SEBI Co-Investment Framework for AIFs under SEBI (Alternative Investment Funds) Regulations, 2021: Key Features and Implications for Investors

Introduction

SEBI has recently introduced a Framework for AIFs to make co-investment within the AIF structure under SEBI (Alternative Investment Funds) Regulations, 2012. In recent years, AIFs in India have experienced significant growth, attracting substantial capital and emerging as a crucial channel for private equity, venture capital, real estate, and structured debt investments. Commitments to AIFs surged to ₹14.2 trillion as of June 2025, underscoring a rise in investor interest.
The article aims to effectively summarise the key features of the directions and analyse their necessity and likely impact in India.

Background: Co-Investment and the Earlier Regime

In the AIF context, co-investment refers to an investor putting additional capital directly into a specific portfolio company alongside the AIF, on the same or similar terms as the fund. It enables investments to take a larger exposure to high-conviction deals without increasing their overall fund commitment.

Historically, much of this activity in India was routed through the co-investment portfolio manager (“PMS”) structure, where the AIF manager also operated a separate portfolio management platform. This meant running parallel regimes and documentation under both the AIF Regulations and the Portfolio Managers Regulations, increasing complexity and compliance burden. The new co-investment framework within the AIF structure is designed to rationalise this position by housing co-investment under a single, coherent regulatory architecture.

Scope

SEBI has amended the SEBI (Alternative Investment Funds) Regulations, 2012 by inserting Regulation 17A on co-investment. The framework permits Category I and Category II AIFs to offer co-investment facilities to accredited investors through dedicated Co-Investment Vehicle (“CIV”) schemes, which are constituted and regulated under the AIF Regulations, but operate as schemes separate and ring-fenced from the main AIF schemes to which they are affiliated.

Key Features of the Framework

Under the new framework, managers can launch separate co-investment schemes (CIV Schemes) within the AIF structure, each with its own bank and demat accounts. A shelf placement memorandum outlines the principal terms, governance, and risk disclosures for co-investments. Only accredited investors in Category I and II AIFs can participate, and their total investment in a particular investment company through CIV schemes is capped at three times their commitment to that company through the main AIF scheme, subject to specified exemptions for certain public and sovereign investors. Investors who are excused or excluded from a deal, or have defaulted on capital calls for that investment, cannot co-invest in that company.

For a given investor and investee company, the manager must use either the PMS route or the CIV route, not both, and CIV schemes cannot be used to create indirect exposures that investors could not hold directly or that the investee company could not receive directly, nor are they permitted to borrow or employ leverage. CIV investors enjoy rights and distributions pro rata to their contributions, subject to carried interest or similar performance-linked upside for the sponsor, manager and its team, and transaction and ongoing expenses linked to a deal must be allocated proportionately between the main AIF scheme and the CIV scheme in line with their respective investment sizes. Furthermore, implementation standards for CIV schemes will be established by the industry’s Standard Setting Forum in consultation with SEBI and must be adopted by AIFs and their managers. Compliance with these standards will be covered in the manager’s regular reporting and overseen by the trustee or sponsor.

Why This Framework is Needed in India

SEBI’s latest statistics on AIFs show a sharp rise in both the number of registered funds and the scale of commitments over the past decade, with cumulative commitments now running into several trillion rupees across Category I, II and III AIFs, and continuing to grow at a strong double-digit annual rate. In that official context, SEBI’s move to embed co-investment within the AIF Regulations pursues three policy goals:

• Improving ease of doing business by consolidating co-investment under a single regulatory architecture;
• Enhancing investor protection through ring fencing of CIV assets, caps on co-investment relative to fund commitments, pro rata economic treatment and a no-leverage rule; and
• Preserving market integrity by ensuring CIVs are not used to create indirect exposures that would breach direct investment limits or regulatory thresholds.

Conclusion

SEBI’s co-investment framework marks a crucial evolution in India’s AIF regime, responding to the rapid growth of private capital and increasing use of deal-by-deal co-investments. By relocating co-investment structures within the AIF Regulations, the framework aims to strike a balance between flexibility for managers and accredited investors, while maintaining ring-fenced vehicles and limiting exposures, thereby strengthening both investor protection and overall market integrity.