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Introduction
In a major regulatory overhaul announced in
September 2025, SEBI has issued a new circular allowing Category I and II Alternative Investment Funds (AIFs)
to host co-investment vehicles
(CIVs) under the AIF umbrella, replacing the erstwhile reliance
on PMS (Portfolio Management Services) channels. This change, effective
immediately, is intended to simplify compliance, align investor interests, and
expand capital access to unlisted opportunities. The shift represents one of
the most significant tweaks to India’s private equity/venture capital regime in
recent years.
Background and Context
What is Co-Investment & Why It Matters
Co-investment refers to a structure where
investors (typically limited partners or accredited investors) invest alongside
a fund in a particular deal or instrument, beyond their committed share in the
main fund. It is a way to:
·
Increase capital allocation flexibility
·
Let investors pick deals they believe in
·
Enable fund sponsors to deploy larger ticket
sizes without overly diluting the core fund’s strategy
Globally, co-investment arrangements are
widespread in private equity and venture capital jurisdictions, allowing LPs to
increase exposure selectively.
SEBI’s Existing Framework & Limitations
Until now, Indian AIFs (under SEBI’s AIF
Regulations, 2012) have used co-investment
via PMS structures:
·
AIF managers or sponsors would route
co-investments through a co-investment
portfolio manager, registered separately under SEBI’s PMS
Regulations.
·
That dual-licence requirement imposed regulatory
and operational burden—funds had to maintain both AIF and PMS set-ups.
Over time, industry participants flagged
several issues:
·
Redundant compliance duplication
·
Slower execution and deal readiness
·
Difficulty making bespoke co-investments
·
Possible inconsistencies of alignment between
PMS and AIF vehicles
In May 2025, SEBI released a consultation paper
proposing a structural overhaul: permit co-investments within the AIF framework
itself, via “Co-Investment Vehicle” schemes, and ease restrictions on advisory
services by AIF managers for listed securities in co-investment contexts.
Then, on June 18, 2025, SEBI’s
Board approved the new framework. Finally,
SEBI formalised the change through an amendment to AIF Regulations (Second
Amendment, 2025, dated September 8) and accompanying circular on September 9.
This marks a watershed shift in India’s
co-investment regime.
Detailed Explanation of the New Circular
Key Policy Changes & Features
1. Introduction of CIV Schemes under AIFs
·
Category I and II AIFs may now set up dedicated Co-Investment Vehicle (CIV)
schemes under their umbrella structure.
·
Each CIV is treated as a separate scheme, with
independent bank account, demat account, and PAN.
·
CIVs can invest only in unlisted securities of investee
companies in which the parent AIF has made or proposes to make an investment.
·
Access is limited to accredited investors (as
defined under SEBI norms).
2. Shelf PPM & Streamlined Disclosures
·
AIF sponsors may now file a shelf Private Placement Memorandum (PPM)
at registration, covering future CIVs, thus avoiding fresh PPMs for each
co-investment.
·
CIV schemes may utilize this shelf PPM for their
capital raising, subject to compliance and investor safeguards.
3. Alignment & Safeguards on Conflict of Interest
·
The circular includes guardrails to align interests between
CIV investors and the core AIF, ensuring that co-investment does not
disadvantage the main fund.
·
Segregation of accounts, independent scheme
treatment, and disclosure protocols aim to prevent cross-contamination.
4. Relaxation on Advisory Services by AIF Managers
·
Under prior rules, AIF managers were prohibited
from providing advisory services in listed
securities to co-investors or parallel funds, to prevent
conflict of interest.
·
The new regime permits advisory services
by AIF managers in listed securities within
the co-investment context, subject to specified conditions.
What Remains Unchanged or Excluded
·
Category III
AIFs are not
permitted to launch CIV schemes under the new circular.
·
The route of co-investment through PMS
(co-investment portfolio manager) continues to be allowed, giving funds
transition flexibility.
·
CIV exit or liquidation must correlate with the
parent AIF lifecycle, ensuring co-investment schemes do not persist
independently beyond the parent’s termination.
Regulatory References & Legal Basis
·
SEBI
(Alternative Investment Funds) Regulations, 2012: foundational
regulation for AIFs, amended via the Second
Amendment Regulations, 2025 to incorporate co-investment scheme
provisions.
·
The circular published on September 9, 2025,
provides operational clarity and implementation guidelines.
·
SEBI’s earlier consultation paper (May 9, 2025)
laid the rationale and solicited stakeholder feedback.
“The new framework permits Category I and II
AIFs to offer Co-Investment Scheme (CIV Scheme), operating alongside the main
fund in unlisted securities.”
— Lexology commentary on SEBI circular
Impact Analysis: Winners, Risks &
Practical Implications
Who Gains
1.
AIF
Managers & Sponsors
o Lower regulatory friction:
no need to hold dual PMS licenses or maintain parallel structures.
o Faster deal execution:
CIV schemes allow more agile co-investments without fresh legal structuring.
o Better alignment: clearer
alignment of interests and control over co-investments.
o Opportunity
to monetize advisory
services in listed contexts under controlled settings.
2.
Investors
& LPs (Accredited Investors)
o Deal-level choice:
ability to cherry-pick specific deals alongside the AIF.
o Clarity in structure:
separate scheme identity, transparent accounting, reduced leakage risk.
o Reduced compliance burden:
consistent disclosures under shelf PPM.
3.
Startup
/ Unlisted Companies / Capital Markets
o Potential
for increased capital flow
into unlisted firms, as CIVs expand investor access.
o Enhanced
fundraising flexibility via co-investment support.
Who May Face Challenges
·
Smaller
AIFs or boutique funds with limited deal flow may struggle to
manage additional scheme accounting overheads.
·
Non-accredited
investors remain excluded, limiting democratization of
co-investment access.
·
Auditors,
CAs, Legal Advisors will need to adapt to new audit, tax, and
disclosure norms for separate CIV schemes.
Practical Implications by Stakeholder
|
Stakeholder |
Key Implication |
Action Required / Risks |
|
AIF Firms / Fund Managers |
Transition planning, scheme launch, documentation,
systems integration |
Assess costs of separate PAN, bank/demat accounts; revise
fund governance; align exit timing with parent AIF |
|
Investors / LPs |
Evaluating co-investment opportunities, due diligence, tax treatment |
Scrutinize separate scheme terms, conflicts, alignment; ensure
understanding of exit alignment |
|
Auditors / CAs / Tax Advisors |
Audit segmentation, accounting, tax treatment for CIVs |
Develop separate audit trails; understand tax
implications under Income Tax and stamp duty; track cross-scheme transactions |
|
Regulators / Compliance Teams |
Monitoring compliance of disclosures, investor protection, conflict of
interest mitigation |
Ensure shelf PPM usage, periodic reporting, segregation compliance |
On taxation, while SEBI’s circular does not
specifically address tax consequences, typical co-investment structures should
consider:
·
Capital
gains treatment: gains arising in CIV scheme likely mirror
treatment of parent AIF investments (subject to holding period, nature of
asset).
·
Cost
allocation / linkage: accurate allocation of cost basis,
expenses, carry and management fee across CIV and parent AIF.
·
Stamp
duty / securities transaction tax (STT) / transfer duty:
separate scheme-level transfers may attract additional costs depending on state
laws.
From a compliance perspective, fund managers
must ensure rigorous conflict
of interest management and disclosure transparency,
given the closer linkage of CIVs under the AIF umbrella.
Common Misunderstandings & Pitfalls
·
CIVs are not
open to all investors — only accredited investors under SEBI
norms.
·
CIV does not allow investment in listed securities
— only unlisted securities where parent AIF is or will be invested.
·
Using shelf PPM doesn’t exempt all disclosures — ongoing
reporting obligations remain.
·
CIV exit may not be independent — it must
broadly align with parent AIF’s lifecycle.
·
Permitting advisory services by AIF manager is not a blanket freedom —
only in defined contexts under safeguards.
Expert Commentary
In my view, SEBI’s CIV framework is a bold
and necessary modernization of India’s private capital architecture. By
internalizing co-investment within the AIF structure, the regulator has reduced
friction, improved alignment between sponsor and co-investor, and extended
flexibility. However, the success of this reform will hinge on robust
implementation — especially in how conflict-of-interest rules are enforced and
how the separate-scheme accounting is audited. The move signals India’s intent
to modernize its private markets and bring domestic funds closer to global best
practices.
Conclusion & Action Steps
SEBI’s 2025 circular introducing Co-Investment Vehicle (CIV)
schemes under the AIF framework is a clear inflection point for India’s private
investment ecosystem. By enabling Category I and II AIFs to host deal-specific
co-investments internally, SEBI has addressed long-standing operational and
compliance constraints associated with the PMS route. The reforms promise
swifter execution, better alignment, and expanded opportunity for accredited
investors to engage directly in high-conviction deals.
Moving forward, stakeholders must:
1.
Map
transition plans: AIF firms should assess existing
co-investment structures and prepare for CIV adoption.
2.
Reconfigure
systems: Firms need to provision for scheme-level PANs,
bank/demat accounts, accounting, audit and reporting.
3.
Update
legal & disclosure documents: Shelf PPMs must be drafted,
investor agreements updated, conflicts managed.
4.
Educate
investors and advisors: LPs, auditors, tax professionals must
grasp the nuances of separate scheme accounting, tax treatment and exit
alignment.
5.
Monitor
policy evolution: SEBI or finance ministry may further refine
CIV rules based on industry feedback and evolving global norms.
In coming months, we may see further
fine-tuning—such as opening co-investment to newer investor classes, refining
accreditation criteria, or extending CIVs to more AIF categories. For now, this
circular stands as a progressive step, nudging India’s alternative investment
markets toward greater institutional maturity and alignment with global PE/VC
practice.
Frequently Asked Questions (FAQs)
Q1:
Who can sponsor a CIV scheme under this new framework?
Only Category I and II AIF
sponsors or managers registered with SEBI may launch CIV
schemes under the AIF umbrella.
Q2:
Can existing co-investments via PMS route continue?
Yes. The circular allows co-investment through PMS route to continue,
offering a transition pathway for funds to shift gradually.
Q3:
Are non-accredited investors eligible to invest in CIV schemes?
No. CIV schemes under the new rules are limited to accredited investors only,
as per SEBI’s investor criteria.
Q4:
Does the new framework allow CIVs to invest in listed securities?
No. CIV schemes are restricted to unlisted
securities of investee companies where the parent AIF is making
or has made an investment.
Q5:
How will exit or liquidation of CIVs be managed?
CIV schemes must align their life cycle or exit timing broadly with that of the
parent AIF. They are not designed to persist independently beyond the life of
the parent fund.
References & Source Links
1.
SEBI’s consultation paper and AIF circular disclosures
2.
Lexology, JSA and AZB commentary on the new CIV
framework
3.
ICICI Direct’s explanation of route change
4.
Inc42, NLS BLR, DealFlowIQ on co-investment reforms
5.
Elplaw and regulatory updates on board approval
6.
Majmudar & Partners, Vinod Kothari writes on AIF
regulatory shifts