SEBI Grants Greater Flexibility to AIFs for Co-Investment Opportunities

In a significant regulatory move aimed at deepening India’s private capital market ecosystem, the Securities and Exchange Board of India (SEBI) has introduced new guidelines allowing Alternative Investment Funds (AIFs) to extend co-investment opportunities to investors through a structured framework.

This change, effective immediately, is expected to simplify fund operations, create more transparent investment structures, and attract larger pools of institutional and high-net-worth capital into the Indian private markets.

Understanding Co-Investment in AIFs

In the context of AIFs, co-investment refers to the opportunity provided to select investors to invest directly—alongside the AIF—in the unlisted securities of an investee company.

For instance, if an AIF identifies a high-potential private company, certain investors meeting predefined eligibility criteria (such as minimum commitment size, accreditation, or strategic relevance) may be offered the chance to co-invest in that same company.

This mechanism is particularly attractive to institutional investors and ultra-high-net-worth individuals, as it:

• Enables direct participation in promising investment opportunities.
• Allows investors to deploy larger capital into specific companies of interest.
• Reduces layered fees compared to standard pooled structures.

Until now, such opportunities were largely offered through the Portfolio Management Services (PMS) route. With the new framework, SEBI has institutionalized a separate route—called the Co-Investment Vehicle (CIV) scheme—within the AIF structure itself.

Introduction of the CIV Scheme

SEBI’s circular outlines the creation of CIV schemes specifically for co-investments under Category I and Category II AIFs. These schemes will be managed by the AIF’s manager and subject to regulatory oversight.

Key Features of the CIV Framework:

1. Exclusive Routes
   • Investors can participate in co-investments either through PMS or the CIV scheme, not both, ensuring clarity in capital deployment.
2. Governance & Transparency
   • Managers must file a shelf placement memorandum that clearly sets out the principal terms of co-investments, governance structures, and the applicable regulatory framework.
3. Ring-Fenced Structures
   • Each CIV scheme will have separate bank and demat accounts, with assets strictly ring-fenced from other schemes of the AIF.
4. Investment Limits
   • An investor’s co-investment in a single company through the CIV cannot exceed three times their commitment to the parent AIF scheme.
   • Exemptions apply to global and government-backed investors such as sovereign wealth funds, central banks, DFIs, and state-controlled corporations.
5. Eligibility Restrictions
   • Investors who are excluded from or have defaulted on their AIF contributions are barred from co-investing in that company.
6. Compliance Safeguards
   • CIV schemes cannot be used to:
     • Circumvent direct investment restrictions.
     • Provide indirect exposure to prohibited investments.
     • Trigger regulatory disclosures that would normally apply in direct investments.
7. Standard-Setting Oversight
   • Implementation will be monitored by a standard-setting forum of AIFs to ensure co-investments are genuine and not misused.

Why This Matters

The introduction of the CIV scheme is a landmark reform for the AIF industry in India. Its significance lies in:

• Ease of Doing Business: Simplifies structuring and reduces regulatory friction for fund managers.
• Attracting Global Capital: Aligns Indian AIF regulations more closely with global best practices, making them more appealing to foreign investors.
• Investor Flexibility: Provides accredited investors with direct exposure to high-quality opportunities while maintaining regulatory safeguards.
• Market Growth: By facilitating larger capital inflows into private markets, the move supports the growth of startups, infrastructure projects, and mid-market companies.

The Bigger Picture

India’s AIF industry has grown rapidly, crossing ₹10 lakh crore in commitments as of 2025. With increasing participation from global pension funds, sovereign wealth funds, and large domestic institutions, SEBI’s move is seen as part of a broader strategy to make Indian capital markets more sophisticated and internationally competitive.

By allowing structured co-investments within the AIF ecosystem, SEBI has effectively created a new investment channel that balances investor demand for flexibility with the regulator’s focus on governance and transparency.

Summary

• SEBI has introduced a new Co-Investment Vehicle (CIV) scheme for Category I & II AIFs.
• Allows investors to co-invest in unlisted companies where the AIF invests.
• CIVs will have ring-fenced assets, dedicated accounts, and strict governance standards.
• Co-investment capped at 3x the investor’s AIF commitment, with exemptions for sovereign/DFI entities.
• Move aligns Indian AIF regulations with global private equity and venture capital practices.
• Expected to boost investor confidence, capital inflows, and AIF market growth.

Disclaimer:
This article is intended solely for educational and informational purposes. The securities or companies mentioned are provided as examples and should not be considered as recommendations. Nothing contained herein constitutes personal financial advice or investment recommendations. Readers are advised to conduct their own research and consult a qualified financial advisor before making any investment decisions.

Investments in securities markets are subject to market risks. Please read all related documents carefully before investing.