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A Guide for AIF Managers on Investor Eligibility and Regulatory Restrictions

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Simrat Singh, Senior Executive | finserv@vinodkothari.com

Introduction

An AIF raises capital by issuance of units, which are privately placed.  Most AIFs follow a commitment–drawdown model, under which investors agree upfront to commit a specified amount of capital (‘committed capital’). The AIF manager then calls this committed capital, either in full or in tranches, as investment opportunities arise (‘drawdown’). This model helps the AIF to minimise the negative carry that would result from raising investments which are yet to be invested. 

This fund-raising process is shaped not only by SEBI’s AIF framework but also by the oversight of the respective sectoral regulators of the relevant investors. AIFs are meant strictly for sophisticated investors, and as such, various categories of AIF investors, such as insurance companies, pension funds, banks and NBFCs, etc. are subject to their respective regulations. When they invest in an AIF, they must comply with SEBI’s rules as well as the investment norms prescribed by their own regulators, each seeking to regulate how the capital of the investor is deployed. In fact, SEBI regulations are agnostic as to who the investor is, hence, most of the SEBI regulations relate to the AIF or the manager, with limited provisions dealing with investors. For example, whether and to what extent an insurance company or a pension fund can invest in an AIF is driven by the guidelines issued by the sectoral regulators such as IRDAI or PFRDA.

In this article, we try to bring together, in one place, the key regulatory norms imposed by various regulators; while these are primarily meant for the investor, however, it will be useful for the AIF managers to keep in mind these restraints while expecting or inviting investments from different categories of investors.

Categories of investors and regulatory restrictions on each category

Minimum investment norms: Common across all categories

  1. ₹25 crore for investors in Large Value Funds (reduced from ₹ 70 Crore per investor vide SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025) [Reg. 2(1)(pa)];
  2. ₹1 crore for other investors [Reg 10(c)];
  3. ₹25 lakh for employees or directors of the AIF, manager, or sponsor [Reg 10(c)];
  4. No minimum for units issued to employees solely for profit-sharing (and not capital contribution) [Para 4.6 of AIF Master Circular];
  5. For open-ended AIFs, the initial investment must meet the minimum threshold, and partial redemptions must not reduce the holding below this minimum [Para 4.7 of AIF Master Circular].

Individuals

An AIF may raise funds from individual investors, whether resident, non-resident (NRI), or foreign, through private placement, subject to the following conditions (Refer Reg. 10(a) of AIF Regulations r/w Chapter 4 of AIF Master Circular).

  1. Foreign investors: A foreign investor must:
    1. be a resident of a country whose securities market regulator is a signatory to the IOSCO Multilateral MoU (Appendix A) or has a Bilateral MoU with SEBI; or
    2. be a government or government-related investor from a country approved by the Government of India, even if the above condition is not met.

Additionally, neither the investor nor its beneficial owner1:

  1. May be listed on the UN Security Council Sanctions List; or
  2. may be a resident of a country identified by the FATF as having serious AML/CFT deficiencies or insufficient progress in addressing such deficiencies.

If a foreign investor ceases to meet these conditions after admission, the AIF manager must stop making further drawdowns from that investor until compliance is restored.

  1. Joint Investments: Joint investments, for the purpose of investment of not less than the minimum investment amount in the AIF, are permitted only between:
    1. an investor and spouse;
    2. an investor and parent; or
    3. an investor and child.

A maximum of two persons may invest jointly. Any other combination of joint investors must individually meet the minimum investment threshold. (Refer Reg. 10(c) of AIF Regulations r/w Chapter 4 of AIF Master Circular)

  1. Terms of Investment: The terms agreed with investors cannot override or go beyond the disclosures in the PPM [Para 4.3 of AIF Master Circular].
  2. The total number of investors is limited to 1000 investors per scheme; also note that an AIF cannot make a public offer. AIF units are commonly offered through distributors; but even the distributors cannot make an open offer (Please refer to our resource on Dos and Don’ts for AIF Distributors and AIF Managers).

Insurance Companies

  1. Permissible AIF Categories [Para 1.5 of Investments – Master Circular, 2022 read with IRDAI Circular No. IRDAI/F&I/CIR/INV/074/04/2021 dated 05.04.2021]: 
    1. Category I AIFs: Infrastructure Funds, SME Funds, Venture Capital Funds, and Social Venture Funds (‘Specified Cat I AIFs’);
    2. Category II AIFs: Only where at least 51% of the corpus is proposed to be invested in infrastructure entities, SMEs, venture capital undertakings, or social venture entities (‘Specified Cat II AIFs’).
    3. Investment in a Fund of Fund (‘FoF’) is allowed only if such FoF does not directly or indirectly invest funds outside India (Refer Section 27E of Insurance Act, 1938). This is to be ensured by inserting a clause in the Fund offer Documents executed by FoF to restrain such FoF investing into AIFs which invest in overseas companies/funds. Further, investment is not allowed in an AIF which in-turn has an exposure to a FoF in which the insurer already invested. Lastly, no investment in an AIF is allowed which undertakes leverage/borrowing other than to meet operational requirements. 

Compliance of conditions laid down in (iii) are to be certified by the concurrent auditor of the insurer and filed along with quarterly periodical returns. Notably, insurance companies are prohibited from investing in Cat III AIFs

  1. Prohibited Structures: Insurers shall not invest in AIFs that:
    1. offer variable rights attached to units.
    2. invest funds outside India either directly or indirectly [s. 27E of Insurance Act, 1938];
    3. are sponsored by persons forming part of the insurer’s promoter group;
    4. are managed a manager who is controlled, directly or indirectly, by the insurer or its promoters;
  2. Investment Limits: 
    1. For life insurers, combined exposure to AIFs and venture capital funds is capped at 3% of the relevant insurance fund2.
    2. For general insurers, the cap is 5% of total investment assets3.

Exposure to any single AIF cannot exceed the lower of 10% of the AIF’s corpus or 20% of the insurer’s total AIF exposure. For Infrastructure Funds, the 10% limit is enhanced to 20%.

Banks and other Regulated Entities (REs)

Banks and other REs may invest in Category I and Category II AIFs, subject to layered limits:

  1. Bank level: Not more than 10% of the AIF corpus.
  2. Group level: Up to 20% without RBI approval, and up to 30% with prior RBI approval, subject to capital adequacy and profitability conditions.
  3. System level: Aggregate investments by all regulated entities cannot exceed 20% of the AIF corpus.

Banks must ensure that AIF investments do not circumvent banking regulations by creating prohibited indirect exposures. Banks are not permitted to invest in Category III AIFs, except for the minimum sponsor contribution where a bank subsidiary sponsors such a fund. For a more detailed discussion on Banks’ investment in AIFs, refer to our resource here. 

NBFCs

An NBFC shall not individually contribute more than 10 percent of the corpus of an AIF Scheme. [See Para 8 of RBI ( NBFC –  Undertaking of Financial Services) Directions, 2025]. The system-level investment limit of 20% for all REs shall also apply. Notably, unlike banks, NBFCs can invest in Cat III AIFs. 

Pension, Provident and Gratuity Funds

Pursuant to a 15 March 2021 notification, non-government Provident Funds, Superannuation Funds, and Gratuity Funds may invest up to 5% of their investible surplus in Specified Cat I AIFs and Specified Cat II AIFs, classified as “Asset Backed, Trust Structured and Miscellaneous Investments”.

Key conditions include:

  • Minimum AIF corpus of ₹100 crore;
  • Maximum exposure of 10% to a single AIF (not applicable to government-sponsored AIFs);
  • Investments restricted to India-based entities only;
  • The AIF sponsor and manager must not be part of the fund’s promoter group.

For Government  Sector Schemes such as UPS/NPS/NPA Lite/Atal Pension Yojna and Corporate CG schemes, the conditions are the same as above for non-government pension funds. 

Mutual Funds

Mutual funds are governed by the SEBI (Mutual Funds) Regulations, 1996. The Seventh Schedule to these regulations sets out the permissible investment universe. Units of AIFs are not included, and accordingly, mutual funds cannot invest in AIF units.

  1. beneficial owner as determined in terms of sub-rule (3) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 ↩︎
  2. The relevant insurance fund would refer to the specific fund of a life insurer from which an investment is made, rather than the insurer’s overall balance sheet. This is because Life insurers maintain separate, ring-fenced funds for different lines of business, such as the life fund, pension fund, annuity fund or ULIP fund and investments must be made out of, and limits calculated with reference to, the particular fund whose money is being deployed. ↩︎
  3. Investment assets would refer to the total pool of assets held by a general insurer that are available for investment, across all lines of non-life insurance business. Unlike life insurers, general insurers do not maintain separate, ring-fenced policyholder funds for each product. Instead, premiums collected from various non-life insurance policies are invested as a consolidated portfolio, and regulatory investment limits such as exposure to AIFs are calculated with reference to the insurer’s aggregate investment assets shown on its balance sheet. ↩︎

See our other resources on AIFs:

  1. CIV-ilizing Co-Investments: SEBI’s new framework for Co-investments under AIF Regulations
  2. Understanding the Governance & Compliance Framework for AIFs
  3. FAQs on specific due diligence of investors & investments of AIFs;
  4. RBI bars lenders’ investments in AIFs investing in their borrowers;
  5. Capital subject to ‘caps’: RBI relaxes norms for investment by REs in AIFs, subject to threshold limits;
  6. Can CICs invest in AIFs? A Regulatory Paradox;
  7. Trust, but verify: AIFs cannot be used as regulatory arbitrage;
  8. 2020 – Year of change for AIFs;
  9. AIF ail SEBI: Cannot be used for regulatory breach;