SEBI Unveils Simplified Co-Investment Structure under AIF Regulations, 2012

A step towards ease of doing business and enhanced investor participation in Alternative Investment Funds.

Introduction

[1]SEBI has made yet another important step towards facilitating the operations of Alternative Investment Funds (“AIFs”). On September 9, 2025, SEBI has introduced a new framework to allow Category I and II AIFs to provide co-investment opportunities to qualified investors, through a new Co-Investment Scheme (CIV Scheme), added to the SEBI (Alternative Investment Funds) Regulations, 2012.

This framework is intended to improve the investment process for investors to afford additional optionality and participation, while co-investing alongside the existing regulated AIF framework.

The Purpose of Circular

• To enhance ease of doing business for AIFs.
• To promote transparency, investor protection and compliance.
• To facilitate the co-investments more directly within the AIF landscape instead of through standalone portfolio management arrangements.

Co-investments used to be possible only through Co-Investment Portfolio Managers (the PMS route), now with the CIV Scheme route, co-investment is possible again but is more integrated.

Key Features of the New Co-Investment Framework

• Routes for Co-Investment: Managers of Category I or II AIFs can now choose either the traditional PMS route or the newly introduced CIV Scheme route to make co-investments for their investors.
• Filing Requirements: The managers must file a Shelf Placement Memorandum (per SEBI’s format) with respect to the following:
  1. High-level details on the contractual arrangement for co-investment
  2. Governance arrangement
  3. Regulatory framework and compliance considerations. Such filing guarantees that every CIV scheme can be easily understood and accounted for.
• Each CIV Scheme Requires Distinct Accounts: Each CIV scheme must have its own bank account and distinct demat account. The assets of various CIV schemes need to be ring-fenced, so that the funds and investments of each scheme remain separate for investor protection.
• Investment Limits: An investor’s co-investment in an investee company through all CIV schemes cannot exceed three times the amount they have contributed through the main AIF scheme.

Nonetheless, this prohibition does not pertain to:

• Multilateral or bilateral development finance institutions,
• State industrial development corporations,
• Entities owned or controlled by the government, central banks, and sovereign wealth funds.
• Such entities may invest without any assigned cap.

Additional Operational Guidelines

• Excused/Defaulting Investors: If an investor fails to contribute to an AIF’s investment in a company or is excluded, they cannot participate in co-investment for that company.
• Investment Restrictions: The CIV scheme cannot make any investment that would: Indirectly give investors exposure they are not permitted to hold directly. Require additional disclosures under regulatory norms. Involve investee companies that are not eligible to receive such investments directly.
• Borrowing Prohibited: CIV schemes cannot borrow or use leverage of any kind.
• Investor Rights: Investors will have entitlements to the investment, and distributions of returns, consistent with their proportional commitment to the investment. Carried interest or other forms of extra returns will be calculated and available to be shared with the sponsor or manager according to the terms of the agreement.
• Cost Sharing: All costs associated with the co-investment will be shared at the same proportion between the main AIF scheme and the CIV scheme with respect to the share of the original investment.
• Implementation Standards: CIV schemes will need to demonstrate implementation standards relating to co-investment to be established as a requirement by the Standard Setting Forum for AIFs (“SFA”) with SEBI input. The purpose of the implementation standards will be to ensure that the flexibility provided under the framework is not misused and investment activity remains bona fide.

Compliance and Oversight

AIF trustees or sponsors must make sure that the Compliance Test Report (“CTR”) prepared by AIF managers includes checks on all provisions of this new circular. The SFA, together with SEBI, will publish the required implementation standards on the websites of:

• Indian Venture and Alternate Capital Association (“IVCA”)
• PE VC CFO Association
• Trustee Association of India
• These bodies will help ensure smooth and uniform adoption across the industry.

Effective Date and Statutory Authority

This circular – effective from the date of issue – September 9, 2025, is issued pursuant to Section 11(1) of the SEBI Act, 1992, as well as Regulations 17A (7) and 36 of the AIF Regulations. These provisions give SEBI the power to safeguard the interest of investors and orderly growth and regulation of the securities markets.

Conclusion

This newly proposed co-investment framework signifies an important step forward in India’s investment environment. SEBI continues its efforts to better protect investors while fostering innovation and growth in the alternative investment space, by structuring a simplified process for co-investment, increasing the transparency of investment structures, and offering more flexible routes for co-investment.

[1] https://www.sebi.gov.in/legal/circulars/sep-2025/framework-for-aifs-to-make-co-investment-within-the-aif-structure-under-sebi-alternative-investment-funds-regulations-2012_96506.html