An alternative investment fund may now offer co-investment through its own scheme, capped at three times the investor's contribution to the fund's investment in that company

Since 9 September 2025 a Category I or Category II alternative investment fund (AIF) may offer its accredited investors a co-investment in a portfolio company through a separate co-investment scheme of the fund itself, and no longer only through a co-investment portfolio manager. Each such scheme holds one investee company, cannot borrow, exits when the main scheme exits, and caps an investor's co-investment at three times what that investor put into the same company through the main scheme. Multilateral and bilateral development financial institutions, State Industrial Development Corporations and entities established, owned or controlled by the Central Government, a State Government or a foreign government, including central banks and sovereign wealth funds, are outside the cap.

What changed, and from when?

Co-investment lets a fund's own investors put more money into a particular portfolio company alongside the fund. Before September 2025 the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 allowed investors of an alternative investment fund to do this only through a co-investment portfolio manager registered under the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020. That was the proviso to the old definition of "co-investment" in regulation 2(1)(fa).

The Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2025 changed that with effect from 9 September 2025, according to the footnotes in the consolidated text of the Regulations that the Board publishes. The amendment rewrote the definition of co-investment, inserted definitions of a "co-investment scheme" (regulation 2(1)(fb)) and a "shelf placement memorandum" (regulation 2(1)(ra)), and inserted a new regulation 17A. It also omitted regulation 15(1)(b), the old rule on the terms of co-investment. Its successor, regulation 17A(8), keeps the bar on more favourable terms but narrows the exit limb from "terms of exit including the timing" to timing alone. On the same day the Board issued Circular No. SEBI/HO/AFD/AFD-POD-1/P/CIR/2025/126, which sets the operating conditions and came into force immediately.

That circular is no longer the operative document. The Master Circular for Alternative Investment Funds, issued on 3 June 2026 and last updated on 7 September 2026, lists it among the circulars it rescinds and carries its operative paragraphs into Chapter 6, without the circular's express direction (paragraph 4) that the compliance test report cover the framework. The operative text today is Chapter 6 of the Master Circular.

The new route sits beside the old one (regulation 17A(1)), and the manager must use one or the other for a given investor in a given investee company (paragraph 6.1.1 of the Master Circular).

What does regulation 17A require?

A shelf document first. Before a co-investment is offered, a shelf placement memorandum must be filed with the Board through a merchant banker, with a fee of INR 1 lakh under the Second Schedule (regulation 17A(2)). It sets out the principal terms of co-investment, the governance structure and the regulatory framework (paragraph 6.1.2, with a template at Annexure 10).

One scheme per deal, one company per scheme. A separate co-investment scheme is launched for each co-investment, in line with the shelf memorandum (regulation 17A(3)), and each scheme invests in only one investee company (regulation 17A(5)). It may not invest in units of other alternative investment funds (regulation 17A(6)). An angel fund may not launch one at all (proviso to regulation 17A(3)).

Accredited investors of that fund only. Only accredited investors of the Category I or Category II fund may invest in its co-investment scheme (regulation 17A(4)). Paragraph 6.1.5 of the Master Circular goes further: an investor who was excused or excluded from the main scheme's investment in a company, or who defaulted on its contribution to it, may not co-invest in that company.

No better terms, the same exit. The terms of co-investment by a manager, sponsor, co-investor or co-investment scheme may not be more favourable than the terms on which the fund invested, and the timing of exit must be identical to the main scheme's exit from the same company (regulation 17A(8) and its proviso). The scheme is wound up on that exit (regulation 17A(9)).

Ring-fenced and unleveraged. Each scheme has its own bank account and demat account, and its assets are ring-fenced from the fund's other schemes (paragraph 6.1.3). It may not borrow, directly or indirectly, or use leverage of any kind (paragraph 6.1.7).

No indirect route to a closed door. The scheme may make no investment that gives its investors an interest they could not hold directly, that would need additional regulatory disclosure had they invested directly, or that the investee company could not take from them directly (paragraph 6.1.6).

Which ordinary AIF rules fall away?

Regulation 17A(10) disapplies these provisions for a co-investment scheme.

Provision disapplied	What it otherwise requires
Regulation 10(b)	A corpus of at least INR 20 crore for each scheme
Regulation 10(d)	The manager's or sponsor's continuing interest, the lower of 2.5 per cent of corpus and INR 5 crore
Regulation 11(2)	The listed contents of a placement memorandum
Regulation 12(2) to (5)	Filing each scheme's placement memorandum before launch, the Board's comments, and first close
Regulation 13	Close-ended structure and a minimum tenure of three years
Regulation 15(1)(a), (c), (da), (g) and (h)	Among others, the cap of 25 per cent of investable funds in one investee company
Regulations 16 and 17	The investment conditions specific to Category I and Category II funds

A vehicle that must hold a single company would breach a 25 per cent concentration limit on its first investment, so clause (c) is disapplied. With regulation 13 disapplied, the scheme's life is set by regulation 17A(9), which ends it on exit, rather than by a minimum term of years.

The INR 1 crore minimum investment in regulation 10(c) is not on the list. A proviso to that clause already excludes accredited investors, the only investors a co-investment scheme may admit.

How does the three-times cap work?

Paragraph 6.1.4 of the Master Circular limits an investor's co-investments in one investee company, across all co-investment schemes, to three times the contribution that investor made to the total investment in that company through the affiliated scheme of the fund.

The base is the investor's own share of the main scheme's investment in that company, not its commitment to the fund and not the fund's total investment. An illustration, with hypothetical figures:

Main scheme invests in Company X                        INR 40 crore
Investor A's contribution to that investment            INR 2 crore
Ceiling on A's co-investment in X, all schemes          INR 6 crore
A's total exposure to X, fund and co-investment         INR 8 crore

The ceiling is cumulative across schemes, so a later co-investment in Company X through a fresh scheme draws on the same INR 6 crore, unless A's contribution through the main scheme to X increases. And because the base is the contribution to that company, an investor excused from the main scheme's investment in X has no base at all, which is consistent with the bar in paragraph 6.1.5.

The three classes of investor named in the opening paragraph may invest any amount through co-investment schemes (paragraph 6.1.4(a) to (c)).

Who bears the costs and the carry?

Expenses associated with a co-investment are shared between the main scheme and the co-investment scheme in the ratio of their investments (paragraph 6.1.9). On the same hypothetical figures, if a further INR 10 crore goes into Company X through co-investment schemes, the ratio is 40 to 10, and INR 1 crore of deal expenses splits INR 80 lakh to the main scheme and INR 20 lakh to the co-investment side.

Investors in a co-investment scheme share its investment and proceeds pro rata, except to the extent that carried interest is shared with the sponsor, the manager or the manager's people (paragraph 6.1.8). The text contemplates carry on a co-investment scheme without fixing its rate.

What it means for managers, investors and investee companies

For a manager, the scheme route is a filing of a shelf memorandum followed by a fresh scheme for each deal, under the fund's own registration. The manager's annual compliance test report covers compliance with the Regulations and the circulars issued under them. It goes within 30 days of the end of the financial year to the trustee and sponsor of a fund set up as a trust, or to the sponsor otherwise. A fund for accredited investors only prepares the report without submitting it, and reports any violation to the Board (paragraphs 21.2.2 and 21.2.5 of the Master Circular). These conditions are within it.

For an investor, the route is open only if it is an accredited investor of that fund. Regulation 2(1)(ab) requires a certificate of accreditation. An individual, for instance, needs an annual income of at least INR 2 crore, or a net worth of at least INR 7.5 crore of which at least INR 3.75 crore is in financial assets, or a combination of the two at lower levels. A body corporate needs a net worth of at least INR 50 crore, as does a trust other than a family trust, and a partnership firm qualifies only if each partner does. The proviso to regulation 2(1)(ab) treats the Central and State Governments, developmental agencies and funds set up under them, qualified institutional buyers, Category I foreign portfolio investors, sovereign wealth funds and multilateral agencies as accredited investors without a certificate. The investor's exit date on the extra exposure is the fund's (proviso to regulation 17A(8)).

For the investee company, paragraph 6.1.6 looks through the scheme: it cannot bring in money the company could not take from the investor directly.

What remains unsettled?

Six points.

Implementation standards. Paragraph 6.1.10 subjects co-investment schemes to implementation standards, "if any", to be framed by the Standard Setting Forum for AIFs in consultation with the Board, so that the flexibility is used for bona fide purposes. We have not read any such standards, and the Master Circular does not reproduce them.

The look-through test. Paragraph 6.1.6 does not say how the manager is to establish each investor's direct position, or what follows if it changes after the scheme has invested.

Terms and carry. Whether a lower carry or fee on the co-investment side is a "more favourable" term under regulation 17A(8) is not answered by the text, which speaks of the terms of investment in the investee company.

The scheme fee. Regulation 17A(10) does not disapply regulation 12(1), under which each scheme is launched with the INR 1 lakh scheme fee in the Second Schedule. Whether each co-investment scheme pays it on top of the shelf fee is not addressed.

Exempt investors and accreditation. Paragraph 6.1.4 lifts the cap for three classes of investor, but regulation 17A(4) admits only accredited investors. Whether every investor in those classes, a bilateral development financial institution for instance, is accredited, by certificate or under the proviso to regulation 2(1)(ab), is not answered by the text.

The amending text. This note takes its dates and wording from the Board's consolidated text of the Regulations, amended up to 14 July 2026, and from its circulars. We have not read the Second Amendment Regulations of 2025 as printed in the Gazette of India, and where that print differs, the Gazette text binds.