Round-Tripping Reined: RBI Rolls Out Relaxed Rules for Investments in AIFs

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-Sikha Bansal, Senior Associate & Harshita Malik, Executive | finserv@vinodkothari.com

Background

The RBI’s regulatory approach to investments by Regulated Entities (REs) in Alternate Investment Funds (AIFs) has undergone a remarkable transformation over the past two years. Initially, the RBI responded to the risks of “evergreening”, where banks and NBFCs could mask bad loans by routing fresh funds to existing debtor companies via AIF structures, by issuing stringent circulars in December 20231 and March 20242 (collectively known as ‘Previous Circulars’). The December 2023 circular imposed a blanket ban on RE investments in AIFs that had downstream exposures to debtor companies, while the March 2024 clarification excluded pure equity investments (not hybrid ones) from this restriction. This stance aimed to strengthen asset quality but quickly highlighted significant operational and market challenges for institutional investors and the AIF ecosystem. Many leading banks took significant provisioning losses, as the Circulars required lenders to dispose off the AIF investments; clearly, there was no such secondary market. 

In response to the feedback from the financial sector, as well as evolving oversight by other regulators like SEBI, the RBI undertook a comprehensive review of its framework and issued Draft Directions- Investment by Regulated Entities in Alternate Investment Funds (‘Draft Directions’) on May 19, 20253. The Draft Directions have now been finalised as Reserve Bank of India (Investment in AIF) Directions, 2025 (‘Final Directions’) on 29th May, 2025. The Final Directions shift away from outright prohibitions and instead introduce a carefully balanced regime of prudential limits, targeted provisioning requirements, and enhanced governance standards. 

Comparison at a Glance

A compressed comparison between Previous Circulars and Final Directions is as follows –

ParticularsPrevious CircularsFinal DirectionsIntent/Implication
Blanket BanBlanket ban on RE investments in AIFs lending to debtor companies (except equity)No outright ban; investments allowed with limits, provisioning, and other prudential controlsMove from a complete prohibition to a limit-based regime. Max. Exposures as defined (see below) taken as prudential limits
Definition of debtor companyOnly equity shares excluded for the purpose of reckoning “investment” exposure of RE in the debtor companyEquity shares, CCPSs, CCDs (collectively, equity instruments) excluded Therefore, if RE has made investments in convertible equity, it will be considered as an investment exposure in the counterparty – thereby, the directions become inapplicable in all such cases.
Individual Investment Limit in any AIF schemeNot applicable (ban in place)Max 10% of AIF corpus by a single RE, subject to a max. of 5% in case of an AIF, which has downstream investments in a debtor company of RE.Controls individual exposure risk. Lower threshold in cases where AIF has downstream investments.
Collective Investment Limit by all REs in any AIF schemeNot applicableMax 20%4 of AIF corpus across all REsWould require monitoring at the scheme level itself.
Downstream investments by AIF in the nature of equity or convertible equityEquity shares were excluded, but hybrid instruments were not. All equity instruments Exclusions from downstream investments widened to include convertible equity as well. Therefore, if the scheme has invested in any equity instruments of the debtor company, the Circular does not hit the RE.
Provisioning100% provisioning to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme or 30-day liquidation, if breachIf >5% in AIF with exposure to debtor, 100% provision on look-through exposure, capped at RE’s direct exposure5 (see illustrations below)No impact vis-a-vis Previous Circulars. 
For provisioning requirements, see illustrations later. 
Subordinated Units/CapitalEqual Tier I/II deduction for subordinated units with a priority distribution modelEntire investment deducted proportionately from Tier 1 and Tier 2 capital proportionatelyAdjustments from Tier I and II, now to be done proportionately, instead of equally. 
Investment PolicyNot emphasizedMandatory board-approved6 investment policy for AIF investmentsOne of the actionables on the part of REs – their investment policies should now have suitable provisions around investments in AIFs keeping in view provisions of these Directions
ExemptionsNo specific exemption. However, Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds were excluded from the scope of circulars. Prior RBI-approved investments exempt; Government notified AIFs may be exempt
Provides operational flexibility and recognizes pre-approved or strategic investments.No specific mention of investments through MFs/FoFs – however, given the nature of these funds, we are of the view that such exclusion would continue.
Transition/Legacy TreatmentNot applicableLegacy investments may choose to follow old or new rulesSee discussion later.

Key Takeaways: 

Detailed analysis on certain aspects of the Final Directions is as follows:

Prudential Limits 

Under the Previous Circulars, any downstream exposure by an AIF to a regulated entity’s debtor company, regardless of size, triggered a blanket prohibition on RE investments. The Final Directions replace this blanket ban with prudential limits:

  • 10% Individual Limit: No single RE can invest more than 10% of any AIF scheme’s corpus.
  • 20% Collective Limit: All REs combined cannot exceed 20% of any AIF scheme’s corpus; and
  • 5% Specific Limit: Special provisioning requirements apply when an RE’s investment exceeds 5% of an AIF’s corpus, which has made downstream investments in a debtor company.

Therefore, if an AIF has existing investments in a debtor company (which has loan/investment exposures from an RE), the RE cannot invest more than 5% in the scheme. But what happens in a scenario where RE already has a 10% exposure in an AIF and the AIF does a downstream investment (in forms other than equity instruments) in a debtor company? Practically speaking, AIF cannot ask every time it invests in a company whether a particular RE has exposure to that company or not. In such a case, as a consequence of such downstream investment, RE may either have to liquidate its investments, or make provisioning in accordance with the Final Directions. Hence, in practice, given the complexities involved, it appears that REs will have to conservatively keep AIF stakes at or below 5% to avoid the consequences as above. 

Now, consider a scenario – where the investee AIF invests in a company (which is not a debtor company of RE), which in turn, invests in the debtor company. Will the restrictions still apply? In our view, it is a well-established principle that substance prevails over form. If a clear nexus could be established between two transactions – first being investment by AIF in the intermediate company, and second being routing of funds from intermediate company to debtor company, it would clearly tantamount to circumventing the provisions. Hence, the provisioning norms would still kick-in. 

Provisioning Requirements

Coming to the provisioning part, the Final Directions require REs to make 100 per cent provision to the extent of its proportionate investment in the debtor company through the AIF Scheme, subject to a maximum of its direct loan and/ or investment exposure to the debtor company, if the REs exposure to an AIF exceeds 5% and that AIF has exposure to its debtor company. The requirement is quite obvious – RE cannot be required to create provisioning in its books more than the exposure on the debtor company as it stands in the RE’s books. 

The provisioning requirements can be understood with the help of the following illustrations:

ScenarioIllustrationExtent of provisioning required
Existing investment of RE in AIF Scheme (direct loan and/or investment exposure exists as on date or in the past 12 months)For example, an RE has a loan exposure of 10 cr on a debtor company and the RE makes an investment of 60 cr in an AIF (which has a corpus of 800 cr), the RE’s share in the corpus of the AIF turns out to be 7.5%. The AIF further invested 200 cr in the debtor company of the RE. The proportionate share of the RE in the investment of AIF in the debtor company comes out to be 15 cr (7.5% of 200 cr). However, the RE’s loan exposure is 10 crores only. Therefore, provisioning is required to the extent of Rs. 10 crores.
Existing investment of RE in AIF Scheme (direct loan and/or investment exposure does not exist as on date or in the past 12 months)Facts being same as above, in such a scenario, the provisioning requirement shall be minimum of the following two:-15 cr(full provisioning of the proportionate exposure); or-0 (full provisioning subject to the REs direct loan exposure in the debtor company)Therefore, if direct exposure=0, then the minimum=0 and hence no requirement to create provision.

Some possible measures which REs can adopt to ensure compliance are as follows: 

  1. Maintain an up-to-date, board-approved AIF investment policy aligned with both RBI and SEBI rules;
  2. Implement robust internal systems for real-time tracking of all AIF investments and debtor exposures (including the 12-month history);
  3. Require regular, detailed portfolio disclosures from AIF managers;
  4. appropriate monitoring and automated alerts for nearing the 5%/10%/20% thresholds; and
  5. Establish suitable escalation procedures for potential breaches or ambiguities.

Further, it shall be noted that the intent is NOT to bar REs from ever investing more than 5% in AIFs. The cap is soft, provisioning is only required if there is a debtor company overlap. But the practical effect is, unless AIFs develop robust real-time reporting/disclosure and REs set up systems to track (and predict) debtor overlap, 5% becomes a limit for specifically the large-scale REs for practical purposes. 

Investment Policy

The Final Directions call for framing and implementing an investment policy (amending if already exists) which shall have suitable provisions governing its investments in an AIF Scheme, compliant with extant law and regulations. Para 5 of the Final Directions does not mandate board approval of that policy, however, Para 29 of the RBI’s Master Directions on Scale Based Regulations stipulates that any investment policy must be formally approved by the Board. In light of this broader governance requirement, it is our view that an RE’s AIF investment policy should similarly receive Board approval. Below is a tentative list of key elements to be included in the investment policy:

  • Limits: 10% individual, 20% collective, with 5% threshold alerts;
  • Provision for real-time 12-month debtor-exposure monitoring and pre-investment checks;
  • Clear provisioning methodology: 100% look-through at >5%, capped by direct exposure; proportional Tier-1/Tier-2 deduction for subordinated units; and
  • Approval procedures for making/continuing with AIF investments; decision-making process
  • Applicability of the provisions of these Directions on investments made pursuant to commitments existing on or before the effective date of these Directions.

Subordinated Units Treatment

Under the Final Directions, investments by REs in the subordinated units7 of any AIF scheme must now be fully deducted from their capital funds, proportionately from Tier I and Tier II as against equal deduction under the Previous Circulars. While the March 2024 Circular clarified that reference to investment in subordinated units of AIF Scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units; the same has not been clarified under the Final Directions. However, the scope remains the same in our view.

What happens to positions that already exist when the Final Directions arrive?

As regards effective date, Final Directions shall come into effect from January 1, 2026 or any such earlier date as may be decided as per their internal policy by the REs. 

Although, under the Final Directions, the Previous Circulars are formally repealed, the Final Directions has prescribed the following transition mechanism:

Time of making Investments by RE in AIFPermissible treatment under Final Directions
New commitments (post-effective date)Must comply with the new directions; no grandfathering or mixed approaches allowed
Existing InvestmentsWhere past commitments fully honoured: Continue under old circulars
Partially drawn commitments: One-time choice between old and new regimes

Closing Remarks

The RBI’s evolution from blanket prohibitions to calibrated risk-based oversight in AIF investments represents a mature regulatory approach that balances systemic stability with market development, and provides for enhanced governance standards while maintaining robust safeguards against evergreening and regulatory arbitrage. 

Of course, there would be certain unavoidable side-effects, e.g. significant operational and compliance burdens on REs, requiring sophisticated real-time monitoring systems, comprehensive debtor exposure tracking, board-approved investment policies, and enhanced coordination with AIF managers. Hence, there can be some challenges to practical implementation.  Further, the success of this recalibrated regime will largely depend on the operational readiness of both REs and AIFs to develop transparent monitoring systems and proactive compliance frameworks. 

  1.  https://vinodkothari.com/2023/12/rbi-bars-lenders-investments-in-aifs-investing-in-their-borrowers/ 
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  2.  https://vinodkothari.com/2024/03/some-relief-in-rbi-stance-on-lenders-round-tripping-investments-in-aifs/ 
    ↩︎
  3.  https://vinodkothari.com/2025/05/capital-subject-to-caps-rbi-relaxes-norms-for-investment-by-res-in-aifs-subject-to-threshold-limits/ ↩︎
  4.  The limit was 15% in the Draft Directions, the Final Directions increased the limit by 5 percentage points.
    ↩︎
  5.  This cap at RE’s direct loan and/or investment exposure has been introduced in the Final Directions.
    ↩︎
  6.  Para 29 of the RBI’s Master Directions on Scale Based Regulations stipulates that any investment policy must be formally approved by the Board. 
    ↩︎
  7. SEBI, vide Master Circular for AIFs, had put restrictions on priority distribution model. Later, pursuant to Fifth Amendment to SEBI (AIF) Regulations, 2024, SEBI issued a Circular dated December 13, 2024 wherein certain exemptions were allowed and differential rights were allowed subject to certain conditions. See our article here. ↩︎

Webinar on Demystifying Promoter & Promoter Group Puzzle

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NAME THEM ALL: SEBI reiterates mandatory disclosure of all promoter group entities in shareholding pattern, regardless of shareholding

“Immediate relatives” and not “relatives” for determining promoter group

Resource Centre on Promoter/Promoter Group Identification and Obligations

“Immediate relatives” and not “relatives” for determining promoter group

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Limiting the ever expanding scope of PG by excluding children-in-law

Nitu Poddar, Partner | Nitu@vinodkothari.com

The definition of “promoter-group” in ICDR Regulations, though longstanding, has been into the highlights lately post the SEBI FAQ dated April 25, 2025 which have reiterated the provisions of Reg 31(4) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) requiring the listed companies to provide the list of all promoter / promoter group (‘P/ PGs’) in the shareholding pattern (‘SHP’) irrespective the shareholding in the company. 

While India Inc is still struggling with the practicality of collating the list of PGs arising from spouse-side immediate relatives and entities controlled by them, another practical issue to be fixed in the definition is the use of the term “relative” in the context of HUFs and firms

Issue – Overreach of the definition of “relatives” 

Item A and C of Reg 2(1)(pp)(iv) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’) pulls in the following entities in the PG list:

  • Body corporates in which HUFs and Firms – in which the “relatives” of promoters are members – hold ≥ 20% of equity share capital. 
  • Any body corporate in which such body corporate (as described above) holds  ≥ 20% of equity share capital.
  • HUFs and Firms where the “relatives” of promoters are holding ≥ 20% of total capital.

The key concern arises from the definition of “relatives” as per section 2(77) of Companies Act, 2013 which is wider than the definition of “immediate relatives” as per reg 2(1)(pp)(ii) of ICDR Regulations. 

  • The former includes spouses of the children (bahu and damad) who are not included in the definition of immediate relatives. 
  • Also, all the co-parcerners of an HUF are relatives u/s section 2(77) of Companies Act, 2013.

Consequence – Looping in non-PG entities as PG

This results in the inclusion of HUFs or firms where children-in-law or extended relatives are  holding ≥  20% of total capital as PG – even though these individuals (children-in-law) are not themselves promoters or immediate relatives under the ICDR framework.

Such interpretations expand the promoter group to cover entities indirectly connected through individuals not formally recognized as part of the promoter group, creating ambiguity in the definition.

Sensible interpretation – aligning with immediate relatives

To make sense of each clause of the definition of PG, in our view, the word “relative” in clause Item A and C of Reg 2(1)(pp)(iv) should be limited to “immediate relatives” as defined in sub-clause (ii) of reg. 2(1)(pp) of ICDR Regulations.

May refer to our related resource on the subject matter below:

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Understanding the Governance & Compliance Framework for AIFs

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– 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
  • Undertake business activities and investments in accordance with the investment objectives in the placement memorandum and other fund documents [to be ensured by the Manager]
  • Be operated in the interest of all investors, and not limited to select investors, sponsor, manager etc [to be ensured by the Manager]
  • Ensure timely and adequate dissemination of information to all investors
  • Ensure existence of effective risk management process and appropriate internal controls
  • Have written policies for mitigation of any potential conflict of interest
  • Prohibition on use of any unethical means to sell, market or induce any investor to buy its units
  • Have written policies and procedures to comply with anti-money laundering lawsnot offer any assured returns to any prospective investors/unitholders.
  • Manager of AIF
  • KMP of Manager
  • KMP of AIF
  • Abide by the laws applicable to AIFs at all times
  • Maintain integrity, highest ethical and professional standards in all its dealings
  • Ensure proper care and exercise due diligence and independent professional judgment in all its decisions
  • Act in a fiduciary capacity towards investors of AIF and ensure that decisions are taken in the interest of the investors
  • Abide by the policies of AIF in relation to potential conflict of interests
  • Not make any misleading or inaccurate statement, whether oral or written, either about their qualifications or capability to render investment management services or their achievements
  • Record in writing, the investment, divestment and other key decisions, together with appropriate justification for such decisions;
  • Provide appropriate and well considered inputs, which are not misleading, as required by the valuer to carry out appropriate valuation of the portfolio;
  • Prohibition on entering into arrangements for sale or purchase of securities, where there is no effective change in beneficial interest or where the transfer of beneficial interest is only between parties who are acting in concert or collusion, other than for bona fide and legally valid reasons;
  • Abide by confidentiality agreements with the investors and not make improper use of the details of personal investments and/or other information of investors;
  • Not offer or accept any inducement in connection with the affairs of or business of managing the funds of investors;
  • Document all relevant correspondence and understanding during a deal with counterparties as per the records of the AIF, if they have committed to the transactions on behalf of AIF
  • Maintain ethical standards of conduct and deal fairly and honestly with investee companies at all times; and
  • Maintain confidentiality of information received from investee companies and companies seeking investments from AIF, unless explicit confirmation is received that such information is not subject to any non-disclosure agreement.
  • Ensure availability of the PPM to the investors prior to providing commitment or making investment in the AIF and an acknowledgment be received from the investor
  • Ensure scheme-wise segregation of bank accounts and securities accountsnot offer any assured returns to any prospective investors/unitholders.
  • Members of Investment Committee
  • Trustee/ Trustee company
  • Directors of Trustee company
  • Directors of AIF
  • Designated Partners of AIF
  • Maintain integrity and the highest ethical and professional standards of conduct
  • Ensure proper care and exercise due diligence and independent professional judgment
  • Disclose details of any conflict of interest relating to any/all decisions in a timely manner to the Manager of the AIF, adhere with the policies and procedures of the AIF with respect to any conflict of interest and wherever necessary, recuse themselves from the decision making process;
  • Maintain confidentiality of information received regarding AIF, its investors and investee companies; unless explicit confirmation is received that such information is not subject to any non-disclosure agreement.
  • Not indulge in any unethical practice or professional misconduct or any act, whether by omission or commission, which tantamount to gross negligence or fraud
  • Not offer any assured returns to any prospective investors/unitholders.
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:

[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.

Should you expect adjustment in profits for “Expected Credit Loss”?

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– Customised profits for CSR and managerial remuneration under Section 198 of the CA, 2013

– Pammy Jaiswal and Sourish Kundu | corplaw@vinodkothari.com

Background

The presentation of the profit and loss account has been outlined under the Schedule III of the Companies Act, 2013  (‘Act’) and the profit computation method has been provided for under the applicable accounting standards [See IND AS 1]. The basic principle is to showcase a true and fair view of the financial position of a company. Having said that, it is also significant to mention that the Act provides for an alternative method for computing net profits, the basic intent of which is to arrive at an adjusted net profit which does not have elements of unrealised gains or losses, capital gains or losses and in fact any item which is extraordinary in its very nature. The same is contained under the provisions of section 198 of the Act. This section, unlike the general computation method, has a limited objective i.e., calculation of net profits for managerial remuneration as well as corporate social responsibility. 

There are four operating sub-sections under section 198 which provides for the adjustment items:

  1. Allowing the credit of certain items – usual income in the form of govt subsidies
  2. Disallowing the credit given to certain items – unrealised gains, capital profits, etc.
  3. Allowing the debit of certain items – usual working charges, interests, depreciation, etc
  4. Disallowing the debit of certain items – capital losses, unrealised losses, usual income tax, etc

It is important to note that items other than those mentioned above need not be specifically adjusted unless their nature calls for adjustment under the said section. Now if we discuss specifically for items in the nature of Expected Credit Loss (‘ECL’) for companies following IND AS, it is important to understand the nature of ECL in the context of making adjustments under section 198 of the Act. See our write on Expected Credit Losses on Loans: Guide for NBFCs.

Understanding ECL and Its Accounting Treatment

Reference shall be drawn from Ind AS 109 which defines ‘credit loss’ as ‘the difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive (i.e. cash shortfalls), including cash flows from the sale of collateral held.’ ECL is essentially a way of estimating future credit losses, even on loans that appear to be fully performing at the time of such analysis (Stage 1 assets). It is based on expected delays or defaults, and the estimated loss is recorded as a charge to the profit and loss account, based on a 12-month probability of default.

As per Ind AS 109, ECL is used for the recognition and measurement of impairment on financial assets both at the time of origination as well as at the end of every reporting period. ECL is a forward-looking approach that requires entities to recognize credit losses based on the probability  of future defaults/ delays.

However, this does not result in a reduction in the carrying value of the asset (unless the asset is already credit-impaired, i.e., Stage 3). In that sense, while ECL reflects asset impairment, it does not operate like a direct write-down. And unlike conventional provisioning, ECL is not a “provision” under traditional accounting – it is a loss allowance rooted in forward-looking estimations. Further, it is also important to understand that the booking of ECL does not mean that there has been a credit loss in the actual sense, the same is a methodical manner of estimating the probable default risk association with the asset value.

Treatment of ECL under Section 198 

Section 198 requires excluding unrealised or notional adjustments, such as fair value changes or revaluation impacts in terms of Section 198(3) of theAct.

The section also refers specifically to actual bad debts, under  Section 198(4)(o). This raises the natural interpretational question: should model-driven, probability-weighted ECL charges – which do not reflect realised losses – really be allowed to remain deducted while computing such customised profits? Well, the answer lies in the requirement and nature of such an item being required to be deducted from the profit and loss account under IND AS 109.  

Alternative approaches -Treatment of ECL

The question around the treatment of ECL can be viewed from two perspectives. The first being the nature of ECL and the second on the routine treatment and calculation of ECL. If we look at the nature, it is clear that while it is imperative for companies to compute ECL at the time of origination as well as at the end of every reporting period, it is important to note that there is no loss or default in the actual sense. This means that the amount computed as ECL has not been an actual default. 

On the other hand, if we look at the need for such computation and the methodical approach to arrive at the value of ECL, the same is likely to be considered as a usual working charge which is charged to the profit and loss account. Accordingly, we have come across two possible and permissible approaches to the treatment of ECL while computing the profits under section 198. The same has been discussed below with the help of illustrations.

Approach 1: Disallowing ECL in the year of its booking and subsequent adjustment of bad debt

Year 1Year 2
PBT – 1000
Depreciation – 20
ECL – 40
Loss on sale of fixed asset – 15		PBT – 1200
Depreciation – 20
ECL – 35
Actual Bad Debt – 15
Profit on sale of equity shares – 25
Year 1AmountYear 2Amount
PBT                                                                                  1000PBT                                                                                  1200
Depreciation                                                                     –Depreciation                                                                    –
Add: ECL                                                                            40Add: ECL                                                                            35
Add: Loss on sale of fixed asset                                    15Less: Profit on sale of equity shares                                                    (25)
PBT u/s 198                             1055PBT u/s 198                                  1210

Notes: 

  • ECL has been ignored in profit computation u/s 198 considering the same is an unrealised loss and therefore reversed.
  • Depreciation and actual bad debt has not been adjusted again as it has already been deducted under normal profit computation.
  • Capital gains and losses have been adjusted/ reversed under the computation.

Approach 2: Allowing ECL in profit computation and netting off actual bad debt from the same in subsequent period

Year 1Year 2
PBT – 1000
Depreciation – 20
ECL – 40
Loss on sale of fixed asset – 15		PBT – 1200
Depreciation – 20
ECL recovered – 35
Actual Bad Debt – 15
Profit on sale of equity shares – 25
Year 1AmountYear 2Amount
PBT                                                                                 1000PBT                                                                                 1200
Depreciation                                                                    –Depreciation                                                                     –
ECL                                                                                     –ECL                                                                                      –
Add: Loss on sale of fixed asset                                   15Actual bad debt                                                                           –
ECL recovered                                                                    –
Less: Profit on sale of equity shares                          (25)
PBT u/s 198                            1015PBT u/s 198                           1185

Notes:

  • ECL has been considered in profit computation u/s 198  and therefore, not adjusted to reverse the impact
  • Similarly, ECL recovered has been considered part of normal or routine adjustment and hence, not reversed.
  • Actual bad debt is not to be considered at the time of profit computation under  the regular computation since it can be adjusted from the ECL already booked.
  • Capital gains and losses have been adjusted/ reversed under the computation.

Concluding remarks

All listed companies are required to comply with Ind AS and given that an instance of a company having nil receivables is a rare occurrence, the discussion on how ECL is to be treated while computing net profit in terms of Section 198 becomes more than just an academic debate.

As long as the impact of any P&L item being extra ordinary in nature is taken off from the profits computed u/s 198, the same serves the purpose and intent of section 198 of the Act. ECL, while valid for accounting, is fundamentally an estimated, non-actual loss. It exists because accounting standards demand alignment of income with credit risk  and not because a real outflow has occurred. However, it cannot be said that ECL already deducted while calculating profit before tax as per applicable accounting standards will be reversed while calculating profits in terms of Section 198. 

Further, given that ECL is based on expectation calculated using due accounting principles, the actual bed debt, if within the ECL limit, does not impact the P&L. On the contrary, in case of the actual bad debt being in excess, the P&L warrants a subsequent debit of the net amount. For example, under approach 2 if the actual bad debt would have been 50, i.e. in excess of the ECL booked in the previous period by 10, the normal profit computation would have allowed a debit of 10.

In fact, both the approaches lead to the fulfilment of the intent of section 198 and hence, it is not necessary to consider any one approach as correct. Having said that, it is imperative to follow uniform practice in this regard in the absence of which the profits u/s 198 may be impacted. 

Therefore, where the statutory and accounting frameworks intersect – but are not necessarily aligned – companies must adopt a carefully considered, principle-based approach as even a single line item like ECL can materially influence the base for managerial remuneration and CSR spending unlike other estimate based items such as revenue deferrals viz. sales returns or warranties, which are made as a matter of accounting prudence, but does not represent outflows for statutory computation purposes. Accordingly, there is no reason for deviating from the Indian GAAP principles for the purpose of customised calculation of net profits for specific purposes. 

Read more: 

Cash in Hand, But Still a Loss? 

Impact of restructuring on ECL computation

Knowledge Centre for Corporate Social Responsibility (CSR)

FAQs on Standards for minimum information to be disclosed for RPT approval

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Register for our Certificate Course on RPTs, see details here – https://vinodkothari.com/2025/08/12-hours-certificate-course-on-nuts-and-bolts-of-related-party-transactions/

FAQs on Revised RPT ISN_05.09.2025Download

Our brief note on the Industry Standards can be read here.

Our other resources on RPTs can be accessed here.

Yeh Rishta kya kahlaata hai! – the strange case of “promoters-in-law”

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Vinod Kothari | vinod@vinodkothari.com

Here is a tale of three families, and trust, almost every business family in the country may fit in the tale. (All names are completely hypothetical.)

Family One – Jaani family, owning large number of listed companies in the country. Ashok, son of the founder, got married to Rani, daughter of the founder of Maani family.

Maani family – once again another leading industrial houses in the country. Rani, daughter of the founder, has two siblings – Prashik, and Vimla. Prashik runs the family’s businesses. Vimla got recently married to Varun, from Dhyaani family.

Camera shifts to Dhyaani family, where Vimla got married to Varun. Relations are made between equals – hence, Dhyaani family is no less in stature than the Maani family and the Jaani family.

All the families have variety of listed and unlisted companies in their control. In most cases, shareholdings of operating entities are through investing vehicles, which are held in the name of individuals of the families.

Given the definition of “promoter group”, Ashok is a promoter. Ashok’s wife, Rani is obviously an “immediate relative” and hence a part of promoter group.

By definition (if we read it to mean parents, brother, sister and child of the spouse too), Rani’s father, the founder of the Maani family, becomes a part of the “promoter group” for Jaani family. So also will be Prashik. Vimla, though married in Dhyaani family, being sister of Rani, will also be part of “promoter group”.

Now look at the consequences. All bodies corporate where 20% shareholding is held by the individuals of Maani  family – founder, Prashik and Prashik’s mother, will form part of the promoter group of the Jaani family. 

We don’t stop here – all entities where Vimla, now a part of Dhyaani family, will also need to identify bodies corporate where she holds 20%, and these entities will be reported as a part of the PG for Jaani family.

The same process will have to run for Maani family and Dhyaani family – hence, the focus may actually shift over to the country’s business tycoons one by one.

The sweep of the definition of “promoter group” may have had its own intent, but it cannot be stretched to include सगे सम्बन्धी where there is no evidence of commonality. Sadly enough, SEBI rules require a listed company to list out the names of all such सगे सम्बन्धी entities, no matter whether there is a shareholding overlap or not. And all these entities will be identified as “related parties” too.

Our other resources on promoter/promoter group can be accessed below:

Regulatory landscape for AIFs: what’s new?

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– 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 AIFApplicability of dematerialisationInapplicability of dematerialisationDematerialisation to be ensured by
On or after 1st July, 2025MandatoryScheme of an AIF whose: Tenure ends on or before 31st October, 2025  orExtended tenure as on 14th February, 2025Immediately
Prior to 1st July, 2025Not 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 formOn 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 managerCategorisation under CSCRF
> Rs. 10000 croresMid-size REs
3000 crores < AUM < 10000 croresSmall-size REs
< Rs. 3000 croresSelf-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.

SEBI approves a mix of reforms for regulated entities

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– Easing ESOPs for IPO-bound companies, relaxations to SEBI regd. intermediaries, providing clarity for uniformity of practices  

– Team Corplaw | corplaw@vinodkothari.com

Various proposals have been approved by SEBI in its Board meeting dated June 18, 2025, pertaining to various relevant regulations. The approved changes may impact various market participants – listed entities as well as IPO-bound companies, SEBI registered intermediaries and regulated entities such as REITs, Invits, AIFs, FPIs, etc. We briefly discuss some of the important proposals as approved by SEBI. 

Relief for promoters in IPO-bound companies: easing rules on ESOPs and offer for sale 

  • Relaxation in eligibility norms with respect to Offer for Sale (OFS) in IPO (see Consultation Paper here)
    • Exemption from minimum holding period of 1 year extended to equity shares arising from conversion of Compulsory Convertible Securities (CCS), where such CCS were acquired pursuant to an approved scheme (earlier limited to equity shares) to assist in reverse flipping (i.e. shifting the country of incorporation from a foreign jurisdiction to India) [Reg 8 & 105 of ICDR Regulations].
  • Enabling Minimum Promoter Contribution (MPC) by Relevant Persons (apart from promoter) through equity shares arising from conversion of fully paid-up CCS  
    • Relevant Persons comprise of AIFs, FVCIs, Scheduled Commercial Banks, PFIs, insurance cos etc.
  • Founders-turned-promoters can retain share based benefits, ESOPs granted 1 year prior to filing of DRHP (see Consultation Paper here)
    • Brings relaxation for treatment of options granted prior to becoming a promoter, which was otherwise required to be liquidated

Dematerialisation of shares: pre-IPO and post-listing requirements 

  • Mandatory dematerialization of securities held by critical pre-IPO shareholders before filing of DRHP (see Consultation Paper here):
    • Following categories covered:
      • Promoter Group
      • KMPs
      • Directors
      • Employees
      • Selling Shareholders
      • QIBs
      • Senior Management
      • Financial sector entities 
    • To reduce volume of physical shares 
    • CA, 2013 also requires mandatory dematerialisation of holding of promoters, directors and KMP of companies prior to undertaking any share based corporate action [Rule 9A and 9B of Companies (Prospectus and Allotment of Securities) Rules]
  • Corporate actions by listed entities in dematerialised form only
    • For shares to be issued pursuant to consolidation/split of face value of  securities  and  scheme  of  arrangements
      • CA, 2013 already requires companies to issue shares in dematerialised form only

Fund raising mandatory for social enterprises registered with SSE, relaxations in eligibility conditions for registration 

  • Mandatory fund raising through SSE 
    • Registration to lapse if social enterprise registered with SSE does not raise funds within 2 years from registration
  • Definition of “Not for Profit Organization” expanded [Reg 292A(e) of ICDR]
    • Trusts registered under Indian Registration Act, 1908 permitted (extant regulations refer to Indian Trusts Act, 1882 and a trust registered under the public trust statute of the relevant state) 
    • Charitable society registered under relevant state Act (extant regulations covered only society registered under the Societies Registration Act, 1860)
    • Companies registered under Section 25 of the erstwhile Companies Act, 1956 (clarity provided since extant regulation refers to section 8 of 2013 Act) 
  • List of eligible activities expanded to align with Schedule VII of the Act, 2013 (pertaining to CSR activities)
  • Criteria of 67% of total activities reflecting in eligible activities (through revenues, expenditure or total customer base) relaxed
    • To be applicable only to “for profit social enterprises” 
  • Annual disclosures bifurcated into financial and non-financial disclosures
    • Different timelines to be prescribed for such disclosures 
    • CP prescribes the extant 60 days’ period for non-financial disclosures, and upto 31st October after end of FY for financial disclosures 
  • Self-reporting of Annual Impact Report instead of certification from Social Impact Assessor
    • For social enterprise that has not raised funds through the SSE 
  • Change in nomenclature of “Social Impact Assessment Firm” to “Social Impact Assessment Organization”(SIAO) and eligibility conditions for the SIAO prescribed 
    • SIAO to is permitted to conduct social impact assessment provided they have at least two social impact assessors in full time employment 
    • Having an and such impact assessors have experience of at least 3 years of conducting social impact assessment.
    • Social impact assessor to sign the report if SIAO does not have 3 years’ track record 

Revamping of regulatory framework for Angel Funds under AIF Regulations 

[refer SEBI consultation paper dated November 13, 2024 and February 21, 2025]

  • Mandatory registration of Angel Investors as Accredited Investors(AI)  
    • Attracts independent verification of investor status
    • Grandfathering of earlier investments as non AI, and implementation through glide path 
  • Accredited Investors included as Qualified Institutional Buyer in ICDR for investments in Angel Funds.
  • Relaxation in investment norms by angel funds in investee company 
    • Floor and cap relaxed from Rs. 25 lacs to Rs. 10 lacs, and from Rs. 10 crores to Rs. 25 crores respectively 
    • Concentration limits of 25% per investee company removed.
    • Follow on investments permitted in investee company, though may no longer be start-up
  • Scheme may now have more than 200 AIs
  • Minimum continuing interest of Sponsor/ Manager at investment level instead of Fund level
    • higher of 0.5% of investment amount or Rs. 50,000
    • Earlier the commitment was required to be maintained at a fund level only

SEBI regulated entities enabled to carry out activities not regulated by SEBI

  • Merchant Bankers and Debenture Trustees have been permitted to carry out activities not regulated by SEBI within the same legal entity subject to following conditions:
    • DT may undertake activity within the purview of any other financial sector regulator (FSR), subject to compliance with the regulatory framework specified by such regulator 
    • For activities not within the purview of SEBI or other FSR, the same shall  be  fee-based and non-fund-based activity and pertain to FSR
      • Had been previously required to hive off such activities pursuant to SEBI Board Meeting decision in December, 2024
  • Custodians permitted to carry out other financial services under  the regulatory oversight  of  other  financial sector regulators within  the  same  legal  entity
  • subject  to  having  adequate  mechanisms  to  address  issues  of conflicts of interest
  • Non-bank associated custodians offering services which are not overseen by any financial sector regulator to : 
  • Disclose clearly that such activities are outside the purview of, and without  recourse  to  SEBI
  • Set up distinct strategic business units (SBUs) for undertaking activities not under the purview of SEBI with adequate mechanisms to address issues of conflicts of interest

Clarity of responsibilities and uniformity measures for DTs

  • Specifying rights of DT and corresponding obligations on issuer under LODR
    • To enable DT in enforcing its rights 
  • Enabling provisions for providing format for model debenture trust deed (DTD) [Refer Annexure-1 of Consultation paper dated Nov 04, 2024 for the model DTD as proposed by SEBI]  
  • Modification in manner of utilization of Recovery Expense Fund (REF) (see an article on REF here)
    • Elaboration of list of expenses for which REF can be utilised
    • To provide ease to DTs to take prompt action upon default by listed entity   

Relaxations in regulatory norms for REITs and InvITs [see consultation paper dated May 02, 2025]

  • Definition of ‘public’ under REITs / InvITs to be amended to include related  parties  of  the sponsor,  investment  manager/manager  and  project  manager to qualify as public if such related parties are Qualified Institutional Buyers
    • Relevant for determination of minimum public holding 
    • Related party of REIT/ InvIT viz. sponsor, sponsor group, investment manager, project manager are not regarded as ‘public’
  • Adjustment of negative net distributable cash flows generated by the Holdco against  cash received from the SPVs
    • Net cash flow post adjustment to be distributed to unitholders
  • Alignment of timelines of submission of various reports including quarterly reports, valuation reports with the timelines for submission of financial results.
  • Reduction of minimum allotment lot for privately placed InVITs to INR 25 lacs from INR 1 crore to align with the trading lot in secondary market.

Read more:

SEBI’s stringent norms for secured debentures

No shares, no say, yet a promoter: How marital ties create fictional “promoter groups”
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