AIF Regulatory framework evolves from light-touch to right-hold

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Simrat Singh | Finserv@vinodkothari.com

When AIF Regulations were formally introduced in 2012, the regulatory approach was deliberately light. The framework targeted sophisticated investors, allowing flexibility with limited oversight. Over the years, however, AIFs have become significant participants in capital markets. Market practices over the decade exposed regulatory loopholes and arbitrages. For example, some investors who did not individually qualify as QIBs accessed preferential benefits indirectly through AIF structures and investors who were restricted to invest in certain companies started investing through AIF making AIF an investment facade. There were concerns regarding circumvention of FEMA norms as well1. In the credit space, regulated entities such as banks and NBFCs started channeling funds through AIFs to refinance their stressed borrowers, raising concerns around loan evergreening2. These developments prompted regulatory response. RBI first issued two circulars, one in 2023 and the other in 2024. Finally, in 2025 formal directions governing investments by regulated entities in AIFs were also issued3. These Directions introduced exposure caps and provisioning requirements.4 

While the RBI addressed prudential risks arising from regulated entities’ participation in AIFs, SEBI focused on investor protection, governance within the AIF ecosystem and curbing the regulatory arbitrages. First it mandated on-going due diligence by AIF Managers5. It then mandated specific due diligence6 of investors and investments of AIF to prevent indirect access to regulatory benefits. Fiduciary duties of sponsors and investment managers and reporting obligations were progressively codified through circulars. Managers were expected to maintain transparency vis-a-vis their investment decisions, maintain written policies including ones to deal with conflict of interest with unitholders and submit accurate information to the Trustee. What were once broad, principle-based expectations have evolved into detailed, enforceable rules. Regulatory tightening has been matched by a more assertive enforcement approach. SEBI’s recent settlement order7 against an AIF underscores its increasing scrutiny of governance lapses, mismanagement of conflicts and inaccurate reporting. This clearly signals that any compliance gaps will no longer be overlooked and are likely to attract regulatory action. In a separate adjudication order, SEBI imposed penalties on both the Trustee and the Manager for the delayed winding-up of the scheme, underscoring that accountability within an AIF structure extends to all key parties and is not limited to the Manager alone.  

However, SEBI’s approach has not been solely restrictive. Alongside regulatory tightening, it has also sought to preserve commercial flexibility and respond to market needs. Examples include the introduction of the co-investment framework8 for AIFs, framework for offering differential rights to select investors and a revamp for angel funds9.

Together, these measures are reshaping the regulatory landscape for AIFs and their managers. Investors can no longer rely on AIF structures to indirectly obtain regulatory advantages otherwise unavailable to them. As AIFs have grown in scale and importance, what is emerging is a more transparent, prudentially sound and closely supervised regulatory regime designed to align investor protection and commercial flexibility.

  1. See SEBI’s Consultation paper on proposal to enhance trust in the AIF ecosystem ↩︎
  2. See our write-up on AIFs being used for regulatory arbitrages here. ↩︎
  3.  RBI (Investment In AIF) Directions, 2025 ↩︎
  4. See our detailed analysis of the Directions here. ↩︎
  5. See our write-up on ongoing due diligence for AIFs here ↩︎
  6. See our FAQs on specific due diligence of investors and investments of AIFs here. ↩︎
  7. See the complete order here ↩︎
  8. See our write-up on co-investments here. ↩︎
  9. See our write-up on changes w.r.t Angel Funds here ↩︎

The Law of Prepaid Payment Instruments (PPIs): A Guide For New Market Entrants

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Subhojit Shome, Senior Manager and Aditya Iyer | finserv@vinodkothari.com

The law of Prepaid Payment Instruments (PPIs) (2)Download

Read our other resources:

  1. Prepaid Payment Instruments, its regulation and current issues
  2. The future of Loan-loaded Prepaid Payment Instruments
  3. Regulations on Prepaid Payment Instruments -Comparing the Master Circular and Master Directions

ECL Framework for Banks: Key Highlights

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-Team Finserv (finserv@vinodkothari.com)

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SWAGAT to foreign branches or offices in India: RBI proposes draft regulations on such establishments

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– Team Corplaw | Corplaw@vinodkothari.com

As a part of its efforts to rationalise the regulations for establishment of a place of business in India by overseas entities[1], RBI has issued Draft Foreign Exchange Management (Establishment in India of a branch or office) Regulations, 2025. The proposals primarily aim to enable delegation of more powers to AD banks and reduction of compliance burden, thereby further enhancing the ease of doing business in India.

As against the extant Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016, as updated in Master Direction – Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any other place of business in India by foreign entities, the classification of foreign establishments have been limited to (a) branch and (b) office. 

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Revised Form IEPF-5 paves way for simplified claim process

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Lavanya Tandon, Senior Executive & Anushka Ganguly, Executive | corplaw@vinodkothari.com

IEPF 5 Amendments-Snippet (1)Download

Demystifying Structured Debt Securities: Beyond Plain Vanilla Bonds

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Palak Jaiswani, Manager | corplaw@vinodkothari.com

Debentures, one of the most common means for raising debt funding, where investors lend money to the issuer in return for periodic interest and repayment of principal at maturity. While the basic feature of any debenture is a fixed coupon rate and a defined tenure (commonly referred to as plain vanilla instruments), sometimes these instruments may be topped up with enhanced features such as additional credit support, market-linked returns, convertibility option, etc., thus referred to as structured debt securities.

Structured debt securities: motivation for issuers

Apart from the economic favouring such structural modifications, a primary motivation for the issuer in issuing such structured instruments might be the regulatory advantages that these securities offer. For instance,

  • Chapter VIII of SEBI NCS Master Circular provides an extra limit of 5 ISINs for structured debt securities & market-linked securities, thus more room for the issuers to issue debt securities, compared to the restriction of a maximum of 9 ISINs for plain vanilla debt.
  • In addition, as per NSE Guidelines on Electronic Book Provider (EBP) mechanism, market-linked debentures are not required to be routed through EBP, allowing issuers to place such instruments almost like an over-the-counter trade. This allows issuers to structure the debt securities on a tailored basis and offer them directly to specific investors.
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Angel Funds 2.0: Navigating the New Regulatory Landscape

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Payal Agarwal, Partner & Jayesh Rudra, Executive | corplaw@vinodkothari.com 

The 2025 Amendments to the AIF Regulations has brought substantive changes to the regulatory landscape for angel funds, moving the same as a category of Cat I Funds, as against a sub-category of Venture Capital Funds. However, regulatory oversight strictens, with the access exclusively limited to accredited investors only. In view of the redundancy of a “scheme” in the context of angel funds (see below), the same has been omitted and replaced with each investment based participation of investors. 

Angel Funds, a unique type of start-up friendly investment vehicle, was formally recognised by SEBI in the year 2013 with the introduction of Chapter III-A to the SEBI (Alternative Investment Funds) Regulations, 2012. As on 31st March 2025, there are 103 registered Angel Funds with a total commitment of Rs. 10,138 crores. The regulatory landscape for angel funds has been substantially revamped with the notification of SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025, dated 8th September, 2025. The Amendment Regulations are further supplemented with a Circular dated September 10, 2025 prescribing the specific conditions and modalities pertaining to the provisions applicable to Angel Funds. 

The amendments are based on the Consultation Paper dated 13th November, 2024, released post the Union Budget announcement of abolishment of angel tax (see a brief presentation here), for operational clarity and strengthening the governance and disclosure requirements for angel funds. 

Uniqueness of structure 

The uniqueness of Angel Funds lie in its structure. Unlike a typical AIF, in the case of Angel Funds, the investors provide specific consent to each investment opportunity. As such, there is no proportionality between the contribution of the investors in a scheme of AIF vis-a-vis the indirect contribution made in an investee company by such AIF scheme. As such, as against the usual “scheme” structure, an Angel Fund follows an “investment” structure. 

Applicability 

The Amendment Regulations are effective from the date of publication of the same in the Official Gazette, viz., 8th September 2025. The Circular was issued on 10th September, 2025. Further, in order to facilitate transition of the existing Angel Funds, additional timeline has been provided for compliance in some cases.  

Exclusive to AIs: eligibility to act as an angel investor 

Pursuant to the amendments, it is only an Accredited Investor who is eligible to be onboarded as an angel investor in an angel fund. The difference between the eligibility conditions are tabulated below:

Particulars Angel Investors (Erstwhile Framework)Accredited Investors (Amended Framework)
Categories of investors Individual/Body corporate/AIF/ VCFIndividualHUF Family trust Sole proprietorship Body corporate Trust other than family trust Partnership firm Government, Govt development agencies, QIBs, FPIs, Sovereign Wealth Funds etc – exempt from accreditation requirement 
Eligibility criteria In case of individual, Net tangible assets > Rs. 2 crs (excluding principal residence) andHas experience of Early stage investment or Serial entrepreneur or SMP with at least 10 years’ experience In case of 1 to 4, either of the following: Annual income > Rs. 2 crs or Net worth > Rs. 7.5 crs out of which at least Rs. 3.75 crs is in the form of financial assets.Annual Income ≥ Rs. 1 cr + Net Worth ≥ Rs. 5 crs, out of which at least Rs. 2.5 crs is in the form of financial assets.In case of 7, each partner to separately meet aforesaid criteria 
In case of body corporate, networth > Rs. 10 crsIn case of body corporate, networth > Rs. 50 crs
Trust other than family trust, networth > Rs. 50 crs
Independent accreditation Not applicable Applicable 

Not only the eligibility conditions are stringent in case of AIs as compared to erstwhile concept of angel investors, but the mandatory “accreditation” criteria would be a primary factor that may lead to elimination of many investors who were earlier eligible for acting as an angel investor. 

Transition period

For angel funds registered on or before 10th September 2025 (the date of issue of Circular), a timeline of 1 year, that is, upto 8th September 2026 has been specified, for transition into the new framework. During this period, offers can be made to upto 200 non-AIs. 

No new contribution can be accepted from non-AIs post 8th September, 2026, though the investors continue to hold their existing investments already made in the angel fund. 

Regulatory regime for Angel Funds: old v/s new 

Topic Old Framework New FrameworkRationale
STRUCTURE OF THE FUND
Category of AIF [Reg 19A(1)] Sub-category of VCF under Cat -I Sub-category of Cat – I In view of the unique features of Angel Funds as compared to VCFs. See differences below
Schemes under Fund [Reg 19E]Allowed Not allowedSince there is practically no distinction between a “scheme” and an “investment” in the context of an angel fund, hence, the concept of scheme is not relevant for an angel fund. 
Filing of placement memorandum with SEBI [Reg 19D(4)]Not applicable PPM to be filed along with application for registration through merchant banker for comments of SEBI Previously, term sheets for each Schemes were filed with SEBI for “informational” purposes. The requirement has been substituted with filing of PPM at the time of registration itself.
Filing of the term sheet for schemes with SEBI [Reg 19E]Mandatory, 10 days from launch of scheme Not applicable Term sheet is filed for material information of each Scheme, not relevant since scheme structure is omitted for angel funds 
Minimum continuing interest of Sponsor/ Manager [Reg 19G]2.5% of corpus or Rs. 50 lacs, whichever is lower0.5% of investment amount or Rs. 50,000, in each investee, whichever is higher To ensure that manager/sponsor has interest in every investment
INVESTMENT IN ANGEL FUND
Eligibility of investor [Reg 19D(1)]Angel Investor based on certain eligibility conditions specified therein (see later in this article)Accredited Investor KMP of Angel Fund/ Manager To ensure proper verification of the risk appetite and informed decision making capabilities of the investor, since investment in start-ups are highly risky. To enhance skin in the game 
Minimum corpus [Reg 19D(2)]  Rs. 5 crore NANA since each investment is based on prior consent of investor, the concept of a common corpus is irrelevant
Minimum investment per investor [Reg 19D(3)]Rs. 25 LakhsNANo minimum limit since only AIs are allowed to invest 
Minimum number of investors [Reg 19D(6)]Not specified At least 5 AIs prior to disclosing first closeTo ensure sufficient investor interest prior to starting to make investments, in the absence of any minimum corpus requirement.  
Maximum number of investors200 in a scheme [Reg 19E(2) – omitted]No limitSince only AIs are eligible who are independently verified, sufficient guardrails exist. No cap on number of investors facilitate scaling up of the industry and enhance capital flow to start-ups. 
Further, ICDR Regulations have been amended to include AIs within the meaning of QIBs for the purpose of investment in angel funds, accordingly, the limit of 200 as per section 42 of the Companies Act, 2013 shall also not apply in case the AIF is formed as a company. 
INVESTMENT BY ANGEL FUNDS
Prohibition from investment in certain investees [Reg 19F(6)]Companies with family connection with any of the angel investors.No investments from such investors who are related party to an investee See below. 
Follow-on investment in existing investee [proviso to Reg 19F(1)]Not permitted once the investee ceases to be start-up Allowed subject to the condition that the Fund’s post-issue shareholding percentage does not exceed pre-issue shareholding percentageTo protect and preserve the value of the existing investments of Angel Funds in an investee. Investment cap is to ensure that while pre-emptive rights can be exercised by angel funds, does not result in dilution of the regulatory intent behind angel funds
Minimum investment in an investee [Reg 19F(1)]Rs. 25 LakhsRs. 10 LakhsThe increase in range is to reflect the growth of angel ecosystem, providing more flexibility to the Angel Funds
Maximum investment in an investee [Reg 19F(1)]Rs. 10 croresRs. 25 crores (including upon follow-on investment)
Lock-in on investments [Reg 19F(3)]1 year6 months – if sold to a third party subject to AoA of investee. 1 year – in other cases, including buyback, sale to promoters of investee/ associates of promotersTo maintain stability of investments while providing flexibility of favourable exit to the angel fund
Minimum number of AIF investors in each investee [Reg 19F(5)]No such limit2  investorsAlso serves as a check against misuse of angel fund structure for facilitating investments from single investor
COMPLIANCES APPLICABLE TO ANGEL FUNDS
Exception from application of certain provisions of the Regs [19B (2)]Reg 10(a), (b), (c), (d), (f) – Conditions w.r.t. Investment in AIFReg 12 – Filing of Scheme Reg 14 – Listing of unitsReg 15(1)(a), (c), (e) – Conditions w.r.t. Investment by AIFReg 16(1)(b) – OmittedReg 16(2) – Additional conditions applicable to VCFsReg 20(21) – Rights of investors pro rata to their contribution Following additional exceptions: Reg 15(da) – AIFs making investments through multiple layers of AIFsReg 16(1)(a) – Types of investeeReg 17 – Conditions for Cat II investments Reg 18 – Conditions for Cat III investments The exceptions are majorly in alignment with the non-Scheme structure of the Angel Funds
Annual audit of compliance with terms of PPMNot applicableMandatory, if total investment (at cost) exceeds Rs. 100 crsExemption to continue for smaller Angel Funds, larger Angel Funds be subject to audit of PPM 
Reporting in relation to performance benchmarkingNot applicableApplicable from FY 25-26To improve transparency

Related Party v/s Family Connection

Angel Funds are not permitted to accept contributions from such investors, who are related parties to the investee company in which the investment is to be made. Here, the definition of “related party” is to be taken from Reg 2(1)(zb) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The definition, in turn, refers to Companies Act and applicable accounting standards as well. 

Various questions arise:

  • Who prepares the list of related parties as per LODR definition? Is it the prospective investee that is responsible? 
  • Can the investment manager and investor be absolved of their responsibilities of verification of whether or not the investor is a related party to the investee?
  • What if the investor becomes a related party of the investee entity, subsequent to making such investments? 

The change from the term “family connection” to “related party” seems to simplify the identification for the prospective investee company, since such companies would have already identified related parties in terms of section 2(76) of CA, 2013 and applicable accounting standards. The only additional categories for such investees would be: 

  1. Promoters and members of promoter group, and 
  2. Shareholders holding 10% or more equity shares in the company on a beneficial interest basis. 

Concluding Remarks 

The amended regulatory framework makes it stringent for angel funds to raise funds from angel investors, restricting the access to accredited investors only. With the limited number of investors “accredited” registered in India (649 as on May 2025), early stage start-ups might face obstacles in startup funding. While SEBI has proposed ease of accreditation requirements, the same has not been made effective yet. As on 30th June 2025, data shows that the number of VCFs are much higher than the number of angel funds, and with the amended requirements, it might so happen that the investors would prefer VCFs over angel funds, as a means of investing in start-ups.

See our other resources on AIF:

Rules of Restraint: RBI proposes revised norms on Related Party Lending and Contracting

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– Team Finserv, finserv@vinodkothari.com

In its current hectic phase of revamping regulations, the RBI has issued Draft Directions for lending and contracting with related parties. Separate sets have been issued for commercial banks, other banks, NBFCs and financial institutions. 

The definition of “related party” is more rationalised and improvised over the existing definitions in Companies Act or LODR Regulations. Loans above a “materiality threshold” [which is scaled based on capital in case of banks, and based on base/middle/upper layer status in case of NBFCs] will require board approval, and nevertheless, will require regulatory reporting as well as disclosure in financial statements. In case of contracts or arrangements with related parties, with the scope of the term derived from sec 188 (1) of the Companies Act, there are no approval processes, but disclosure norms will apply. In the case of banks, trustees  of funds set up by banks are also brought within the ambit of “related persons”.

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ECBs become Easy: RBI liberalises norms for external commercial borrowings

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– Vinita Nair, Joint Managing Partner and Heta Mehta, Senior Executive | corplaw@vinodkothari.com

Updated as on 19th February, 2026

Permits acquisition finance, enhances limits to 3x of net worth, removes cost ceilings, all PROIs become eligible lenders and many more.

RBI significantly relaxed the framework for External Commercial Borrowings (ECBs) effective February 16, 2026,  permitting entities to borrow from any person resident outside India (PROI), enhancing the ECB limit from USD 750 mn to higher of USD 1 bn / 300% of net worth, relaxing it for financial sector regulated entities, removing the absolute restrictions on all-in cost, penal interest on all ECBs etc. Necessary amendments have been notified in FEMA (Borrowing and Lending) Regulations, 2018  pursuant to which the RBI Master Directions on ECB also stands modified. ECB norms are now governed by Schedule 1 of these regulations. These measures are expected to further strengthen cross-border fundraising avenues for Indian corporates.

As per RBI data, ECB inflows rose sharply from approximately USD 8 billion in FY 2022–23 to USD 26.5 billion in FY 2023–24, and further to over USD 61 billion in FY 2024–25. In FY 2025–26, around USD 27.6 billion has been mobilised up to December, indicating continued access to offshore funds, though at a moderate pace compared to the previous year’s peak. The present amendment will provide further impetus to entities to avail ECBs.

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