Description

The 213th SEBI Board meeting approved flexibility for AIFs in winding up schemes and surrendering registration, and permitted net settlement of funds for FPI transactions in cash markets.

Summary

The 213th SEBI Board meeting held in Mumbai on 23rd March, 2026 approved two significant ease-of-doing-business measures: (1) flexibility for Alternative Investment Funds (AIFs) in winding up schemes and surrendering registration, including an ‘inoperative funds’ framework; and (2) permission for net settlement of funds for Foreign Portfolio Investor (FPI) transactions in the cash market.

Key Points

  • AIFs may now retain liquidation proceeds beyond permissible fund life under specific conditions related to pending litigation, tax demands, or residual operational expenses
  • A new ‘inoperative funds’ tag introduced for AIFs intending to surrender registration, with reduced compliance requirements
  • FPIs permitted to net settle funds for outright transactions in the cash market to reduce funding costs and forex slippages
  • Securities settlement for FPIs will continue on a gross basis; only funds settlement is affected
  • AIF proposals were deliberated by AIPAC on January 07, 2026, with a public consultation paper issued on February 05, 2026

Regulatory Changes

AIF Winding-Up Flexibility (Amendment to SEBI AIF Regulations, 2012)

  • Retention of proceeds beyond permissible fund life permitted if any one of three conditions is met:
    • (a) Demonstrable receipt of a litigation notice or tax/regulatory demand (including show-cause notices, re-assessment notices, or similar official written communications)
    • (b) Consent of at least 75% of investors by value for anticipated liabilities from litigation or tax demand
    • (c) Substantiation of amounts retained for operational expenses via invoices or prior-year comparables, subject to a maximum retention of three years from end of permissible fund life
  • ‘Inoperative funds’ designation introduced with lighter compliance requirements, including discontinuation of periodic filings, PPM updation, and performance benchmarking

FPI Net Settlement (Cash Market)

  • Net settlement of funds permitted for outright FPI transactions (either purchase or sale in a security within a settlement cycle, not both)
  • Securities settlement remains gross between FPI and custodian

Compliance Requirements

  • AIFs seeking to retain funds post-tenure must satisfy at least one of the three stipulated conditions (litigation notice, 75% investor consent, or substantiated operational expenses)
  • AIFs tagged as ‘inoperative funds’ must meet reduced but still applicable regulatory requirements until formal surrender of registration
  • Custodians and FPIs must adapt settlement processes to accommodate net fund settlement for eligible outright cash market transactions

Important Dates

  • Board Meeting Date: 23rd March, 2026
  • AIPAC deliberation on AIF proposals: January 07, 2026
  • Public consultation paper on AIF winding-up: February 05, 2026
  • Effective dates for amended regulations: To be notified via formal regulatory amendments

Impact Assessment

AIFs: Significant relief for funds stuck in limbo post-tenure due to unresolved tax or litigation demands. The ‘inoperative funds’ framework reduces compliance burden while maintaining regulatory oversight, enabling smoother wind-downs without active fund management obligations.

FPIs: Net fund settlement reduces funding costs, minimises foreign exchange slippages, and improves operational efficiency for foreign investors participating in Indian cash markets. Securities settlement remaining gross preserves market integrity.

Broader Market: These measures reinforce SEBI’s ease-of-doing-business agenda, making India’s market infrastructure more attractive to foreign and alternative investment fund participants.

Impact Justification

Board-level regulatory changes affecting AIF winding-up framework and FPI settlement mechanisms, with broad industry-wide implications for fund managers and foreign investors.