AIF Registration in India: SEBI Alternative Investment Fund Guide

What is an Alternative Investment Fund (AIF)?

An Alternative Investment Fund (AIF) is any fund established or incorporated in India — as a trust, a company, a limited liability partnership (LLP), or a body corporate — that is a privately pooled investment vehicle. It collects funds from sophisticated investors, whether resident or non-resident, and invests them in accordance with a defined investment policy for the benefit of its investors. AIFs are governed by the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (SEBI AIF Regulations).

The AIF framework is distinct from mutual funds (covered under the SEBI Mutual Fund Regulations, 1996) and collective investment schemes. It is designed for high-net-worth individuals, family offices, institutional investors, and corporates who can make informed investment decisions and commit a minimum of ₹1 crore. The framework specifically excludes family trusts set up for the benefit of relatives, ESOP trusts, employee welfare trusts, and funds directly regulated by another SEBI regulation.

The AIF regime replaced the older SEBI (Venture Capital Funds) Regulations, 1996. Any new fund vehicle — including those following a purely venture capital strategy — must now register as an AIF. The ecosystem has grown rapidly: as of 31 March 2026 there were close to 1,850 SEBI-registered AIFs, and total commitments raised reached about ₹15.74 lakh crore by December 2025, channelled into Indian start-ups, infrastructure, private equity, and distressed assets.

VCF vs AIF: The Regulatory Transition

India's venture capital ecosystem was originally governed by the SEBI (Venture Capital Funds) Regulations, 1996. Those regulations were narrow — VCFs could invest only in unlisted equity of domestic companies, faced mandatory sector restrictions, and operated with a minimum corpus of ₹5 crore. The SEBI AIF Regulations, 2012 replaced this framework with a broader, more flexible three-tier structure that accommodates the full spectrum of alternative assets.

Existing VCFs registered before 2012 may continue operating for their existing fund life but cannot raise fresh commitments under the 1996 Regulations. A new venture capital vehicle — even one with an identical strategy to a 1996-era VCF — must register as a Category I AIF (Venture Capital Fund sub-category) under the 2012 Regulations.

The Three AIF Categories Explained

The SEBI AIF Regulations define three categories based on investment strategy, asset class, and regulatory treatment. Choosing the correct category at the outset is critical — the category determines your investment restrictions, leverage permissions, tax treatment, and the level of SEBI scrutiny.

Category I AIF — Socially and Economically Beneficial Investments

Funds that invest in start-ups, early-stage ventures, social ventures, SMEs, infrastructure, and other areas that the government or SEBI considers economically or socially desirable. These funds receive concessions and incentives and qualify for pass-through taxation.

Sub-categories:

• Venture Capital Fund (VCF): invests primarily in unlisted securities of start-ups and early-stage domestic companies.
• Angel Fund: pools capital from accredited angel investors. Following the September 2025 reform, Angel Funds no longer carry a minimum-corpus requirement and must onboard only accredited investors; each angel investment in an investee company must be between ₹10 lakh and ₹25 crore.
• SME Fund: invests in listed or unlisted SMEs and small-cap companies.
• Social Impact (Social Venture) Fund: invests in social enterprises with measurable social-impact objectives.
• Infrastructure Fund: invests in infrastructure projects or infrastructure companies.

Key features: close-ended fund with a minimum three-year tenure; no leverage except for day-to-day operational expenses; investment-concentration limits per investee company; pass-through taxation under Section 115UB of the Income Tax Act, 1961; the government may notify additional incentives.

Category II AIF — Private Equity, Debt, and Real Estate

Funds that do not fall under Category I or III and do not undertake leverage or borrowing other than for day-to-day operational requirements. This is the broadest residual category and covers most private equity, debt, and real estate strategies in India — it accounts for the bulk of AIF commitments (about ₹11.6 lakh crore as of December 2025).

Typical fund types: Private Equity (PE) funds, debt funds (including distressed debt), real estate funds, funds of funds, and special-situation funds.

Key features: close-ended with a minimum three-year tenure; no leverage other than operational borrowing; investment-concentration limits; pass-through taxation under Section 115UB; no specific government incentives (unlike Cat I).

Category III AIF — Complex and Leveraged Strategies

Funds employing diverse or complex trading strategies, including leverage through investment in listed or unlisted derivatives. Category III captures hedge funds and other actively-traded vehicles that require more operational flexibility than Cat I or II allows.

Typical fund types: hedge funds, PIPE funds (Private Investment in Public Equity), long-short strategy funds, and quant / multi-strategy funds.

Key features: may be open-ended or close-ended; leverage permitted subject to SEBI limits; no pass-through tax — income is taxed at the fund level; custodian appointment is mandatory; tighter investment-concentration limits per company.

Sponsor and Investment Manager: Who Can Run an AIF?

Every AIF has two essential controlling parties — the Sponsor (promoter of the fund) and the Investment Manager (the entity that makes investment decisions). These may be the same entity or different entities. In most Indian AIF structures, a dedicated fund management company acts as both Sponsor and Investment Manager.

Sponsor Requirements

The Sponsor promotes the AIF and must demonstrate "skin in the game" through a minimum continuing-interest commitment to the fund:

• Category I & II: 2.5% of the total corpus or ₹5 crore, whichever is lower.
• Category III: 5% of the total corpus or ₹10 crore, whichever is lower.
• The continuing interest must be by way of investment in the AIF (not through a waiver of management fees).
• The Sponsor must satisfy the "fit and proper" criteria under the SEBI (Intermediaries) Regulations, 2008.

Investment Manager Requirements

• Demonstrated professional experience in fund management, portfolio management, or investment advisory.
• A key investment team with relevant qualifications and experience in the relevant asset class.
• Compliance with SEBI's "fit and proper" criteria — no conviction, regulatory bar, or insolvency proceedings.
• Adequate infrastructure, systems, and compliance personnel in place at the time of registration.

Note: SEBI has issued specific net-worth and "manager and key personnel" requirements for Investment Managers, which it has revised periodically through circulars. Verify the current threshold at sebi.gov.in before filing.

Key Eligibility Thresholds at a Glance

Before filing for SEBI AIF registration, ensure your proposed fund structure satisfies the minimum thresholds under Regulation 10 of the SEBI AIF Regulations, 2012:

SEBI has amended these thresholds through circulars and the 2025 amendment regulations. Verify current figures at sebi.gov.in before filing.

What Changed in 2025: Angel Funds, Accredited Investors and Co-Investment

2025 brought the most significant overhaul of the AIF framework in years. Three developments matter most for anyone registering a new fund:

• Revised Angel Fund framework (September 2025): the ₹5 crore minimum-corpus and ₹25 lakh minimum-angel-commitment requirements were removed; Angel Funds must now onboard only accredited investors (a transition window runs to September 2026 for existing funds, capped at 200 non-accredited investors); the investee-company investment band moved to ₹10 lakh–₹25 crore; and an Angel Fund must onboard at least five accredited investors before its first close.
• Accredited-Investor-only (AI-only) funds: SEBI now formally recognises AI-only AIFs and schemes that enjoy lighter-touch regulation; accredited investors are excluded when counting the 1,000-investor scheme limit.
• Co-Investment Vehicles (CIVs): a dedicated CIV framework lets managers offer co-investment opportunities through a separate scheme, exempt from the ₹20 crore minimum-corpus threshold.

Step-by-Step SEBI AIF Registration Process

1. Choose the category and legal structure. Determine the AIF category (I, II, or III) based on your investment strategy. Choose the legal form — most AIFs in India are constituted as trusts (contributory trusts) for maximum flexibility and pass-through tax treatment; an LLP or company is also permissible but adds MCA-level compliance. Appoint the Sponsor, Investment Manager, and Trustee.
2. Incorporate the AIF legal entity. Execute and register the Trust Deed with the appropriate Sub-Registrar's office, or incorporate an LLP via the MCA portal. Obtain a PAN for the fund entity. The Trust Deed must precisely define the investment mandate, governance, fee waterfall, and investor protections — it is reviewed carefully by SEBI.
3. Draft the Private Placement Memorandum (PPM). The PPM is the principal disclosure document for investors. AIFs may raise funds only through private placement — not public advertisement. The PPM must contain the investment objective and strategy, risk factors, fee structure (management fee, performance fee/carried interest), governance, liquidity and exit mechanism, and full details of the Sponsor and Investment Manager.
4. File the application on the SEBI Intermediary Portal. Submit the registration application using Form A (First Schedule to the SEBI AIF Regulations) through the SI Portal at siportal.sebi.gov.in, with the Trust Deed/constitutional document, PPM, Investment Management Agreement, KYC of key persons, and the Manager's track record. Pay the non-refundable application fee of ₹1,00,000 (plus 18% GST). All filings are online — SEBI does not accept physical applications.
5. SEBI due diligence and query response. SEBI scrutinises the application, investment strategy, key persons' background, conflict-of-interest policies, and structural soundness, and may raise queries. For straightforward applications with experienced managers, the process from a complete application to grant of registration typically takes 60–90 days; complex structures or first-time managers may take longer.
6. Receive the Certificate of Registration. Once satisfied, SEBI issues the Certificate of Registration (Form B) with a unique AIF registration number. The certificate is valid for the lifetime of the fund — there is no periodic renewal. Pay the applicable category registration fee on approval, then update the PPM with the registration details.
7. First close and investment commencement. AIFs operate on a commitment-and-drawdown model. The "First Close" — the threshold at which the Manager can begin drawing down capital — is specified in the PPM. Investments commence post First Close, subject to the investment conditions and concentration limits under the Regulations.

Tax Treatment: Pass-Through vs Fund-Level Taxation

Taxation is one of the most commercially significant aspects of AIF structuring. Section 115UB of the Income Tax Act, 1961 (introduced by the Finance Act 2015) created a pass-through regime for Category I and II AIFs.

Category I AIF

Income (other than business income) is taxed in the hands of investors as if they had invested directly, at their applicable rates. The character of income — capital gains, interest, dividends — is preserved at the investor level. Any business income is taxed at the fund level. The Finance Act 2025 clarified that income from the transfer of securities held by Category I and II AIFs is treated as capital gains in the hands of the fund (with effect from 1 April 2025).

Category II AIF

Same pass-through treatment as Category I under Section 115UB. Income flows through to investors and is taxed at their individual rates, preserving the nature and character of income. This makes Cat II funds commercially attractive for Indian HNIs and institutional investors seeking tax efficiency.

Category III AIF

No pass-through treatment — the AIF itself is the taxable entity. Income is generally taxed at the maximum marginal rate (MMR) applicable to the fund's legal form: for a non-corporate AIF the headline MMR is about 42.74% (30% plus 37% surcharge plus 4% health and education cess), though the surcharge on certain capital gains is capped. Investors receive distributions net of tax already paid at the fund level.

Tax treatment is subject to change by subsequent Finance Acts and CBDT circulars. Consult a qualified CA or tax counsel and verify the current position at incometax.gov.in before finalising the structure.

Ongoing Compliance Obligations

SEBI AIF registration is the starting point, not the finish line. Registered AIFs carry a continuous compliance burden under Regulation 22 and SEBI's circulars. SEBI revised the reporting framework with effect from the quarter ending June 2026 (circular dated 4 March 2026, superseding Clause 15.1 of the AIF Master Circular dated 7 May 2024):

• Quarterly Activity Report (QAR) to SEBI: filed via the SI Portal within 15 calendar days of the end of the June, September, and December quarters. No separate QAR is required for the March quarter — it is covered by the annual report.
• Annual Activity Report (AAR) to SEBI: a comprehensive return covering investment strategy, sector allocation, investor composition, performance, leverage, valuation, and compliance status, filed within 30 calendar days of the financial-year end (March). The first AAR (FY 2025-26) was due by 31 May 2026.
• Annual Report to Investors: the Investment Manager must share a comprehensive annual report, including audited financial statements, within 180 days of the close of each financial year.
• PPM Compliance Audit: an annual audit of compliance with the terms of the PPM, communicated to the Trustee/Board/Designated Partners and SEBI within six months of the financial-year end.
• PPM Material Updates: any material change to investment strategy, fee structure, key personnel, or governance must be disclosed to investors and filed with SEBI (through a merchant banker, where applicable).
• AML / KYC Compliance: KYC on all investors under SEBI's PMLA guidelines, including Ultimate Beneficial Owner (UBO) declarations and reporting of suspicious transactions under the PMLA, 2002.
• Custodian (Category III, and Cat I/II above the prescribed corpus): appointment of a SEBI-registered custodian to hold the fund's securities and provide an independent check on asset ownership and valuation.

Researching an AIF's Investment Manager Entity?

Most AIF Investment Managers are incorporated as Private Limited Companies or LLPs under MCA. If you need to verify an Investment Manager's corporate details — CIN, incorporation date, registered address, directors, or annual filing status — search for the company on WeeDoo.in for free across 27 lakh+ MCA-registered entities. For official documents such as the Certificate of Incorporation or latest Annual Return, WeeDoo can retrieve them for ₹249 per document — useful when conducting investor due diligence on a fund manager.