% of the paper · Written from pages 487–559 of the official NISM workbook · Updated 18 September 2026

17.1.1 Who must register, and in which category

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. Existing schemes will be allowed to complete their agreed tenure, however, SUCH FUNDS SHALL NOT RAISE ANY FRESH MONIES other than commitments already made till registration is granted.

The funds registered as venture capital fund under SEBI (Venture Capital Funds) Regulations, 1996 — desirous of migrating to SEBI (AIF) Regulations may seek registration... as 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

1. Category I Alternative Investment Fund — invests in start-ups, early-stage ventures, social ventures, SMEs, infrastructure or other sectors, areas which the GOVERNMENT AND REGULATORS CONSIDER AS SOCIALLY OR ECONOMICALLY DESIRABLE. Examples: Venture Capital Funds, Social Impact Funds, SME Funds, Infrastructure Funds, Special Situation Funds, Corporate Debt Market Development Fund.

2. Category II Alternative Investment Fund — prohibited from taking leverage or borrowing, except as prescribed by SEBI. Such Funds DO NOT FALL IN EITHER CATEGORY I OR CATEGORY III. Examples: Private Equity Funds, Debt Funds.

3. Category III Alternative Investment Fund — uses DIVERSE OR COMPLEX TRADING STRATEGIES. They may also employ leverage, including through investment in both listed and unlisted derivatives, to make SHORT-TERM PROFITS. Funds such as Hedge Funds... fall under Category III.

4. Specified Alternative Investment Fund — SEBI may specify regulations for such type of funds that do not fall under any 3 categories mentioned above.

Note how Category II is defined: not by what it does but by what it is not — it is the residual category for funds that fit neither I nor III.

The four permissible legal structures

A "Company" formed under the Companies Act, 2013
A "Trust" formed under a Trust Deed, duly registered under the provisions of the REGISTRATION ACT, 1908
A "Limited Liability Partnership" incorporated under a Partnership Deed, which is filed with Registrar under the provisions of the Limited Liability Partnership Act, 2008
A "Body Corporate" established under the laws of the Central or State Legislature

A sole proprietorship or an ordinary partnership firm is NOT a permissible structure — a point one of the chapter's own sample questions turns on.

17.1.2 What SEBI examines

SEBI decides on the eligibility and registration of an AIF by examination of the given documents and criteria for eligibility:

1. The Memorandum of Association / Trust Deed / Partnership Deed must permit it to carry on the activity of an AIF. REGISTRATION OF THESE LEGAL DOCUMENTS IS COMPULSORY for every applicant.

2. 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.

3. The Applicant, including its Sponsor and Manager, should be "FIT AND PROPER" as defined in SCHEDULE II of SEBI (Intermediaries) Regulations, 2008, which specifies four criteria:

integrity, reputation and character
no history of restraint orders and convictions
financial competence based on net worth and solvency
no history of being a WILFUL DEFAULTER

4. The certification requirement — this examination itself

At least ONE KEY PERSONNEL, amongst the associated persons functioning in the key investment team of the Manager of AIFs shall have the relevant certification as specified by SEBI:

for Category I and/or Category II AIF Managers: either 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
for Category III AIF Managers: either NISM-Series-XIX-C: Alternative Investment Fund Managers Certification Examination or NISM-Series-XIX-E: Category III Alternative Investment Fund Managers Certification Examination

In case of expiry of the validity of such certification, the personnel shall obtain FRESH CERTIFICATION. However, this provision is NOT APPLICABLE FOR AI-ONLY FUNDS.

And a second key personnel requirement: 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... provided that BOTH the requirements... MAY BE FULFILLED BY THE SAME KEY PERSONNEL.

One certification, one qualification — and one person may satisfy both.

5. The Manager or Sponsor has the necessary INFRASTRUCTURE AND MANPOWER to discharge its activities.

6. The applicant has clearly described the investment objective, the targeted investors, proposed corpus, investment style or strategy and proposed tenure.

7. Whether the applicant or any entity established by the Sponsor or Manager has EARLIER BEEN REFUSED REGISTRATION by SEBI.

17.1.4 Conditions for registration

The AIF shall abide by the provisions of the Act and the SEBI (AIF) Regulations, 2012
The AIF shall NOT CARRY ON ANY OTHER ACTIVITY other than permitted activities
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
An AIF which has been granted registration under a particular category CANNOT CHANGE ITS CATEGORY subsequent to registration, EXCEPT WITH THE APPROVAL OF SEBI

17.1.5 In-principle approval

Filing of a Trust Deed and getting it registered under the Registration Act, 1908... may be time-consuming... In order to speed-up the Registration of Applicants... SEBI may grant an "IN-PRINCIPLE" APPROVAL to eligible applicants.

If SEBI is satisfied that the applicant meets the eligibility criteria... it may grant an in-principle approval... EVEN IF THE TRUST DEED OR PARTNERSHIP DEED, AS APPLICABLE, IS NOT REGISTERED under the applicable law.

However, after receiving the in-principle approval:

The applicant must ensure the Trust Deed or Partnership Deed... is REGISTERED under the applicable law, WITHIN 6 MONTHS from the date of in-principle approval from SEBI.
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.

Commitments yes, money no — until the Registration Certificate arrives. And the deed must be registered within 6 months.

17.2 Sponsor and Manager commitment

The Manager or Sponsor shall have a continuing interest in CATEGORY I AND II AIFs (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. The Sponsor or Manager of a CATEGORY III AIF shall have a continuing interest of NOT LESS THAN 5 PERCENT of the corpus of the fund OR INR 10 CRORE WHICHEVER IS LOWER.
The commitment shall be in the form of INVESTMENT IN THE SCHEME of the fund and SHALL NOT BE THROUGH THE WAIVER OF MANAGEMENT FEES.
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.
The Manager or Sponsor shall DISCLOSE their investment interest in the AIF to the investors.

Note that the continuing interest applies in each scheme where there are multiple schemes in the fund — not merely at fund level.

17.3 Open-ended and close-ended structures

In an OPEN-ENDED fund structure:

Investors contribute their capital UPON ADMISSION OR SUBSCRIPTION to the Fund.
Investors may make ADDITIONAL capital contributions from time-to-time, if required.
Redemption of capital from the fund is permitted at pre-defined regular intervals, being QUARTERLY, HALF-YEARLY OR YEARLY.

In a CLOSE-ENDED fund structure:

Investors make CAPITAL COMMITMENTS, which are called by the Investment Manager by making "Capital Calls"... over a pre-defined period known as "COMMITMENT PERIOD".
The Commitment Period is usually THE FIRST THREE YEARS of the Fund Tenure.
REDEMPTION OF CAPITAL IS NOT PERMITTED in a close-ended fund structure, prior to winding-up. Investors would need to pay an EXIT LOAD for exiting from the fund, after the lock-in period specified in the PPM.

Who may be which

Category I and II AIFs need to COMPULSORILY be formed as CLOSE-ENDED funds because such investments are PRIMARILY ILLIQUID... Investors are meant to realise cash returns on their fund interests only when realisation events occur through the sale of the underlying portfolio companies.

Schemes of all Category III Alternative Investment Funds are EITHER OPEN-ENDED OR CLOSE-ENDED, as structured by the Sponsor or Investment Manager, AT THE TIME OF REGISTRATION.

17.3.3 Listing of close-ended schemes

Units of a scheme launched by a CLOSE-ENDED AIF are eligible for listing on a recognized stock exchange. The scheme should have a MINIMUM TRADABLE LOT OF INR 1 CRORE and listing shall be permitted ONLY AFTER FINAL CLOSE of the fund or scheme. UNITS OF ANGEL FUNDS SHALL NOT BE LISTED on any recognised stock exchange. LISTING... IS VOLUNTARY.

The four-step process:

An AIF must make an APPLICATION TO A RECOGNIZED STOCK EXCHANGE for listing... submit the required documentation and pay the designated fees based on the size of the Fund/Scheme.
Based on the documentation, the recognized stock exchange grants an IN-PRINCIPLE APPROVAL.
The AIF seeks APPROVAL FROM SEBI, for listing of units of its close-ended scheme.
After receiving SEBI approval... the recognized stock exchange can grant the FINAL APPROVAL and list the units.

Exchange in-principle approval first, then SEBI approval, then exchange final approval.

Benefits of Listing: provide investors with an EASY EXIT OPPORTUNITY, subject to KYC; enable PRICE DISCOVERY in a demand-supply mechanism; enable investors to VIEW THE NAV of the fund on a timely basis; ensure LIQUIDITY in the AIF industry.

Think of it like this

Category II is defined by exclusion

Most categories in law are defined by what belongs in them. Category II is defined by what does not.

Category I is the "desirable" box — invests in start-ups, early-stage ventures, social ventures, SMEs, infrastructure or other sectors, areas which the government and regulators consider as socially or economically desirable. Venture capital, social impact, SME, infrastructure, special situation and corporate debt market development funds.

Category III is the "complex" box — uses diverse or complex trading strategies... may also employ leverage, including through investment in both listed and unlisted derivatives, to make short-term profits. Hedge funds.

Category II is everything left over: such Funds DO NOT FALL IN EITHER CATEGORY I OR CATEGORY III of AIFs, and are prohibited from taking leverage or borrowing, except as prescribed by SEBI. Private equity and debt funds live here — not because a rule welcomed them in, but because no other box fitted.

That residual character explains a lot of the regulation. Category I gets concessions because policy favours it. Category III gets leverage because its strategies require it. Category II gets neither the concessions nor the leverage — it simply gets on with buying unlisted companies.

And when a fund fits nowhere at all, a fourth door exists: Specified Alternative Investment Fund — SEBI may specify regulations for such type of funds that do not fall under any 3 categories mentioned above.

The certification you are studying for is a registration condition

There is something unusual about this chapter: it describes the requirement that produced the examination you are sitting.

At least one key personnel, amongst the associated persons functioning in the key investment team of the Manager of AIFs shall have the relevant certification as specified by SEBI — for Category I and II managers, either NISM-Series-XIX-C: Alternative Investment Fund Managers Certification Examination or NISM-Series-XIX-D, and for Category III managers, either NISM-Series-XIX-C... or NISM-Series-XIX-E.

Notice the design. XIX-C covers both, which is why this workbook spans venture capital, private equity, hedge fund strategies, derivatives leverage and everything in between. XIX-D and XIX-E are the narrower routes.

Two more details are examinable. First, it does not lapse quietly: in case of expiry of the validity of such certification, the personnel shall obtain fresh certification to ensure compliance with certification norms. Second, there is one carve-out: this provision is not applicable for AI-only Funds — where every investor is accredited, SEBI relaxes several investor-protection requirements, and this is one of them.

And the certification requirement sits beside a qualification requirement — at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking... or a CFA charter — with the sensible proviso that both the requirements... may be fulfilled by the same key personnel.

Commitments yes, money no

Registering a trust deed under the Registration Act, 1908 takes time. Meanwhile investors are interested and a fund manager is losing momentum.

SEBI's answer is the in-principle approval: if SEBI is satisfied that the applicant meets the eligibility criteria... it may grant an in-principle approval to the applicant for the AIF, even if the Trust Deed or Partnership Deed, as applicable, is not registered under the applicable law.

But it comes with a precise boundary that candidates routinely blur:

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.

A commitment is a promise; money is money. The manager may collect promises on in-principle approval, but cannot draw down a rupee until the certificate arrives. And the clock runs: the applicant must ensure the Trust Deed or Partnership Deed... is registered under the applicable law, WITHIN 6 MONTHS from the date of in-principle approval.

The fund-raising table in the chapter maps it exactly — Step 3: Receive SEBI In-principle Approval... Step 4: After receiving in-principle approval, the fund can approach investors to raise capital commitments, BUT NOT RAISE MONEY... Step 5: Obtain SEBI Registration Certificate in Form B. Only then does Step 6, First Close, become possible.

Skin in the game, and it must be cash in each scheme

A manager could, in principle, claim to have skin in the game by waiving his own fee. SEBI closes that door explicitly.

The commitment shall be in the form of INVESTMENT IN THE SCHEME of the fund and shall NOT be through the WAIVER OF MANAGEMENT FEES.

Waiving a fee you were going to receive is not risking capital you already own. It costs the manager an opportunity, not an asset, and it disappears the moment the fund performs badly enough that no fee would have been earned anyway.

The amounts differ by category and, in both cases, take the lower of two figures:

Category I and II: not less than 2.5% of the corpus or INR 5 crore, whichever is LOWER. Category III: not less than 5 percent of the corpus of the fund or INR 10 crore, whichever is LOWER.

Two further points that catch people. The commitment applies in each scheme where there are multiple schemes in the fund — not once at fund level. And a separate floor applies to insiders investing personally: 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 — a fifth of the ordinary INR 1 crore minimum, recognising that these are people with information but not necessarily large means.

Finally, none of it is private: the Manager or Sponsor shall disclose their investment interest in the AIF to the investors.

Two lanes for capital, and no bridge between them

A close-ended AIF and an open-ended one handle money in opposite ways, and the difference decides almost everything else about the fund.

Open-ended: investors contribute their capital upon admission or subscription to the Fund... may make additional capital contributions from time-to-time... Redemption of capital from the fund is permitted at pre-defined regular intervals, being quarterly, half-yearly or yearly. Money in at the start, out on a schedule.

Close-ended: investors make capital commitments, which are called by the Investment Manager by making "Capital Calls"... over a pre-defined period known as "Commitment Period" — usually the first three years of the Fund Tenure — and redemption of capital is NOT permitted... prior to winding-up of the Fund.

Now the allocation, which is not a choice for two categories: Category I and II AIFs need to compulsorily be formed as close-ended funds because such investments are primarily illiquid, while schemes of all Category III Alternative Investment Funds are either open-ended or close-ended, as structured by the Sponsor or Investment Manager, at the time of registration.

The logic is entirely about what the fund owns. You cannot promise quarterly redemption to investors while holding a seven-year stake in an unlisted company. Liquidity out must match liquidity in — which is also why the only route to early exit in a close-ended fund is an exit load... after the lock-in period specified in the PPM, or listing.

Listing: three approvals, one crore lots, and nothing for angels

A close-ended AIF is a locked box for years. Listing offers a keyhole.

Units of a scheme launched by a close-ended AIF are ELIGIBLE for listing on a recognized stock exchange. But look at the conditions, each of which limits who benefits.

The scheme should have a MINIMUM TRADABLE LOT OF INR 1 CRORE. That is not a retail market — the lot size deliberately keeps the same sophisticated-investor threshold the whole framework rests on.

Listing shall be permitted ONLY AFTER FINAL CLOSE of the fund or scheme. No trading while the fund is still raising money.

Units of angel funds shall NOT be listed on any recognised stock exchange. Angel investments are the earliest and least valuable to price — a market in them would mislead more than it informs.

Listing... is VOLUNTARY. Nobody is obliged.

And the process runs through three approvals in a strict order: the recognized stock exchange grants an in-principle approval, then the AIF seeks approval from SEBI, then the recognized stock exchange can grant the final approval and list the units.

The benefits the workbook claims are worth remembering as a set: an easy exit opportunity, subject to KYC; price discovery in a demand-supply mechanism; NAV visibility on a timely basis; and liquidity in the AIF industry.

Key terms in this chapter

Accreditation Agency: A subsidiary of a recognised stock exchange or of a depository, or any other entity specified by SEBI, which certifies accredited investors after verifying that they are fit and proper and not wilful defaulters.
Accredited Investor: A person granted a certificate of accreditation by an accreditation agency on meeting income or net worth thresholds, who may avail flexibility in minimum investment amount and concessions from specific 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, with no minimum investment requirement. All LVFs are AI-only Funds. The manager carries out the trustee's responsibilities.
Angel Fund: A sub-category of Category I AIF raising funds only from accredited investors, with no minimum investment, at least 5 accredited investors before first close, no schemes, and no listing of units.
Angel fund investment limits: Investment only in start-ups not promoted by or related to a corporate group with turnover above INR 300 crore, with total investment per investee company including follow-ons capped at INR 25 crore and follow-on shareholding not exceeding the pre-issue percentage.
Angel investor: An accredited investor, or key management personnel of an angel fund or its manager, who invests in an angel fund.
Category III leverage cap: Total exposure of long plus short positions after permitted offsetting divided by NAV, not exceeding 2 times NAV, calculated at scheme level, with NAV excluding any funds borrowed by the AIF.
Commitment Period: The pre-defined period in a close-ended fund over which the manager makes capital calls, usually the first three years of the fund tenure.
Concentration limits: Category I and II may invest not more than 25 per cent of investable funds in one investee company, rising to 50 per cent for a large value fund; Category III may invest up to 10 per cent, rising to 20 per cent for a large value fund.
Continuing interest (registration): Not less than 2.5 per cent of corpus or INR 5 crore whichever is lower for Category I and II, and 5 per cent or INR 10 crore whichever is lower for Category III, in each scheme, made as investment and never through waiver of management fees.
Deemed accredited investors: Entities requiring no accreditation certificate — the Central and State Governments, their developmental agencies and funds, QIBs under the ICDR Regulations, Category I FPIs, sovereign wealth funds and multilateral agencies.
Drawdown-shortfall borrowing: Borrowing to bridge a delayed capital call, allowed only in emergency and as a last recourse when a deal is imminent. Its cost is charged only to the delaying investors, with a 30-day cooling off period from repayment.
Evergreening of liabilities: Using money invested by an AIF scheme, directly or indirectly, to repay obligations of an investee company towards the manager, sponsor or their associates. It is prohibited and unethical.
FATCA and CRS: FATCA self-declaration has been mandatory for all Indian and NRI AIF investors since January 2016, with FATCA reporting for U.S. persons and CRS reporting for other foreign investors. An AIF is a deemed financial institution; changes must be intimated within thirty days.
First Close: The declaration at which corpus must be at least INR 20 crore, from which tenure is computed, after which sponsor commitment cannot be reduced, withdrawn or transferred, and which must be achieved within twelve months of SEBI taking the PPM on record.
Fit and proper (Schedule II): The test in Schedule II of the SEBI (Intermediaries) Regulations, 2008 — integrity, reputation and character; no history of restraint orders and convictions; financial competence based on net worth and solvency; and no history of being a wilful defaulter.
Fourth Schedule Code of Conduct: The AIF code requiring investment in accordance with stated objectives, operation in the interest of all investors and not a select class, adequate and timely disclosure, effective risk management and internal controls, written conflict policies, no unethical selling, and anti-money laundering policies.
In-principle approval: Approval granted before the trust or partnership deed is registered. The deed must be registered within 6 months, and the applicant may accept commitments but may not call or accept money until the Registration Certificate is received.
Investable funds: The corpus of the scheme net of expenditure for administration and management of the fund estimated for the tenure of the fund — the base against which concentration limits are measured.
Junior or subordinate class of units: Units accepting lesser returns or sharing excess losses, open only to the manager or sponsor, multilateral or bilateral DFIs, State Industrial Development Corporations and government-owned entities including central banks and sovereign wealth funds.
Key personnel certification requirement: At least one key personnel of the manager's key investment team must hold NISM-Series-XIX-C or XIX-D for Category I and II AIFs, or XIX-C or XIX-E for Category III, with fresh certification required on expiry. Not applicable to AI-only Funds.
Large Value Fund for Accredited Investors (LVF): An AIF or scheme in which every investor other than the manager, sponsor and their employees or directors is an accredited investor investing not less than INR 25 crore.
Leverage breach protocol: The AIF reports the breach to the custodian and to all investors before 10 a.m. on the next working day and squares off the excess by end of that day; the custodian separately reports the fund name, extent and reasons to SEBI before 10 a.m. on the next working day.
Listing of close-ended schemes: Voluntary listing of units on a recognised stock exchange, permitted only after final close, with a minimum tradable lot of INR 1 crore. Units of angel funds may never be listed.
Migrated venture capital fund: A fund registered under the SEBI (Venture Capital Funds) Regulations, 1996 that sought registration under the AIF Regulations, subject to approval of two-thirds of its investors by value, within 19 July 2025.
Overseas investment framework: Investment in equity and equity-linked instruments of unlisted offshore venture capital undertakings within an overall USD 1500 million limit on a first-come-first-served basis, needing prior SEBI approval valid 6 months, capped at 25 per cent of the scheme's investable funds, restricted to companies with an Indian connection, and never into a joint venture or wholly owned subsidiary of the AIF itself.
Pari-passu rights: The principle that differential rights offered to select investors must not create liabilities between investors, confer control except through the Investment Committee, or alter other investors' rights, and must be disclosed in the PPM. It does not apply to AI-only Funds.
Permissible legal structures: A company under the Companies Act 2013, a trust under a deed registered under the Registration Act 1908, an LLP under the LLP Act 2008, or a body corporate under a Central or State enactment. A sole proprietorship is not permitted.
Pro-rata rights: Investors' rights in each investment and in distribution of proceeds must be pro-rata to their commitments, except where an investor is excused, excluded or in default, and except for performance fees or carried interest shared with the manager.
Regulatory sandbox: A live testing environment in which new products, processes, services or business models may be deployed on a limited set of eligible customers, with exemption from any or all AIF Regulations for a period not exceeding twelve months.
Social units: Units issued by a social impact fund to investors who have agreed to receive only social returns or benefits and no financial returns against their contribution.
Specified Alternative Investment Fund: A fourth registration category for funds that fall under none of Categories I, II or III, for which SEBI may specify regulations.
Suspension of redemptions: Permitted for open-ended Category III AIFs only in exceptional circumstances justified by investors' best interest or SEBI requirement, during which no new subscriptions or commitments may be accepted, with documentation and communication to SEBI and investors.
Temporary borrowing (Category I and II): Permitted only for temporary funding requirements, for not more than 30 days, on not more than 4 occasions in a year and not more than 10 per cent of investable funds.

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

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