Understanding the Governance & Compliance Framework for AIFs
– Payal Agarwal, Partner | payal@vinodkothari.com
Alternative Investment Funds (AIFs) are private investment vehicles registered with and regulated by SEBI. Private investment vehicles, as is understood, are investment vehicles that pool investments from investors on a private basis, and make investments in investee entities based on the investment objectives disclosed to the investors. The returns from such investments, net of the expenses incurred by the vehicle, is distributed back to the investors. A typical AIF structure would look like:

The general obligations of AIFs are provided in the SEBI (Alternative Investment Funds) Regulations, 2012 read with the circulars issued from time to time. In addition to that, the Standard Setting Forum for AIFs (SFA) formulates implementation standards for various compliance requirements, as required by SEBI from time to time.
As may be understood, the AIF takes funds from its investors and makes investments in the investees. As between the sponsor/ manager of the Fund and the investors, there is a fiduciary relationship – since the investment decisions taken by the fund manager is on behalf of the investors, and in accordance with the investment objectives disclosed to the investors. Investor protection and transparency and proper due diligence of the investees become crucial in the context of an AIF. As compared to a traditional company, the AIFs are intermediaries between the investors and investees. This article discusses the various compliance requirements as applicable to AIFs.

Governance structure of AIFs
- Governing body of AIF: Depending on the legal form of the AIF, the governing body of the AIF may compose of trustee (in case of a trust), directors (in case of a company) or designated partners (in case of an LLP).
- Manager: The primary responsibility of ensuring compliance with the applicable provisions by an AIF is on the manager of the AIF. Similarly, ensuring compliance with the internal policies and procedures of an AIF is also the responsibility of the manager. The manager is appointed by an AIF, and the Sponsor may also be the manager of the Fund.
- Investment Committee: Constituted by the manager, the Investment Committee approves the decisions of the AIF and is responsible for ensuring that such decisions are in compliance with the policies and procedures laid down by the AIF. The Investment Committee may be composed of internal members (employees, directors or partners of the Manager) as well as external investors (with the approval of the investors in the AIF/ Scheme). The external members may include ex-officio members who represent the sponsor, sponsor group, manager group or investors, in their official capacity. Pending clarification from RBI, currently non-resident Indian citizens are not permitted to act as an external member in the Investment Committee [Reg 20(7) of AIF Regulations read with Chapter 14 of AIF Master Circular].
The responsibilities of the Investment Committee may be waived by the investors (other than the Manager, Sponsor, and employees/ directors of Manager and AIF), if they have a commitment of at least Rs. 70 crores (USD 10 billion or other equivalent currency), by providing an undertaking to such effect, in the format as provided under Annexure 11 of the AIF Master Circular, including a confirmation that they have the independent ability and mechanism to carry out due diligence of the investments.
- Key Management Personnel: Key Management Personnel (KMP) of the Manager has been defined to mean:
- members of key investment team of the Manager, as disclosed in the PPM of the fund;
- employees who are involved in decision making on behalf of the AIF, including but not limited to, members of senior management team at the level of Managing Director, Chief Executive Officer, Chief Investment Officer, Whole Time Directors, or such equivalent role or position;
- any other person whom the AIF (through the Trustee, Board of Directors or Designated Partners, as the case may be) or Manager may declare as key management personnel. [Para 13.1.2. of the AIF Master Circular]
The responsibilities of the Manager are complied through the Key Management Personnel of such Manager.
- Compliance Officer: The Compliance Officer is appointed by the Manager, and is responsible for monitoring of compliance with the applicable laws and requirements as applicable to the AIF. Compliance Officer, shall be an employee or director of the Manager, other than Chief Executive Officer of the Manager or such equivalent role or position depending on the legal structure of Manager [Para 13.1.1. of the AIF Master Circular].
The Compliance Officer is responsible to report any non-compliance observed by him within 7 days from the date of observing such non-compliance.
- Custodian: The Sponsor/ Manager of the AIF is required to appoint a custodian, registered with SEBI, for safekeeping of the securities of the AIF. An associate[1] of the Sponsor/ Manager may also act as a custodian, subject to compliance with certain conditions[2]. The custodian provides periodic reports to SEBI with respect to the investments of AIFs that are under custody with the custodian in accordance with the standards formulated by SFA.
The various roles and responsibilities at the different levels of the governance structure is discussed below.
Code of Conduct for AIFs [Reg 20(1) of AIF Regulations]
The Code of Conduct, as prescribed under the AIF Regulations, puts forth various requirements applicable to the AIFs and other relevant entities. The Code of Conduct is applicable to various responsibility centers charged with the governance requirements in an AIF. The requirements are given in the Fourth Schedule to the AIF Regulations read with Para 13.3. of the AIF Master Circular.
The applicability to various stakeholders along with the requirements are given in the table below:
Person covered by the CoC | Requirements to be adhered to under the CoC |
AIF |
|
|
|
|
|
Compliance with Stewardship Code
The AIFs, being institutional investors, it is mandatory for AIFs to comply with the Stewardship Code in terms of Para 13.4 of the AIF Master Circular. This is applicable in respect of investments in listed equity instruments. Annexure 10 of the Master Circular specifies the broad principles of stewardship and provides guidance for its implementation. Further, the AIFs are required to report the status of implementation of the principles atleast on an annual basis (periodicity may differ for different principles), through the website of the AIFs. Such report may also be sent as a part of annual intimation to its clients/ beneficiaries. An article on the stewardship responsibilities of institutional investors may be read here.
Policies to be formulated by AIFs
In order to ensure that the decisions of the AIF are taken in compliance with all applicable laws and regulations, PPM, investor agreements and other fund documents, detailed policies and procedures are required to be kept in place in terms of Reg 20(3). The policies are jointly approved by:
- Manager and
- Relevant governing body of the AIF (viz., the trustee/ trustee company/ board of directors/ designated partners etc)
The Manager is required to ensure that the decisions taken by the AIF are in compliance with such policies and procedures.
Further, the policies should be reviewed periodically, on a regular basis and whenever required as a result of business developments, to ensure their continued appropriateness.
Audit
Annual Audit of terms of PPM
The AIF is required to file Private Placement Memorandum (PPM) with SEBI through a Merchant Banker for the launch of Schemes. The format of PPM is specified under Annexure 1 read with the requirements specified under various other circulars from time to time. In order to ensure that the activities of the AIF are in compliance with the terms of PPM, annual audit of the terms of PPM is required to be done. In this regard, the following needs to be noted:
- Scope of audit: Compliance with all sections of the PPM. Further, audit of the following sections is optional, viz., ‘Risk Factors’, ‘Legal, Regulatory and Tax Considerations’ and ‘Track Record of First Time Managers’. The format of PPM audit report may be accessed here.
- Eligibility to conduct audit: an internal or external auditor/legal professional
- Periodicity of PPM audit: Annual
- Timeline: within 6 months from the end of the Financial Year
- Reported to: Governing Body (Trustee or Board of Directors or Designated Partners) of the AIF, Board of directors or Designated Partners of the Manager and SEBI
- Non-applicability: if no funds are raised from investors, subject to submission of a certificate from CA to that effect within 6 months from end of FY
- Exemptions: (i) Angel Funds, (ii) AIFs/ Schemes with each investor having a minimum commitment of Rs. 70 crores (USD 10 mn or equivalent), upon providing a waiver for the same.
Audit of accounts
Reg 20(14) of the AIF Regulations require the books of account to be audited by a qualified auditor annually.
Valuation of Investments of AIF
Reg 23 read with Chapter 22 of the AIF Master Circular specifies the requirements with respect to the valuation of the investments of AIF. The valuation is required to be done by an independent valuer, on a half-yearly basis (may be made an annual requirement subject to consent of 75% of investors in value).
Eligibility criteria have been specified for acting as an independent valuer:
- shall not be an associate of manager or sponsor or trustee of the AIF
- shall have at least three years of experience in valuation of unlisted securities
- shall be a registered valuer with IBBI and a member of ICAI, ICSI or ICMAI or shall be a holding or subsidiary of SEBI-registered CRA
The Manager shall specifically inform the investors, the reasons/ factors for deviation in valuation, in case the deviation is more than:
- 20% between two consecutive valuations, or
- 33% in a financial year
In case of Cat III AIFs, the listed and unlisted debt securities are required to be valued by an independent valuer, and the NAV is required to be reported on a quarterly basis for close ended funds, and monthly basis for open ended funds.
Investor complaints and Grievance Redressal Mechanism
Resolution of investor complaints is a role of the Manager of AIF [Reg 24 of AIF Regulations]. Reg 24A requires the Manager to redress investor grievances in a prompt manner, but within a maximum of 21 days from receipt of grievances. The AIF is required to be registered on the SCORES portal for receipt of investor grievances. Further, in terms of Reg 25, the dispute resolution mechanism provided by SEBI (SMARTODR) is applicable to AIFs as well. Refer details under Master Circular for Online Resolution of Disputes in the Indian Securities Market dated 28th December, 2023.
Further, in terms of Para 17.4 of the AIF Master Circular, the AIFs are required to maintain data on investor complaints received against the AIF/ its Schemes on a quarterly basis within 7 days from the end of the quarter, in addition to the disclosure in the PPM. The data includes the following:
S. No. | Investor Complaints received from | Pending as at the end of the last quarter | Received | Resolved | Total Pending at the end of the quarter | Pending complaints > 3months | Average Resolution time ^ (in days ) |
1 | Directly from Investors | ||||||
2 | SEBI (SCORES) | ||||||
3 | Other Sources |
Matters requiring consent of investors of AIF
The AIFs act in a fiduciary capacity towards the investors, and manage the funds of the investors invested in the AIF. Thus, the decisions of AIF are required to be taken in the interests of the investors. Some matters require approval of the investors of a specified majority, prior to undertaking such activity:
Regulatory reference | Matter requiring approval | Requisite majority in terms of value of investment |
Reg 9(2) | Material alteration to fund strategy | 2/3rd of unitholders |
Reg 13(5) | Extension of tenure of close-ended funds (upto 2 years) | 2/3rd of unitholders |
Reg 15(1)(e) | Investment in associates or units of AIFs managed/ sponsored by its Manager, Sponsor or associates of its Manager or Sponsor | 75% of investors |
Reg 15(1)(ea) | Purchase or sale of investments from/ to: Associates Schemes of AIF managed or sponsored by its Manager, Sponsor or associates of its Manager or Sponsoran investor who has committed to invest at least fifty percent of the corpus of the scheme of AIF | 75% of investors, excluding investor covered under (c) where purchase/ sale is from such investor |
Reg 20(10) | Appointment of external members (other than ex-officio members) in Investment Committee other than as disclosed in the fund documents | 75% of investors |
Reg 23(2) | Reducing frequency of valuation of investments from six months to 1 year | 75% of investors |
Reg 29(9) | In-specie distribution of investments of AIF due to lack of liquidity or enter into liquidation period | 75% of investors |
Disclosure to investors
The funds of the investors invested in the AIF are managed by the Manager and Sponsor in a fiduciary capacity. In order to ensure transparency, various disclosure requirements apply in terms of Reg 22 of the AIF Regulations – either on a periodic basis or upon the happening of certain events.
Periodic disclosures
The periodic disclosures include:
- financial, risk management, operational, portfolio, and transactional information regarding fund investments
- any fees ascribed to the Manager or Sponsor; and any fees charged to the AIF or any investee company by an associate of the Manager or Sponsor
Further, in terms of clause (g) of Reg 22, the following information is required to be disclosed within 180 days from the year end (60 days from the end of each quarter for Cat III AIF):
- financial information of investee companies.
- material risks and how they are managed which may include:
- concentration risk at fund level;
- foreign exchange risk at fund level;
- leverage risk at fund and investee company levels;
- realization risk (i.e. change in exit environment) at fund and investee company levels;
- strategy risk (i.e. change in or divergence from business strategy) at investee company level;
- reputation risk at investee company level;
- extra-financial risks, including environmental, social and corporate governance risks, at fund and investee company level.
Any changes in terms of PPM or other fund documents are required to be intimated to the investors on a consolidated basis within 1 month from the end of each financial year [Para 2.5.3. of AIF Master Circular]
Event-based disclosures
These events are required to be disclosed ‘as and when occurred’:
- any inquiries/ legal actions by legal or regulatory bodies in any jurisdiction
- any material liability arising during the AIF’s tenure
- any breach of a provision of the placement memorandum or agreement made with the investor or any other fund documents
- change in control of the Sponsor or Manager or Investee Company
- any significant change in the key investment team
Matters requiring reporting to SEBI
Reg 28 provides power to SEBI to seek such information from the AIFs, as may be required, from time to time. In addition to such powers, there are various specific reporting requirements that are applicable on AIFs under various applicable provisions. These include:
Regulatory reference | Matters requiring reporting to SEBI | Timelines |
Reg 20(12) | Any material change from the information provided at the time of application | Promptly |
Reg 26 | Information for systemic risk purposes (including the identification, analysis and mitigation of systemic risks) | when so required by SEBI |
Para 2.5.2 | Any changes in the terms of PPM and other fund documents, along with DD certificate from Merchant Banker | within 1 month from the end of FY |
Para 15.1 | Reporting on investment activities of AIF in the format specified by SFA | 15 calendar days from end of each quarter |
Para 15.2 | Any violations reported in the Compliance Test Report (refer detailed discussion below) | As soon as possible |
Reg 20(11) r/w Para 15.4. | Investments of AIF that are in custody of the custodian | Quarterly |
Compliance with provisions applicable to SEBI-registered intermediaries
An AIF, in its capacity of a SEBI-registered intermediary, is required to comply with the SEBI (Intermediaries) Regulations, 2008 read with the circulars issued thereunder. These include, for instance, compliance with the circulars/guidelines as may be issued by SEBI with respect to KYC requirements, Anti-Money Laundering and Outsourcing of activities [Para 13.5 of AIF Master Circular].
The guidelines with respect to anti-money laundering and KYC requirements are contained in a Master Circular dated 6th June, 2024 on the subject. Our various resources on KYC and anti-money laundering can be accessed here.
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. This requirement is in addition to the obligation of the Compliance Officer to report a non-compliance, within 7 days of becoming aware of the same. The format of CTR is provided in Annexure 12 of the AIF Master Circular.
Other compliances
SEBI specifies various compliances applicable to the AIFs from time to time. The compliances as applicable to the AIFs for the first time during FY 25-26 has been dealt with in our article Regulatory landscape for AIFs: what’s new? Further, there are certain requirements applicable on special categories of AIFs, viz., angel funds, Special Situation Funds, Social Venture Funds etc. Further, there are various prudential requirements applicable to receipt of funds from investors and making of investments by the AIFs.
See our other resources on AIFs:
- https://vinodkothari.com/2024/10/faqs-on-specific-due-diligence-of-investors-investments-of-aifs/
- https://vinodkothari.com/2025/05/capital-subject-to-caps-rbi-relaxes-norms-for-investment-by-res-in-aifs-subject-to-threshold-limits/
- https://vinodkothari.com/2025/01/can-cics-invest-in-aifs-a-regulatory-paradox/
- https://vinodkothari.com/2020/11/2020-year-of-changes-for-aifs/
- https://vinodkothari.com/2024/01/aifs-ail-sebi-cannot-be-used-for-regulatory-breach/
- https://vinodkothari.com/wp-content/uploads/2018/03/PPT-on-financial-and-capital-markets_27-02-18_final.pdf
[1] Associate means:
- a company or a limited liability partnership or a body corporate
- in which a director or trustee or partner or Sponsor or Manager of the Alternative Investment Fund or a director or partner of the Manager or Sponsor
- holds, either individually or collectively, more than fifteen percent of its paid-up equity share capital or partnership interest, as the case may be
[2] The conditions include:
(a) Minimum net worth of the Sponsor or Manager of at least twenty thousand crore rupees at all points of time;
(b) fifty per cent or more of the directors of the Custodian do not represent the interest of the Sponsor or Manager or their associates;
(c) the Custodian and the Sponsor or Manager of AIF are not subsidiaries of each other;
(d) the custodian and the Sponsor or Manager of AIF do not have common directors; and
(e) the Custodian and the Manager of AIF sign an undertaking that they shall act independently of each other in their dealings of the schemes of AIF.