Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012

What it does

The Regulations are the regime for alternative investment funds (AIFs): privately pooled investment vehicles that gather funds from investors, Indian or foreign, for investing in accordance with a defined policy for the benefit of those investors. No person may carry on activity as an AIF unless the Securities and Exchange Board of India (SEBI) has granted a certificate of registration. A fund may be set up as a trust, a company, a limited liability partnership or a body corporate.

The Regulations divide funds into three categories. Category I covers funds that invest in start-ups, early stage ventures, small and medium enterprises, social ventures and infrastructure, and that the Government or regulators consider socially or economically desirable. Category II covers funds, including private equity and debt funds, that do not fall in the first or third and that do not borrow other than to meet day to day operational needs. Category III covers funds that employ diverse or complex trading strategies and may borrow more freely, including hedge funds. Category I and Category II funds are closed-ended, and a Category III fund may be open-ended.

The Regulations set a minimum corpus for a fund and a minimum investment of INR 1 crore by an investor, with relaxations that the Regulations themselves provide for particular classes of investor, such as accredited investors. They also provide for the contents of the private placement memorandum, for a manager and sponsor, for valuation, for reports to investors and for inspection and action by SEBI.

Who it binds

The fund, its sponsor and manager, and the trustee or the other person holding the fund's assets, and in some respects the investor, who has to meet the minimum investment. The Regulations are made by SEBI under the Securities and Exchange Board of India Act, 1992, which is the source of its power, and they sit among SEBI's other regulations on intermediaries, takeovers and listed company disclosure.

What has changed, and when

The Regulations were notified in 2012 and have been amended many times since, so the consolidated text that SEBI publishes is the place to read them. One recent change is on co-investment. Before September 2025, the Regulations allowed investors in an AIF to co-invest alongside it only through a co-investment portfolio manager registered under the SEBI (Portfolio Managers) Regulations, 2020. The SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025, with effect from 9 September 2025, rewrote the definition of co-investment, inserted definitions of a co-investment scheme and a shelf placement memorandum, and inserted a new regulation 17A. The old regulation 15(1)(b) was omitted. On the same day, SEBI issued a circular that sets the operating conditions and came into force immediately.

What turns on it in practice

Since 9 September 2025, a Category I or Category II AIF may offer its accredited investors a co-investment in a portfolio company through a separate co-investment scheme of the fund itself. Each such scheme holds one investee company, cannot borrow, and exits when the main scheme exits. An investor's co-investment is capped 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. Regulation 17A(8) keeps the bar on more favourable terms for the co-investor, though it narrows the exit limb from the terms of exit including timing to timing alone.

For a fund manager, the choice of structure turns on these conditions, and a fund document has to say how a co-investment scheme will be formed and how its terms are kept in line with the main scheme. For an investor, the cap and the terms decide how much additional exposure to a company can be taken through the fund. For a company that raises money from AIFs, the registration and the category of the fund decide which rules bear on its investor, and the Regulations are read with the SEBI Act, 1992 and SEBI's other regulations. This is part of the private equity and funds work of this practice.