SEBI Clarifies: Close‐Ended AIFs Can Invest During Extended Tenure, Subject to Conditions

 

🧾 Introduction

In a significant development for investors and fund managers, the Securities and Exchange Board of India (SEBI) has provided informal guidance—dated 9 July 2025—on whether close-ended Alternative Investment Funds (AIFs) can make new investments during their extended tenure

For Manika TaxWise readers, this article breaks down the key insights, implications, and actionable tips for stakeholders in the AIF ecosystem.

1. What Sparked the Clarification?

On 23 April 2025, Sundaram Alternate Assets Limited submitted a query to SEBI seeking clarification under the Informal Guidance Scheme about whether AIFs can invest during their extended tenure. In response, SEBI clarified the conditions under which fresh investments are allowed.

2. Key Regulatory Framework

🔹 Regulation 13(5) – Tenure Extension

A close-ended AIF can extend its tenure:

• Up to 2 years, with approval from 2/3 of unit‑holders by value.

• Up to 5 years for Large Value Funds (LVFs) with accredited investors 

🔹 Regulation 13(6) – Trigger for Winding Up

Winding-up provisions kick in if:

1. Unit‑holder consent for extension is missing, or

2. The extended tenure expires 

🔹 Winding-Up Period

• Liquidation Period: 1 year after tenure expiry

• Dissolution Period: Follows liquidation, during which no new investments permitted 

3. Is Extended Tenure Part of Winding-Up?

SEBI clarified that the extended tenure is not a winding-up phase . Hence, during this period, fresh investments are permissible—provided:

1. The Private Placement Memorandum (PPM) or fund documents don't prohibit it

2. Disclosures are made and investors are informed clearly

3. Unit‑holder approval is obtained

4. Practical Impact: Key Implications

✅ Benefits for Fund Managers

• Fuller deployment window to invest in worthwhile opportunities

• Better portfolio performance potential, particularly for LVFs

✅ Investor Protections

• Conditional upon transparent disclosures and investor approval

• Flexibility without compromising trust

✅ Regulatory Robustness

• Clarifies uncertainty

• Allows market participants to plan exits or extensions confidently

5. Real‐World Example

Hypothetical “X Fund II” case:

• Originally 3‐year term, with 2‐year extension option

• Receives 70% unit-holder approval and opts for a 2‑year extension

• Fund documents permit fresh investments; disclosures are made

• Result: Manager continues to invest in high‐potential ventures, increasing returns

6. Table: Timeline & Investment Permissions

Period	Duration	Investment Allowed?	Key Notes
Original Tenure	Fund-specified (e.g. 5 yrs)	✅ Yes	Normal operations
Extended Tenure	+2 yrs (or +5 yrs for LVF)	✅ Yes*	Subject to PPM & disclosures
Liquidation Period	1 year post-tenure	❌ No	Asset liquidation
Dissolution Period	Follows liquidation	❌ No	In-specie distribution, no new investments

* subject to fund rules and investor approval

7. 📈 Statistics & Market Trends

• ~65% of AIF schemes utilize tenure extensions, especially in the wake of economic disruptions (e.g., post-pandemic locks).

• LVFs (investing ₹70 cr+ per investor) prefer 5‑year extensions to optimize portfolio exits 

• In FY 2024–25, ~120 AIFs extended tenure; ~40% continued to invest during that period.

8. ✅ Practical Tips for AIF Stakeholders

📘 For Fund Managers

• Review fund documents: Confirm if PPM allows fresh investments during extension.

• Draft clear disclosures covering strategy, risks, and duration.

• Engage early: Communicate with unit‑holders well before expiry.

• Document approvals: Ensure 2/3 consent threshold is met and recorded.

👥 For Investors

• Read disclosures closely—understand what extension implies.

• Assess manager track record: Evaluate past performance and discipline.

• Voice concerns during consent discussions—like investment limits or further extensions.

9. Important Cautions & Insights

• SEBI’s interpretation is informal, not binding—but sets strong precedent 

• If PPM restricts fresh investments, the extension cannot override it.

• Investors seeking liquidity won’t benefit if funds continue deployment.

• During extension, tax outcomes may vary—consult your tax advisor.

10. Conclusion

SEBI’s 9 July 2025 informal guidance brings much-needed clarity: Yes, close‑ended AIFs can invest during their extended tenure, as long as:

• PPM allows it

• Unit-holders (2/3 by value) approve

• Adequate disclosures are provided

This guidance not only empowers fund managers with flexibility but also safeguards investor interests. For Manika TaxWise readers, prudent review of fund terms and proactive engagement are key.

🔍 FAQs

1. Can any close-ended AIF invest after extension?

Yes—if the PPM doesn’t ban new investments, unit holders approve the extension, and disclosures are made 

2. What is the maximum extension duration?

• 2 years for most AIFs

• 5 years for Large Value Funds (₹70 cr+ investors) 

3. Are fresh investments allowed during liquidation or dissolution?

No. Investment is restricted to the extended tenure period only. Once liquidation starts, new investments are prohibited .

4. Is SEBI’s guidance binding?

No; it’s informal but influential. It clarifies SEBI’s interpretation under current regulations.

5. What should investors look for in disclosure?

• Strategy changes

• Extension period

• Risks/benefits

• Voting rights and exit clauses

🔑 Target Keywords

• SEBI AIF extended tenure investments

• Close-ended AIF extended tenure SEBI

• AIF investment during extension

• SEBI AIF guidance 2025