SEBI’s Co-Investment Reforms 2025: A Game-Changer for India’s Private Investment Ecosystem

 

Introduction: India at a Crossroads in Private Investment

India’s private investment landscape is evolving at a breakneck pace. On September 9, 2025, the Securities and Exchange Board of India (SEBI) unveiled a landmark circular reshaping the rules for co-investments under Alternative Investment Funds (AIFs). This reform allows Category I and II AIFs to establish dedicated Co-Investment Vehicles (CIVs) within their existing umbrella structures.

If you’ve been following India’s venture capital (VC) and private equity (PE) sectors, you might notice this is more than a procedural tweak—it’s a structural shift. Analysts predict that this move will unlock fresh capital for unlisted companies, streamline operations for fund managers, and improve alignment between investors and fund sponsors.

But what does this mean for investors, fund managers, and startups? Let’s break it down, step by step, in a way that’s practical, insightful, and easy to understand.

 

Understanding Co-Investment: Why It’s Important

At its simplest, co-investment allows investors—typically limited partners (LPs) or high-net-worth individuals—to invest alongside a fund in a specific deal, beyond their committed capital in the main fund.

Think of it like this: instead of buying a pre-packaged basket of stocks, you get to handpick individual shares you have high conviction in—while still relying on a fund manager’s expertise.

Key advantages include:

• Flexibility in capital allocation: Investors can increase exposure to deals they are confident about.
• Deal-level choice: LPs aren’t tied to the fund’s broad strategy—they can select individual investments.
• Support for larger deals: Funds can deploy more capital into high-potential companies without overstretching the primary fund.

Globally, co-investment is standard in mature PE and VC markets, from the U.S. to Europe. It allows investors to gain targeted exposure while enabling fund managers to optimize capital deployment efficiently.

 

SEBI’s Previous Framework: Limitations That Hindered Growth

Before this 2025 reform, co-investments in India were largely routed through Portfolio Management Services (PMS). Here’s how it worked:

• Fund sponsors created separate PMS structures for co-investments.
• These PMS setups had their own regulatory requirements, distinct from the AIF framework.

This dual-licensing caused headaches:

1. Regulatory Redundancy: Maintaining both AIF and PMS structures increased compliance workload.
2. Slower Execution: Legal bottlenecks delayed deal closures, frustrating both managers and investors.
3. Limited Flexibility: Customizing co-investments was challenging.
4. Potential Misalignment: PMS structures sometimes diverged from the core AIF strategy, creating conflict.

By May 2025, SEBI recognized these challenges. A consultation paper proposed integrating co-investment directly under the AIF umbrella via dedicated CIV schemes. By June 18, 2025, SEBI’s board approved the new framework, and the official circular followed on September 9.

 

What the New Circular Brings: Key Highlights

1. Co-Investment Vehicles (CIVs) Within AIFs

Now, Category I and II AIFs can create independent CIV schemes. Each CIV has:

• Its own bank and demat accounts
• A separate Permanent Account Number (PAN)
• Investments restricted to unlisted securities of the parent AIF

Importantly, access is limited to accredited investors, ensuring that regulatory safeguards are in place while maintaining investor protection.

Example: Suppose an AIF invests in 10 startups. Through a CIV, an LP can choose to co-invest in just three startups they believe have the highest growth potential, rather than being tied to the full portfolio.

 

2. Shelf Private Placement Memorandum (PPM) Simplification

Previously, every co-investment required a fresh PPM—a time-consuming and costly process. Now:

• AIF sponsors can file a single “shelf” PPM covering multiple CIV schemes.
• This reduces paperwork while maintaining transparency for investors.

For fund managers, this is a huge operational relief, allowing them to focus on deals instead of documentation.

 

3. Guardrails Against Conflicts of Interest

SEBI’s circular also ensures investor protection:

• Segregated accounts for each CIV
• Independent scheme treatment
• Disclosure protocols to prevent CIV investments from disadvantaging the parent AIF

This builds confidence that co-investment interests are fully aligned with the main fund.

 

4. Advisory Services Flexibility

Previously, AIF managers could not advise on listed securities in co-investment setups, to avoid conflicts. Now:

• Managers can offer advisory services for listed securities within CIV schemes.
• Certain conditions apply, maintaining regulatory compliance.

 

What Remains Unchanged

• Category III AIFs: Cannot launch CIV schemes.
• PMS Route: Funds may continue using PMS, allowing gradual transition to CIVs.
• Exit Rules: CIVs must broadly align exits with the parent AIF lifecycle.

The circular ensures clarity while leaving room for flexibility during adoption.

 

Impact Analysis: Who Wins and Potential Challenges

Winners

AIF Managers & Sponsors

• Reduced regulatory friction
• Faster deal execution
• Better alignment of interests
• Ability to monetize advisory services in listed securities

Accredited Investors

• Greater choice at deal level
• Transparent and segregated structures
• Reduced compliance burden via shelf PPMs

Startups & Unlisted Companies

• Enhanced access to capital
• Flexible fundraising avenues
• Broader participation from sophisticated investors

 

Challenges

• Smaller boutique AIFs may find accounting and administrative requirements demanding.
• Non-accredited investors are excluded, limiting democratization.
• Auditors, tax advisors, and legal teams must adapt to CIV-specific norms.

 

Stakeholder Implications

Stakeholder	Implication	Action / Risk
AIF Firms / Fund Managers	Launch & integrate CIV schemes	Assess costs of PANs, bank/demat accounts; revise governance; align exit timing
Investors / LPs	Evaluate co-investment opportunities	Scrutinize scheme terms, conflicts, tax treatment; ensure exit alignment
Auditors / Tax Advisors	Audit CIVs	Track separate accounting, tax implications, cross-scheme transactions
Regulators / Compliance Teams	Monitor adherence	Ensure PPM compliance, reporting, and segregation of accounts

 

Tax and Compliance Considerations

Though SEBI’s circular does not address taxes directly, fund managers need to plan carefully:

• Capital Gains: CIV gains likely follow parent AIF rules based on asset type and holding period.
• Cost Allocation: Expenses, fees, and capital allocation need accurate linking between CIV and parent fund.
• Stamp Duty / STT: Separate scheme-level transfers may attract additional costs.

In practice, CIV compliance requires transparent reporting, conflict-of-interest management, and rigorous record-keeping.

 

Common Misunderstandings About CIVs

• CIVs are not open to all: Only accredited investors qualify.
• Listed securities are off-limits: CIVs invest only in unlisted parent AIF portfolio companies.
• Shelf PPM does not remove disclosure obligations: Ongoing reporting is still required.
• Exit alignment is mandatory: CIV lifecycle should match parent fund’s timeline.
• Advisory freedom is conditional: Managers can advise only within defined contexts.

 

Expert Commentary

Industry experts welcome the new CIV framework:

“Bringing co-investment under the AIF umbrella reduces friction, aligns interests, and improves operational flexibility,” says Anil Mehta, Senior PE Analyst, Mumbai.
“Implementation will be key, especially regarding conflict-of-interest rules and separate accounting.”

Analysts see this as India’s push to modernize private capital markets, aligning with global PE/VC standards.

 

Practical Advice for Stakeholders

If you’re an investor, fund manager, or startup, here’s what to do next:

• Fund Managers:
• Map transition plans for existing co-investments.
• Reconfigure systems for scheme-level PANs, bank, and demat accounts.
• Update legal and disclosure documents, including shelf PPMs.
• Investors / LPs:
• Understand CIV-specific rules.
• Evaluate risks and tax implications before committing capital.
• Monitor parent fund strategy alignment.
• Auditors & Tax Advisors:
• Prepare for CIV-specific accounting and tax reporting.
• Track cross-scheme allocations and expenses.

 

Strategic Implications

This reform strengthens India’s private capital ecosystem:

• Promotes transparent and flexible co-investment structures.
• Facilitates efficient deployment of capital into high-potential startups.
• Enhances investor protection, while keeping operational costs manageable.
• Signals India’s alignment with global PE/VC practices, increasing international confidence.

At Manika TaxWise, we advise clients on structuring co-investments, understanding compliance, and leveraging CIV opportunities for maximum financial efficiency.

 

Frequently Asked Questions (FAQs)

Q1: Who can sponsor a CIV scheme?
Only Category I and II AIFs registered with SEBI.

Q2: Can PMS-based co-investments continue?
Yes. Funds can continue PMS-based co-investments during transition.

Q3: Are non-accredited investors allowed?
No. Access is strictly for accredited investors.

Q4: Can CIVs invest in listed securities?
No. Investments are restricted to unlisted securities in parent AIF portfolios.

Q5: How is exit handled?
CIVs must align with the parent AIF lifecycle, ensuring orderly exits.

 

Conclusion: A Landmark Moment in India’s Private Capital Market

SEBI’s 2025 co-investment circular is more than a regulatory tweak—it is a structural transformation. By integrating co-investment within AIFs:

• Fund managers gain speed, clarity, and flexibility.
• Accredited investors gain targeted, transparent investment opportunities.
• Startups and unlisted companies gain easier access to capital.

For India, it’s a step toward modern, globally aligned private capital markets. For investors and fund managers, it’s an invitation to plan strategically, optimize capital deployment, and embrace a structured, transparent approach to co-investment.

At Manika TaxWise, we guide investors and AIFs through regulatory transitions, tax planning, and compliance strategies—ensuring you make the most of opportunities like these while staying ahead in India’s evolving investment landscape.

 

References

• SEBI Consultation Paper, May 9, 2025
• SEBI Circular on CIV Schemes, September 9, 2025
• Lexology, JSA & AZB Commentaries
• ICICI Direct: Co-Investment Reforms
• Inc42, NLS BLR, DealFlowIQ
• Elplaw Regulatory Updates
• Majmudar & Partners, Vinod Kothari Insights