SEBI Allows AIFs to Retain Proceeds Beyond Fund Life: Introduces “Inoperative Fund” Framework

Context

The Guidelines

• Issued by: Securities and Exchange Board of India (SEBI).
• Date: 16 June 2026.
• Subject: AIFs’ liquidation proceeds retention beyond fund life.
• Builds on: Amendments to SEBI (AIF) Regulations, 18 April 2026.

Three Circumstances When AIFs Can Retain Proceeds

1. Litigation Notices or Regulatory Demands

• Communications can include notices from:
  • Tax authorities.
  • Regulators.
  • Law enforcement agencies.
  • Courts.
  • Investors or counterparties.
• Liabilities need not have crystallised.

2. Anticipated Liabilities (with Investor Consent)

• 75 per cent of investors by value must consent.
• Fund managers must disclose:
  • Amount proposed to be retained.
  • Estimated duration of retention.

3. Residual Winding-Up Operational Expenses

• Retention period: Cannot exceed 3 years from the end of permissible fund life.
• The Standard Setting Forum for AIFs to formulate implementation standards for eligible operational expense heads in consultation with SEBI.

Introduction of "Inoperative Fund" Status

• New status for AIFs that:
  • Have completed liquidation of all investments.
  • But continue to hold retained proceeds.
  • OR remain registered pending outcome of litigation.
• Provides structured framework for dormant funds.

What is an Alternative Investment Fund (AIF)?

• Privately pooled investment vehicles that collect funds from sophisticated investors (Indian or foreign) to invest as per a defined investment policy.
• Regulated by: SEBI (AIF) Regulations, 2012.
• NOT covered under: SEBI (Mutual Funds) Regulations or other SEBI regulations.
• Three categories:

Category I AIFs

• Invest in start-ups, early-stage ventures, social ventures, SMEs, infrastructure.
• Sub-categories:
  • Venture Capital Funds (VCFs).
  • Angel Funds.
  • SME Funds.
  • Social Venture Funds.
  • Infrastructure Funds.

Category II AIFs

• Invest in debt or equity of companies not covered under Category I or III.
• Examples: Private Equity Funds, Debt Funds.
• No specific incentives or concessions from the government.

Category III AIFs

• Invest in listed and unlisted derivatives, use complex trading strategies (including leverage).
• Examples: Hedge Funds.

About SEBI

• Securities and Exchange Board of India.
• Established: 1988, became statutory in 1992.
• Headquartered: Mumbai.
• Functions:
  • Regulate capital markets.
  • Protect investor interests.
  • Promote development of capital markets.
• Current Chairperson: Tuhin Kanta Pandey (since February 2025).

SEBI's Regulatory Framework for AIFs

• SEBI (Alternative Investment Funds) Regulations, 2012: The principal regulation.
• Master Circular for AIFs: Periodic updates.
• Standard Setting Forum for AIFs: Industry body for implementation standards.

Practice MCQs

Q1. With reference to SEBI’s recent guidelines on AIFs, consider the following statements:

1. AIFs may retain liquidation proceeds beyond their permissible fund life under specified circumstances.
2. Litigation notices, regulatory demands, or anticipated liabilities can justify retention.
3. For retention against anticipated liabilities, 75 per cent of investors by value must consent.
4. Retention for residual operational expenses can extend indefinitely.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; retention for residual operational expenses CANNOT exceed 3 years from the end of permissible fund life.)

Q2. With reference to AIFs in India, consider the following statements:

1. AIFs are privately pooled investment vehicles regulated by SEBI (AIF) Regulations, 2012.
2. AIFs have three categories: Category I, II, and III.
3. Category I AIFs invest in start-ups, early-stage ventures, social ventures, SMEs, and infrastructure.
4. Category III AIFs are open to all retail investors with no minimum investment.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; Category III AIFs require minimum investment of ₹1 crore and are for sophisticated investors, NOT retail investors.)

Q3. With reference to the “Inoperative Fund” framework, consider the following statements:

1. It is introduced by SEBI for wound-up AIFs with residual obligations.
2. It applies to AIFs that have completed liquidation of all investments but continue to hold retained proceeds.
3. It also applies to AIFs that remain registered pending the outcome of litigation.
4. The Inoperative Fund framework allows AIFs to operate as new investment vehicles.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; the Inoperative Fund framework is for wound-up funds, NOT for new investment activity.)

Q4. With reference to the AIF industry in India, consider the following statements:

1. India has over 1,400 registered AIFs as of mid-2026.
2. Cumulative commitments raised by AIFs are about ₹13-14 lakh crore.
3. The industry has grown about 5x in AUM over the past 5 years.
4. AIFs are regulated by the Reserve Bank of India (RBI).

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; AIFs are regulated by SEBI, NOT the RBI.)

Q5. With reference to SEBI, consider the following statements:

1. SEBI was established in 1988 and became statutory in 1992.
2. SEBI is headquartered in Mumbai.
3. The current SEBI Chairperson (as of 2026) is Tuhin Kanta Pandey.
4. SEBI regulates AIFs under the SEBI (AIF) Regulations, 2012.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

Answer Key

1. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because retention for residual operational expenses cannot exceed 3 years.
2. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because Category III AIFs are for sophisticated investors with minimum ₹1 crore investment.
3. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because the framework is for wound-up funds.
4. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because AIFs are regulated by SEBI.
5. (d), All four statements are correct.