Regulatory Framework

1Registration and the PPM

• An AIF must be registered with SEBI in one category (I, II or III). Changing category needs SEBI's approval.
• Its constitution (trust deed, memorandum or LLP agreement) must permit AIF activity and prohibit any public invitation to subscribe.
• The manager's key investment team must have relevant experience and the NISM certification for AIF managers as SEBI requires.
• Each scheme is launched with a Private Placement Memorandum (PPM) that sets out the strategy, fees, risks, key people, conflicts of interest and terms. The PPM is filed with SEBI through a merchant banker, and SEBI's comments must be incorporated before launch.
• PPMs follow a standard template developed by industry associations, and compliance with the PPM is audited every year.

Remember

• SEBI registration, one category, PPM filed through a merchant banker, annual PPM audit.

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2Raising money

Accredited investors are investors certified by an accreditation agency as having enough income or net worth to understand and bear the risks. For individuals, the criteria are annual income of at least ₹2 crore, or net worth of at least ₹7.5 crore (with at least half in financial assets), or income of at least ₹1 crore together with net worth of at least ₹5 crore. Body corporates and non-family trusts need a net worth of at least ₹50 crore.

• Large value funds for accredited investors need a minimum commitment per investor of ₹25 crore (lowered from ₹70 crore in November 2025). They have more flexibility on terms and concentration limits.
• SEBI also allows schemes open only to accredited investors, with lighter rules, including no cap on the number of investors.

Remember

• ₹20 crore corpus; ₹1 crore ticket; 1,000 investors; private placement.
• Sponsor stake (Cat I/II): 2.5% or ₹5 crore, lower of the two.

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3Tenure, borrowing and investment limits

• Category III AIFs may be open-ended or close-ended and may use leverage within limits (section 5.7). The points below on tenure and borrowing apply to Category I and II.
• Tenure: Category I and II AIFs are close-ended, with a minimum tenure of three years from final close. The tenure can be extended only as allowed by the Regulations and with investors' approval.
• Borrowing: Category I and II AIFs may not borrow or use leverage to invest. They may borrow only to meet temporary funding needs, for at most 30 days, on no more than four occasions a year, and up to 10% of investable funds.
• Concentration: a Category I or II AIF may invest at most 25% of its investable funds in one investee company (50% for large value funds for accredited investors). For Category III the limit is 10% (20% for large value funds).
• Associates: investing in associates of the sponsor, manager or trustee needs approval from 75% of investors by value.
• Co-investment by the manager, sponsor or other investors may not be on better terms than the AIF's own investment.
• Idle money awaiting investment may be kept only in liquid mutual funds, bank deposits, T-bills, commercial paper, certificates of deposit and similar instruments.

Exam trap "Investable funds" means the corpus net of estimated expenses for management fees and other expenses over the fund's tenure, not the gross corpus.

Remember

• Cat I/II: close-ended, minimum 3 years, no leverage (temporary: 30 days, 4 times a year, 10%).
• One investee company: 25% (Cat I/II), 10% (Cat III).

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4Distribution, fees and direct plans

• Every scheme must offer a direct plan, with no distribution fee, for investors who come without a distributor.
• Distribution fees:
  • Category III: trail basis only, no upfront fee;
  • Category I and II: up to one-third of the total distribution fee may be paid upfront; the rest is paid in equal trail instalments over the scheme's tenure.
• Distribution fees must be disclosed to investors upfront.
• Distributors dealing with investors must hold the relevant NISM certification: XIX-A for Category I and II, XIX-B for Category III.

Remember

• Direct plan: mandatory, no distribution fee.
• Cat I/II distribution fee: up to 1/3 upfront, rest trail. Cat III: trail only.

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5Valuation, reporting and investor protection

• Valuation: Category I and II investments are valued by an independent valuer, at least once every six months (annual valuation is allowed with the approval of 75% of investors by value). Category III AIFs compute NAV at least quarterly (close-ended) or monthly (open-ended).
• Reporting: AIFs report regularly to SEBI and to investors on portfolio, valuation, fees, and material changes.
• Performance benchmarking: AIFs report data to benchmarking agencies, which publish industry benchmarks. A fund may present its performance against benchmarks only as SEBI's rules allow.
• Demat units: AIF units are issued in dematerialised form, under SEBI's phased requirements.
• Complaints: investors can complain to the manager and then escalate through SCORES and online dispute resolution.

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6Winding up

A scheme is wound up when its tenure ends, when the trustees or 75% of investors by value decide, or when SEBI directs. After the intimation:

• no new investments may be made;
• assets must be liquidated and proceeds distributed within one year, or as permitted under SEBI's rules on dissolution and distribution in kind;
• the registration is surrendered when all schemes are wound up.

Remember

• Winding-up triggers: tenure ends, trustees, 75% of investors by value, or SEBI.
• After intimation: no new investments; distribute within a year (unless SEBI's dissolution rules allow otherwise).

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7Rules specific to Category III AIFs

• Leverage: a Category III AIF may use leverage or borrow, with investors' consent, but its leverage may not exceed 2 times NAV. Leverage is measured as gross exposure ÷ NAV, after allowing offsets for hedging and portfolio rebalancing positions as SEBI specifies.
• Breach: the fund reports leverage to its custodian daily. If the limit is breached, investors must be told by 10 a.m. the next working day, and the excess must be squared off by the end of that day.
• Reporting to SEBI: Category III AIFs that use leverage report to SEBI monthly; other Category III AIFs report quarterly.
• Liquidity: open-ended Category III AIFs must have a liquidity management policy that matches the liquidity of the portfolio to the fund's redemption terms.
• Redemptions: open-ended funds may suspend redemptions only in exceptional circumstances, in investors' interest or as required by law, and as disclosed in the PPM.
• NAV: at least monthly (open-ended) or quarterly (close-ended).

Example A fund with NAV of ₹100 crore has ₹230 crore of gross exposure after permitted offsets. Its leverage is 2.3 times, above the limit. Investors must be told by 10 a.m. the next working day, and ₹30 crore of exposure must be cut by the end of that day.

Remember

• Leverage ≤ 2× NAV, with investors' consent; daily report to the custodian.
• Breach: tell investors by 10 a.m. next working day; square off by end of day.
• Leveraged Category III funds report to SEBI monthly; others quarterly.

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8Other laws that apply

• FATCA and CRS: the US Foreign Account Tax Compliance Act and the OECD Common Reporting Standard require financial institutions, including AIFs, to collect tax-residency self-certifications from investors and report accounts of foreign tax residents to the Indian tax department, which shares the data with other countries.
• Anti-money laundering: under the Prevention of Money Laundering Act (PMLA), AIFs must do KYC, identify beneficial owners, monitor transactions, keep records for the required period and report suspicious transactions to the Financial Intelligence Unit (FIU-IND). Funds must not "tip off" the client about a suspicious transaction report.
• Insider trading: Category III AIFs trade listed securities, so SEBI (Prohibition of Insider Trading) Regulations apply. No one may trade while in possession of unpublished price sensitive information (UPSI), or pass it on except for legitimate purposes. Managers keep restricted lists, information barriers ("Chinese walls") and records of who holds UPSI.
• FEMA: foreign investment into an AIF, and an AIF's investments abroad, must follow the Foreign Exchange Management Act and RBI rules. SEBI allows AIFs to invest a limited share of their funds overseas, within an industry-wide limit.

Remember

• FATCA/CRS = tax-residency self-certification and reporting.
• PMLA = KYC, beneficial owners, STRs to FIU-IND, no tipping off.
• Insider trading: no trading on UPSI; restricted lists and Chinese walls.

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