Key Changes In The AIF Landscape In 2025

OPENING INVESTMENT AVENUES: SEBI'S CO-INVESTMENT VEHICLE FRAMEWORK

Co-investments have long been a feature to private equity funds globally, allowing high-profile investors to participate directly in portfolio opportunities. The existing regulatory framework for co-investments in India, via the Co-investment Portfolio Management Services ("CPMS") framework has long drawn strenuous compliances.

With the private investment space in India witnessing a roaring growth in the recent years, Investors have been seeking a less cumbersome and more tailored approach to participate in such opportunities. Recognizing this demand, the Securities and Exchange Board of India ("SEBI"), via the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025 ("Second Amendment Regulations"), has introduced a dedicated mechanism for Co-Investment Vehicles ("CIVs") under the SEBI (Alternative Investment Funds) Regulations, 2012 ("AIF Regulations"). ¹This move simplifies the co-investment process, allowing accredited investors to co-invest directly in unlisted companies alongside Alternative Investment Funds ("AIFs").²

What is a co-investment in an Alternative Investment Fund?

An Alternative Investment Fund ("AIF"), governed by AIF Regulations, is a privately pooled investment vehicle which collects investments from high profile investors are further invested by the AIF in investee companies by the Investment Manager of the AIF.

An opportunity may arise where an investee company of the AIF may require additional capital, or where an investor of the AIF is interested in making further investments in a particular investee company. While further investments from the AIF's capital may not be a feasible option³, the investor can make a co-investment i.e. a parallel investment alongside the AIF, where he/she can directly invest into the specific portfolio company. A co-investment is distinct from the traditional pool structure and is often opted by investors as it provides them with direct access to specific deals on a low-cost basis, with a reduced management fees and no expense on due diligence and deal sourcing.

Co-investments under the Portfolio Management Services ("PMS") Scheme

In 2021, SEBI amended the SEBI (Portfolio Managers) Regulations, 2020 to allow managers of AIFs to act as CPMS and offer co-investment opportunities to investors of their AIFs.⁴

The new Co-investment Vehicle Scheme and its key features

The new route for co-investments in AIFs, via CIV was introduced via the Second Amendment Regulations. This introduction is made in line with SEBI's consultation paper dated 9 May 2025, which recommended the CIV Scheme to meet investor demands of an easier low-compliance route.⁵ The scheme permits AIFs to offer co-investment opportunities through separate CIVs, which will act as an affiliate scheme, operating alongside the main fund in unlisted securities. A few key features of this vehicle include:

1. CIV and PMS Scheme: The Second Amendment Regulations are intended to act as an alternate route for co-investments and does not replace co-investments made through the PMS Scheme.
2. Definition of 'Co-investment' and 'Co-investment Scheme': The Second Amendment Regulations include 'co-investment' as a defined term, meaning an investment made by the manager, sponsor or investor of any Category I or II AIF in unlisted securities of an investee companies, in which the AIF has already invested. 'Co-investment Scheme' is defined as the scheme of an AIF which facilitates co-investment.⁶
3. Deal-Specific Structure and Segregation: Each co-investment opportunity requires the formation of a separate, distinct CIV Scheme. Crucially, strict ring-fencing protocols must be observed: all assets, bank accounts, and demat accounts belonging to the CIV must remain completely isolated from the main AIF scheme and any other CIV schemes.⁷ This separation ensures that the capital and returns attributed to co-investors are securely protected and distinct from the main fund's pool.⁸
4. Parity of Terms: To prevent preferential treatment, neither the Manager nor the Sponsor of the AIF can offer co-investment terms through the CIV that are more advantageous than those secured by the main AIF scheme for the same investee company. The terms must remain equitable across both vehicles.⁹
5. Synchronized Exit Strategy: The exit timeline for the co-investment must align perfectly with that of the primary AIF scheme regarding the specific portfolio company. This "co-terminus" requirement is essential to prevent scenarios where co-investors exit prematurely, which could otherwise undermine the primary fund's exit strategy or valuation.¹⁰
6. Investment Cap (The 3x Rule): To maintain diversification and prevent any single investor from dominating a deal via co-investment, SEBI has imposed a specific cap. An investor's contribution to a portfolio company through CIV schemes cannot exceed three times of their contribution to that same company through the main AIF scheme. However, this restriction does not apply to major institutional investors, such as Sovereign Wealth Funds or Development Financial Institutions.¹¹
7. Limited to Accredited Investors: As provided under Regulation 17A(4) of the Second Amendment Regulations, only accredited investors of Category I and II AIFs are permitted to invest in CIV Schemes. ¹²An accredited investor includes an individual, Hindu Undivided Family, family trust, sole proprietorship, body corporate, trust or partnership firm that has obtained an accreditation certificate from accreditation agency and meets the prescribed minimum threshold for annual income or net worth.¹³

Is making co-investments from GIFT City an option?
Co-investing from Gujarat International Finance Tec-City (GIFT City), under the International Financial Services Centres Authority (Fund Management) Regulations, 2025 ("FM Regulations") is an attractive and viable option for high-net-worth investors. To do so, they must invest with a Fund Management Entity ("FME") which is eligible to co-invest i.e., any FME registered with the International Financial Services Centres Authority having an operational Venture Capital Scheme or Restricted Scheme.

Regulations 29(1) and 41(1) of the FM regulations enable Venture Capital Schemes and Restricted Schemes respectively to co-invest in permissible investments through two mechanisms: (i) a Special Purpose Vehicle, which may undertake leverage as disclosed in the private placement memorandum; or (ii) through a segregated portfolio by issuing a separate class of units.¹⁴

Conclusion
The introduction of the CIV Scheme through the Second Amendment Regulations was implemented to facilitate the ease of doing business and increase operational flexibility by providing a streamlined, in-house alternative to the previously available Co-investment Portfolio Manager route under PMS Regulations.

While the CIV Scheme provides a cost-effective avenue for co-investments, the restrictions implemented by the CIV Scheme, inter alia limiting co-investments to accredited investors, at an investment cap, and subject to separate schemes per investment with compliance requirements, brings into question the flexibility offered by this scheme.

While both schemes offer distinct advantages and disadvantages, tailored to different investor profiles, fund managers must choose the specific route of offering co-investments basis each factual matrix. They must strategically evaluate the specific transaction characteristics, investor composition, and operational priorities before selecting the route to offer the co-investment. The CPMS route may prove more suitable for transactions involving non-accredited investors, requiring flexible exit arrangements, or where larger co-investments are anticipated. The CIV scheme presents compelling advantages for transactions with accredited investors seeking simplified documentation, reduced costs, and integrated AIF operations, particularly where the three-times cap does not constrain participation.

KEY CHANGES TO ANGEL FUNDS FRAMEWORK

With the introduction of the CIV framework under AIF regulations, India's rules governing angel funds have also undergone a major structural change through the Second Amendment Regulations. Earlier, angel funds were treated merely as a sub category within the broader venture capital fund structure. Through the Second Amendment Regulations, they have been repositioned as a standalone Category I AIF.

This change indicates two things:

1. Regulatory importance – Angel funds are now recognised as a distinct and significant investment vehicle, deserving of separate regulatory treatment rather than being grouped under venture capital funds.
2. Market maturity – The reclassification reflects the growing scale, sophistication, and relevance of angel investing in India's startup ecosystem, suggesting that the segment has evolved enough to warrant its own regulatory identity.

KEY STRUCTURAL SHIFTS

Investment Architecture
One of the most significant shifts is the transition from a "scheme based" structure to an "investment centric" model. Under the earlier framework, angel funds operated multiple schemes, each requiring proportional capital commitments from investors. Under the Second Amendment Regulations this approach has been done away with because investors now provide formalized, operationalized explicit consent for every individual investment opportunity, a practice that existed under prior regulations but lacked robust governance guardrails, making the traditional scheme architecture unnecessary.¹⁵

This redesign reflects the practical realities of how angel funds actually operate: fund managers typically curate investments on a deal-by-deal basis, rather than pooling capital under broad, predefined mandates. By aligning the regulatory structure with on‑ground investment behaviour, the new model offers greater transparency and operational coherence, though gains in managerial flexibility are counterbalanced by exclusive Accredited Investor requirements, which narrow investor accessibility compared to the prior framework's eligibility criteria.

Investor Eligibility Tightening
Second Amendment Regulations introduce a fundamental access restriction. Now only accredited investors can participate. This represents a material change from the prior "angel investor" criteria. The shift from experience-based qualification (such as serial entrepreneurship or 10+ years in investment) to purely financial metrics creates operational complexity.¹⁶

Minimum Corpus and Minimum Commitment requirements removed
Prior to the Second Amendment Regulations, angel funds were required to maintain a minimum corpus of INR 5 crores and they couldn't accept investments smaller than INR 25 lakh from any angel investor. The Second Amendment Regulations have removed both these requirements and now an angel fund is only required to onboard at least five accredited investors before it can close its first round and start investing. The first close has to be declared within 12 months from SEBI's communication taking the PPM on record.¹⁷

COMPLIANCE AND OPERATIONAL IMPLICATIONS

Filing and Regulatory Documentation
Funds must now file Placement Memoranda alongside registration applications rather than term sheets for individual schemes.¹⁸ This represents a one-time disclosure requirement versus the previous mandatory filing 10 days post-scheme launch. The simplified disclosure burden applies equally to all fund sizes, though audit obligations distinguish between smaller and larger operations.

Performance Transparency Requirements
Beginning fiscal 2025-26, funds must report performance metrics benchmarked against industry standards. Concurrent with this, annual PPM compliance audits become mandatory for funds with total investments exceeding Rs. 100 crores at cost value. Smaller funds remain exempt, creating a tiered compliance regime that reflects fund maturity.¹⁹

Investment Parameters Clarified
The amended framework permits follow-on investments in existing portfolio companies even after they cease startup status, provided the fund's post-investment shareholding doesn't exceed pre-investment levels.²⁰ This preserves value protection mechanisms while preventing unintended dilution. Minimum investment per company decreased to Rs. 10 lakhs (from Rs. 25 lakhs), while maximum capacity expanded to Rs. 25 crores (from INR 10 crores) including follow-on investments.²¹ The lock‑in period for angel fund investments has been shortened from one year to six months when the fund exits by selling its stake to an unrelated third party.²² But if the angel fund exits because the company itself is buying back the shares, or if it sells its stake to the company's promoters, then the lock‑in will still be one full year.

Continuing interest of Manager or Sponsor
The rules about how much the fund manager or sponsor must invest in the angel fund have changed. Earlier, they had to put in 2.5% of the total fund size or ₹50 lakh, whichever was lower, and this was calculated at the fund level. Now, they must invest in each individual deal instead. For every investment the angel fund makes, the manager or sponsor must contribute 0.5% of that investment amount or ₹50,000, whichever is higher.²³

Conclusion
The 2025 amendments represent a maturation mechanism for the angel funding sector, elevating governance standards while constraining investor access. Success of this framework depends on effective accreditation ecosystem expansion and clarity on operational responsibility allocation between fund managers, investors, and investee companies. 

FOCUSING ON ACCREDITED INVESTORS

The SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025 notified on 18 November 2025 ("Third Amendment"), introduced the concept of Accredited Investors-only schemes ("AI-only Schemes") in the regulatory framework of AIFs. As noted above, vide the Second Amendment Regulations, the angel funds have also been exclusively restricted to Accredited Investors only.²⁴

AI-only Schemes are exempt from following regulatory requirements:

• Pari-passu exemption: AI-only Schemes are permitted to treat their investors differently in terms of rights and benefits. Under the existing AIF Regulations (Regulation 20(22)), investor rights within a scheme are typically required to be pari-passu across all investors in all aspects. Any differential rights that are offered to select investors of a scheme of an AIF should not affect the interests of other investors in that scheme. This flexibility, which was previously limited to LVFs, has now been extended to AI-only Schemes.²⁵
• Investor Cap: There is no upper limit on the number of investors that can participate in AI-only Schemes. However, regular AIF schemes maintain a maximum investor threshold of 1,000 participants, though this restriction applies only to non-accredited investors.²⁶
• Fund Tenure: AI-only Schemes may extend their operational period for up to 5 years (compared to the standard 2-year duration for conventional AIF schemes), subject to requisite investor consent.²⁷

The Third Amendment gave several relaxations to Large Value Funds (LVFs). These funds are not required to follow the standard Private Placement Memorandum (PPM) format or undergo mandatory PPM audits, which are still required for other AIF categories. In addition, SEBI lowered the minimum investment amount for LVFs from INR 70 crore to INR 25 crore.²⁸

Footnotes

1 Regulation 3, Securities Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2025

2 Regulation 2(1)(b), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

3 This is owing to the pooled nature of an AIF, having a limited capital and a set funding strategy.

4 Regulation 2(1)(fa), Securities Exchange Board of India (Portfolio Managers) Regulations, 2020

5 SEBI, 'Consultation paper on providing flexibility to AIFs to offer Co-investment opportunities to investors within the AIF structure under the AIF Regulations' (2025).

6 Regulation 2(1)(fa), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

7 Paragraph 2.3, Securities Exchange Board of India Circular on Framework for AIFs to make co-investment within the AIF structure under SEBI (Alternative Investment Funds) Regulations, 2012

8 Regulation 17A(3), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

9 Regulation 17A(8), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012 and Proviso to Regulation 22(2), Securities Exchange Board of India (Portfolio Managers) Regulations, 2020

10 Proviso to Regulation 17A(8), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012 and Proviso to Regulation 22(2), Securities Exchange Board of India (Portfolio Managers) Regulations, 2020

11 Paragraph 2.4, Securities Exchange Board of India Circular on Framework for AIFs to make co-investment within the AIF structure under SEBI (Alternative Investment Funds) Regulations, 2012

12 Regulation 17A(4), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

13 Regulation 2(1)(ab), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

14 Regulation 29 and 41, International Financial Services Centres Authority (Fund Management) Regulations, 2025

15 Regulation 19E, Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

16 Regulation 19D(1), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

17 Regulation 19D(2), (6), (7), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

18 Regulation 19D(4), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

19 Paragraph 11, Securities Exchange Board of India Circular on Revised Regulatory framework for Angel Funds under AIF Regulations dated 10th September 2025

20 Proviso to Regulation 19F(1), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

21 Regulation 19F(2), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

22 Regulation 19F(3), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

23 Regulation 19G(1), Securities Exchange Board of India (Alternative Investment Funds) Regulations 2012

24 Regulation 2(1)(ac), Securities Exchange Board of India (Alternative Investment Funds) Regulations 2012

2 5Regulations 20(22), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

26 Regulation 10(f), Securities Exchange Board of India (Alternative Investment Funds) Regulations 2012

27 Paragraph 6, Securities Exchange Board of India Circular on Modalities for migration to AI only schemes and relaxations to Large Value Funds for Accredited Investors under SEBI AIF Regulations 2012

28 Regulation 2(1)(pa), Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012

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