Regulatory Update: Introduction of a New Co-Investment Scheme for AIFs by SEBI
BACKGROUND AND OVERVIEW
The Securities and Exchange Board of India (“SEBI”) has introduced a new framework to facilitate co-investments within the structure of Alternative Investment Funds (AIFs). On September 9, 2025, SEBI notified amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”), and issued a circular enabling Category I and Category II AIFs to offer co-investment opportunities to their accredited investors through a dedicated Co-Investment Vehicle Scheme (“CIV Scheme”).
These measures, effective immediately from September 9, 2025, provide a streamlined, in-house alternative to the existing Co-investment Portfolio Manager (PMS) route.
This update consolidates the provisions of the newly inserted Regulation 17A of the AIF Regulations and the accompanying operational circular to provide a clear understanding of the framework.
KEY PROVISIONS OF REGULATION 17A
- Permitted Routes: Co-investment for Category I and II AIF investors may be conducted either through a CIV scheme launched under the AIF Regulations or via a Co-investment Portfolio Manager registered under the SEBI (Portfolio Managers) Regulations, 2020.
- Setup Requirement: A shelf placement memorandum must be filed with SEBI through a merchant banker before offering co-investment opportunities to investors, specifying principal terms, governance, and the regulatory framework. A separate CIV scheme must be launched for each co-investment. Angel funds are prohibited from launching CIV schemes.
- Eligible Investors: Only accredited investors of the respective AIF are eligible to participate.
- Investment Restrictions: Each CIV scheme must invest in only one investee company and cannot invest in units of other AIFs.
- Investment Terms: The terms of co-investment for the Sponsor, Manager, Co-investors, or CIV scheme cannot be more favorable than those of the main AIF scheme. The timing of exit from a co-investment must mirror the AIF scheme’s exit from the investee company.
- Winding-up: A CIV scheme must be wound up upon exit from the co-investment.
- Exemptions from Other Regulations: Certain routine AIF requirements, such as minimum corpus, continuing interest, tenure, general investment conditions, and some conditions specific to Category I and II AIFs, do not apply to CIV schemes, recognizing their narrower scope and offering operational flexibility.
CIRCULAR-BASED OPERATIONAL MODALITIES FOR CIV SCHEMES
- Scheme Structure: Each CIV scheme must maintain a separate bank and demat accounts, with ring-fencing of assets between schemes.
- Investment Limits: An investor’s co-investment in an investee company across CIV schemes must not exceed three times the investor’s contribution made via the AIF scheme. Exceptions apply to government-owned entities, sovereign wealth funds, multilateral or bilateral development financial institutions, and state industrial development corporations.
- Investor Restrictions: Investors excused, excluded, or defaulting under their AIF scheme commitment cannot co-invest in the same investee company through a CIV scheme.
- Restrictions on Indirect Exposures: CIV schemes cannot create indirect exposures or interests in investee companies that investors are prohibited from holding directly, that would trigger additional regulatory disclosures if held directly, or where the investee company is barred from receiving investments from such investors.
- Prohibition on leveraging: CIV schemes must not borrow, directly or indirectly, or engage in any form of leverage.
- Investor Rights: Proceeds and rights must be distributed pro-rata to investors’ contribution, with carried interest or other incentive allocations permitted for the AIF Sponsor/Manager and relevant employees.
- Expenses: Co-investment related expenses must be shared proportionately between the CIV and the AIF scheme based in line with their respective investments.
- Implementation Standards: CIV schemes will be subject to implementation standards formulated by the Standard Setting Forum for AIFs in consultation with SEBI, to ensure bona fide use and prevent misuse of co-investment flexibility.
- Compliance and Reporting: Compliance with these provisions must be included in the Compliance Test Report prepared by AIF Managers as part of their regulatory obligations.
CONCLUSION
The introduction of the CIV Scheme marks a significant step by SEBI in strengthening the co-investment framework for AIFs. It provides managers with a more integrated and efficient mechanism to manage co-investments, while safeguarding investor interests through clear regulatory guardrails.