Getting a SEBI registration is a milestone for any Alternative Investment Fund (“AIF”). It is also where the real compliance work begins. Once the fund becomes operational, the regulatory focus shifts to how its obligations are implemented in practice. The SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) require detailed policies and procedures to govern fund decisions.
This article explains why policies matter for fund governance, which policies an AIF should have, and what can go wrong when they are missing or ignored.
A. Why Policies Matter After Registration?
The AIF Regulations require an AIF to have detailed policies and procedures. Their purpose is to make sure every fund decision follows the law and the fund documents. These policies and procedures are jointly approved by the investment manager and the relevant governing body and are required to be reviewed regularly, including where business developments warrant reconsideration.1 Documented policies and procedures are therefore an integral part of the AIF’s regulatory governance framework, rather than merely an internal preference. These are not template documents to be copied and adopted casually. Each policy forms part of the fund's internal control framework and should be drafted, approved and adopted through a proper process, uniquely tailored to the fund's strategy, structure and risk profile.
Policies serve three core governance functions:
- They provide a defined framework for decision-making and the standard operating procedures to be followed by the fund team.
- They establish standards against which the investment manager’s conduct can be assessed by investors and other stakeholders.
- They establish a documented benchmark against which SEBI and the relevant governance and compliance functions can assess the fund’s conduct and compliance.
The annual Compliance Test Report (“CTR”) provides another layer of oversight. The investment manager is required to prepare the CTR in the prescribed format to assess compliance with the AIF regulatory framework, including the applicable provisions of the Master Circular.2 The CTR should accurately reflect the fund’s compliance position during the relevant financial year, including where compliance depends on the implementation of applicable policies and procedures.
B. The Core Policies
The table below identifies the principal governance and compliance policies or frameworks relevant to an AIF and the regulatory provisions from which they arise. While certain provisions expressly require a written policy, others impose substantive obligations that are ordinarily implemented through documented internal policies and procedures. The policies identified below are therefore indicative and not exhaustive. Depending on the category and structure of the AIF, its investment strategy, asset class, use of leverage, investor profile, governance arrangements and other operational features, additional policies or procedures may also be required or considered appropriate.
|
S. No. |
Name of Policy/Framework |
What Each Policy Does? |
|
1 |
Code of Conduct3 |
Schedule IV of the AIF Regulations, requires the AIF, the Manager, key management personnel, members of the investment committee, the trustee and other governing persons to act with integrity, due diligence and independent professional judgment, and in the interests of investors.4 It also requires the AIF to act for the benefit of its investors and in accordance with its investment objectives and fund documents. The Code reinforces standards on disclosure, risk management, conflicts and decision-making. A written code converts these requirements into practical rules for day-to-day conduct. |
|
2 |
Risk Management5 |
It provides a framework for identifying, assessing, monitoring and managing risks arising from the fund’s activities. It should align the fund’s investment and operational processes with appropriate internal controls and escalation mechanisms, considering the nature and complexity of the fund.6 A documented framework helps ensure that material risks are identified consistently and addressed before they affect the fund or its investors. |
|
3 |
Conflict of Interest7 |
It sets out how actual or potential conflicts are identified, assessed, escalated, mitigated and disclosed to investors, and who is responsible for dealing with them. The PPM also contains disclosures on conflicts of interest and the procedures for identifying and addressing such situations, and the policy should operate consistently with those disclosed processes. SEBI has examined adherence to such policies, as discussed in the next section. |
|
4 |
Investor Grievance Redressal8 |
It sets a clear route for complaints. The manager must redress grievances promptly, within 21 days of receipt, and the fund must also work with SEBI’s SCORES and dispute resolution systems.9 The Investor Charter and complaint data must be disclosed in the placement memorandum. |
|
5 |
Cybersecurity and Cyber Resilience10 |
It depends on the CSCRF category applicable to the Manager. For AIFs, categorisation is determined at the Manager level, considering the cumulative corpus of the AIF schemes managed by it. Depending on the applicable threshold, the Manager may fall within the small-size, mid-size, self-certification or qualified category.11 The cybersecurity framework and controls should accordingly be aligned with the requirements applicable to the relevant category. |
|
6 |
AML / CFT12 |
It sets out the framework for preventing the fund from being used for money laundering or terrorist financing. It covers client acceptance, customer due diligence and KYC, ongoing monitoring of transactions, maintenance of records and identification and reporting of suspicious transactions.13 |
|
7 |
Privacy14 |
It governs how personal information is collected, used, disclosed and protected. Rule 4 of the SPDI Rules requires an applicable body corporate handling personal information to provide and publish a privacy policy covering its data practices, purposes of collection, disclosure and security practices. |
|
8 |
Stewardship15 |
It sets out how an AIF monitors its investee companies and exercises its rights in relation to those investments. It guides the fund’s approach to monitoring performance and governance, engaging with management, exercising voting rights and managing conflicts of interest. By establishing a framework for such oversight and engagement, the policy helps ensure that stewardship decisions are taken in the interests of the fund’s investors and promotes accountability in the exercise of those rights.16 |
C. When Policy and Practice Diverge?
Policies are effective only when they are reflected in the fund’s actual decision-making and compliance processes. A policy must therefore be implementable: it should assign responsibility, set out approval and escalation steps, and require records that can be produced on inspection. A failure at this stage can create risks at multiple levels.
The first risk is to governance: Without clear policies, decisions become inconsistent and hard to defend. Investors may question decisions taken outside a defined process. Complaints then move to SEBI’s platforms instead of being settled by the manager.
The second risk is inconsistency between policy, conduct and reporting: A policy may require a particular approval, review or escalation, but if the transaction record does not show that the process was followed, the fund may be unable to demonstrate compliance. The same inconsistency can then flow into the CTR, trustee reporting or investor disclosures, creating a separate compliance concern even where the underlying commercial decision may otherwise have been defensible.
The third risk is enforcement and monetary penalty: A failure to comply with the AIF Regulations or directions issued by SEBI may attract enforcement action. Section 15EA of the Securities and Exchange Board of India Act, 1992 grants SEBI the power to levy a penalty of not less than ₹1 lakh, which may extend to ₹1 lakh for each day during which the failure continues, subject to ₹1 crore or three times the gains made from such failure, whichever is higher.17
Recent SEBI proceedings show that policy-related risk does not arise only from the absence of a written policy, but also from failures in its implementation. SEBI has examined cases involving failure to follow prescribed conflict-management processes, absence of documented procedures, inconsistencies between actual conduct and compliance reporting, and disclosures made only after the relevant issue had arisen.18
D. Conclusion
Registration is only the starting point of an AIF’s regulatory journey. While the investment manager’s core function is to manage the capital pooled from investors in accordance with the fund’s investment strategy, that function must operate within a sound governance framework. This requires the AIF Regulations, SEBI circulars and fund documents to be translated into policies and processes that are appropriately designed, consistently followed and kept up to date.
Some policies arise from express regulatory requirements, while others help implement broader obligations relating to risk management, investor grievances, cybersecurity, data protection and stewardship. Their purpose is not merely to create a compliance record, but to ensure that regulatory obligations are reflected in the fund’s day-to-day decision-making.
Ultimately, having policies on paper is not enough. The real test for a investment manager is simpler: if SEBI examines a fund decision tomorrow, can the fund demonstrate that the applicable policy was current, followed and properly documented? That is the difference between regulatory documentation and effective fund governance.
Foontotes
1 Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 20(3).
2 SEBI Master Circular for Alternative Investment Funds dated June 3, 2026, para 21.2 and Annexure 14 (Compliance Test Report).
3 Regulation 20(1) read with Schedule IV, AIF Regulations
4 Regulation 20(1) and the Fourth Schedule (Code of Conduct), SEBI (Alternative Investment Funds) Regulations, 2012.
5 Regulation 20(3) read with Schedule IV, Part 1, clause (e), AIF Regulations
6 Fourth Schedule, clause 1(e), SEBI (Alternative Investment Funds) Regulations, 2012.
7 Regulation 21(2) read with Regulation 20(3), Schedule IV, Part 1, clause (f), and Regulation 24(d), AIF Regulations
8 Regulation 24(a) and Regulation 24A (1), AIF Regulations
9 Regulations 24 and 24A, SEBI (Alternative Investment Funds) Regulations, 2012; SEBI Master Circular for Alternative Investment Funds dated June 3, 2026, Annexure 4 (Investor Charter).
10 SEBI Circular dated August 20, 2024, read with SEBI Circular dated April 30,2025
11 SEBI Circular No. SEBI/HO/ITD-1/ITD_CSC_EXT/P/CIR/2024/113 dated August 20, 2024 on the Cybersecurity and Cyber Resilience Framework, read with SEBI’s clarifications, including those of April 30, 2025.
12 Regulation 20(3) read with Schedule IV, Part 1, clause (h), AIF Regulations; PMLA, 2002 and PML Rules, 2005.
13 Fourth Schedule, clause 1(h), SEBI (Alternative Investment Funds) Regulations, 2012; Prevention of Money Laundering Act, 2002; SEBI Master Circular on AML/CFT obligations of securities market intermediaries.
14 Section 43A, Information Technology Act, 2000 read with Rule 4, Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011(“SPDI Rules”); transitioning to Digital Personal Data Protection Act, 2023 from May 13, 2027.
15 SEBI Circular dated December 24, 2019 read with Annexure 13 of SEBI AIF Master Circular dated June 3, 2026
16 SEBI Circular No. CIR/CFD/CMD1/168/2019 dated December 24, 2019 (Stewardship Code); SEBI Master Circular for Alternative Investment Funds dated June 3, 2026, Annexure 13.
17 Section 15EA, Securities and Exchange Board of India Act, 1992.
18 SEBI Settlement Order in the matter of HDFC Capital Affordable Real Estate Fund – I, Order No. SO/PSD/2024-25/8176-8177 dated May 6, 2025; SEBI Settlement Order in the matter of Examination of SCORES complaints against Edelweiss Stressed and Troubled Assets Revival Fund Trust, Settlement Order No. SO/SM/RG/2025-26/8086-8087 dated September 30, 2025; SEBI Settlement Order in the matter of Motilal Oswal Alternative Investment Trust, Order No. SO/PSD/2025-26/8334-35 dated April 20, 2026; SEBI Adjudication Order in the matter of Trinity Alternative Investment Managers Limited, Order No. Order/GG/VV/2023-24/28720-28727.
The views expressed in this article are solely those of the author in her personal capacity and are based on her understanding of the applicable legal and regulatory framework. They do not necessarily represent the views, policies or practices of organisation with which the authors is associated.
