Regulatory landscape for AIFs: what’s new?

– Payal Agarwal, Partner | corplaw@vinodkothari.com

Alternative Investment Funds (AIFs) have come up as a regulators’ favourite in the recent years with both SEBI and RBI tightening regulatory controls around the same within their respective domains. The use of AIF as regulatory arbitrage in recent years calls for such strict regulatory boundaries.  The growth of AIFs appears quite decent, with statistics showing a cumulative investment of  Rs. 5.38 lac crores made by AIFs, against Rs. 5.63 lac crores of funds raised (as on 31st March, 2025). Compared to the market size as at the end of 31st March, 2023, the market has grown by more than 50% as at the end of 31st March, 2025. Category II AIFs occupy the highest share, with Category III AIFs following suit. As the market size increases, so does the regulatory supervision.

This article deals with the regulatory requirements for AIFs that find their first-time mandatory applicability during FY 25-26, and would form a part of the Compliance Test Report (CTR) to be issued for FY 25-26 (see later part of this article).

Certification requirements for key investment team of Manager of AIF

Vide a 2023 amendment, the active schemes of AIFs as on 13th May, 2024 and those launched on or after 10th May, 2024 are required to have at least one key personnel in the key investment team of its Manager, with relevant certification as specified by SEBI. The NISM certification requirement, prescribed on 13th May, 2024, as extended, is required to be complied latest by 31st July, 2025.

Holding investments in dematerialised form

AIFs have been mandated to hold investments in dematerialised form, subject to certain relaxations. The timelines, as extended vide circular dated 14th February, 2025, attract dematerialisation requirements as below:

Date of investment by AIF	Applicability of dematerialisation	Inapplicability of dematerialisation	Dematerialisation to be ensured by
On or after 1st July, 2025	Mandatory	Scheme of an AIF whose: Tenure ends on or before 31st October, 2025  orExtended tenure as on 14th February, 2025	Immediately
Prior to 1st July, 2025	Not applicable, except: If investee company is mandated under applicable law to facilitate dematerialisation (for e.g. – CA, 2013 requires mandatory dematerialisation of shares except in case of small company or WoS of public company etc)AIF exercises control over the investee company, either on its own or along with other SEBI regd. intermediaries mandated to hold investments in demat form		On or before 31st October, 2025

Due diligence of investors and investments of AIF

An April 2024 amendment to the AIF Regulations, followed by a circular dated 8th October, 2024 read with the Implementation Standards formulated by the Standard Setting Forum for AIFs (‘SFA’)  requires an AIF to carry out various due diligence checks through its Manager and its Key Management Personnel (KMP) with respect to investors and investments of the AIF, to prevent facilitation of circumvention of the specified regulatory frameworks. The scope and requirements for the due diligence has been detailed in our article and further elaborated in the form of FAQs (read here).

In addition to the ongoing due diligence requirements, a one-time due diligence was required for existing investments as on the date of the Circular (8th October, 2024), the report of which was required to be submitted to the custodian on or before 7th April, 2025.

Cybersecurity and Cyber Resilience Framework (CSCRF)

The Cybersecurity and Cyber Resilience Framework (CSCRF), notified vide the circular dated 20th August, 2024 as revised vide the circular dated 30th April, 2025, categorises AIFs based on the AUM at manager level. Accordingly, the following categorisation follows:

Corpus of all AIFs, VCFs and their schemes managed by a manager	Categorisation under CSCRF
> Rs. 10000 crores	Mid-size REs
3000 crores < AUM < 10000 crores	Small-size REs
< Rs. 3000 crores	Self-certification REs

The classification w.r.t. Qualified REs (the topmost categorisation) does not apply in case of AIFs.

The timeline for compliance with the requirements as per the CSCRF is 30th June, 2025 (as extended by the circular dated 28th March, 2025) based on which cyber audit is to be conducted from FY 25-26 and the report shall be submitted to SEBI.

Consequence of non-compliance: negative reporting in Compliance Test Report

The manager of AIF is required to report the compliances with various applicable provisions of the AIF Regulations read with the circulars made thereunder, on an annual basis. CTR is submitted within 30 days from the end of the financial year, to the sponsor and trustee (in case AIF is set up as a trust). The trustee/ sponsor provides their comments on the CTR to the manager within 30 days from the receipt of CTR, based on which the manager shall make necessary changes and provide a response within the next 15 days.

A significant aspect of the CTR is that any violation observed by the trustee/ sponsor is required to be intimated to SEBI, as soon as possible.

The format of CTR is provided in Annexure 12 of the Master Circular for Alternative Investment Funds (AIFs) dated 7th May, 2024.

What to expect going forward?

RBI, through a series of circulars (dated 19th December 2023 and 27th March 2024 respectively), regulates the investments made by the RBI-regulated entities in AIFs, putting a prohibition on the regulated entities from making investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of such an entity. Draft Directions have been issued recently, proposing to permit investments by RBI-regulated entities upto a certain percentage of the corpus of the AIF scheme. Read more about the same here. Once notified, the same would relax the investment norms for RBI regulated entities in AIFs.

Further, SEBI has, in its meeting held on 18th June 2025, approved certain amendments for AIFs, particularly for angel funds. This aims to strengthen the regulatory regime around investments by angel funds considering the abolishment of angel tax in India, while also relaxing certain investment norms by such angel funds. Further, SEBI has approved co-investment schemes that may be offered by Cat I and Cat II AIFs, facilitating co-investment to accredited investors of a particular scheme of an AIF, in unlisted securities of an investee company  where  the  scheme  of  the  AIF  is  making  investment  or  has invested. The AIF Regulations presently permits co-investments through a co-investment portfolio manager. 

Thus, the approach of regulators seems to be gradually softening, attempting to bring a balance between regulatory supervision and ease of business considerations.