Description

SEBI introduces framework allowing Category I and II AIFs to offer co-investment facility through separate CIV schemes with specific operational modalities and restrictions.

Summary

SEBI has amended the Alternative Investment Funds Regulations, 2012 to permit Category I and Category II AIFs to offer co-investment facility to accredited investors by launching separate co-investment schemes (CIV schemes) within the AIF structure. This framework provides an additional route for co-investment alongside the existing Portfolio Management Services route.

Key Points

  • Category I and II AIFs can now launch separate CIV schemes for co-investment facility
  • Each CIV scheme must have separate bank and demat accounts with ring-fenced assets
  • Co-investment limit: maximum 3x of investor’s contribution in the main AIF scheme for the same investee company
  • Certain institutional investors (DFIs, SIDCs, government entities) are exempt from the 3x limit
  • CIV schemes cannot borrow funds or engage in leverage
  • Investors excluded from main scheme investments cannot co-invest in the same companies

Regulatory Changes

  • Amendment to SEBI (Alternative Investment Funds) Regulations, 2012 notified on September 9, 2025
  • Introduction of sub-regulation 7 of regulation 17A allowing co-investment through CIV schemes
  • New operational framework specified through this circular
  • Requirement for shelf placement memorandum filing as per regulation 17(A)(2)

Compliance Requirements

  • AIF managers must file shelf placement memorandum including principal terms, governance structure, and regulatory framework
  • Maintain separate bank and demat accounts for each CIV scheme
  • Ensure ring-fencing of assets between schemes
  • Comply with co-investment limits (3x restriction for most investors)
  • Ensure CIV schemes don’t facilitate investments that investors cannot make directly
  • Verify that investee companies can receive direct investments from CIV scheme investors
  • Maintain pro-rata rights for CIV scheme investors in investments and distributions

Important Dates

  • Effective Date: September 9, 2025 (regulation amendment notification date)
  • No specific implementation deadlines mentioned in the circular

Impact Assessment

This framework enhances ease of doing business for AIFs by providing greater flexibility in structuring co-investment opportunities. It particularly benefits institutional investors who can now access co-investment opportunities through a regulated AIF structure rather than only through the PMS route. The 3x limit ensures proportionate co-investment while exemptions for government and multilateral institutions recognize their different risk profiles and investment mandates.

Impact Justification

Provides new investment structure for AIFs but affects specialized institutional investors rather than broader market