SEBI amends AIF rules to allow co-investments via portfolio management route

5 August 2022
5 mins read
by Angel One
SEBI amends AIF rules to allow co-investments via portfolio management route

Capital markets regulator SEBI has brought in amendments to the regulations that govern alternative investment funds (AIFs), according to reports. According to the amended rules, co-investment is facilitated by way of portfolio management. As per SEBI’s notification, co-investment by AIF investors would be made available via a portfolio manager handling the said co-investments.

What does an AIF mean?

As per the SEBI definition, an alternative investment fund is any fund that has been set up or incorporated in India; it is an investment avenue or vehicle that is privately pooled and invests in private equity, hedge funds or venture capital.

There are categories of AIFs including category I, where investment is in venture capital funds, infrastructure funds, SME funds, social venture funds or angel funds. Category II AIFs invest in private equity funds, real estate funds, debt funds or distressed asset funds, while Category III AIFs invest in hedge funds and private investment in PPFs (public equity funds). Co-investment is the term used to refer to investment that has been made by a sponsor, investor or manager of Category I and II AIFs in investee firms where the AIF invests.

According to the SEBI notification, the co-investment terms in an investee firm by a co-investor, sponsor or manager would be along the same lines of the AIF’s investment terms. Also, the exit terms from the co-investment such as the timing of the exit will be along the lines of the terms that are applicable to AIF exit. The amended guidelines will be applicable for co-investment made from December 9 onwards, according to reports.

For Category III funds, SEBI has noted that they would be allowed to compute the norms of concentration on the basis of the fund’s net asset value (NAV). As per the market regulator, the Category III AIFs would be permissible to invest not more than 10 per cent of NAV in the listed equity of the investee firm. The category III alternative investment funds would also invest not over 10 per cent of the funds that are investable in securities apart from the listed equity of the investee firm, through investment in other AIF units or directly. This is applicable if large value funds for Category III accredited investors invest capped at 20 per cent of NAV in the equity listed by an investee firm, and 20 per cent of funds that are investable in securities apart from listed equity directly or via other AIF units.

SEBI regulations governing AIFs

It may be recalled that SEBI first brought in alternative investment fund regulations in India in May 2012. Before that AIFs were governed by SEBU’s venture capital fund regulations.

Earlier this year, in May 2021, SEBI notified amendments to the AIF Regulations, 2012. The SEBI (Alternative Investment Fund) (Second Amendment) Regulations of 2021 created a framework for AIFs to simultaneously invest in units of other AIFs and directly in the securities of investee firms, apart from other changes.

Also, SEBI has brought in the third amendment in August this year to introduce the concept of investors who are accredited and brought in some relaxations for AIFs that have such investors. Also, the third amendment brought in the concept of funds of large value for investors who are accredited. Essentially it is an AIF or a scheme of an AIF wherein every investor apart from AIF staff, investment manager or service providers is an accredited investor investing not less than Rs 70 crore.

According to news reports, 90 new AIFs were registered in the fiscal year 2021 with SEBI, taking the overall number of alternative investment funds in India to more than 700. Data also suggests that the overall investments have risen from nearly Rs 1.5 lakh crore to nearly Rs 2 lakh crore over a year in the fiscal year 2021. Also, data from reports show that the investments in Category III rose to nearly Rs 42,000 crore in the last quarter of the financial year 2021, from around Rs 3,800 crore in the first quarter of the fiscal year 2017.


The regulatory rules pertaining to alternative investment funds (AIFs) have been amended by SEBI in order to permit co-investment via portfolio management.



What is an alternative investment fund?

An alternative investment fund is an investment fund wherein funds from investors are pooled in and invested in private equity, hedge funds, venture capital, infrastructure funds, etc.

What does the latest SEBI notification on AIF norms say?

According to the latest SEBI notification on AIF regulations, co-investment by investors of alternative investment funds will be done through a co-investment portfolio manager. The terms of co-investment and exit will be along the lines of the terms of an AIF’s investment or exit.

When were the first SEBI regulations specific to AIFs brought in?

AIFs are governed by SEBI under the SEBI (Alternative Investment Fund) Regulations, which were first brought in 2012. Before that AIFs were governed by SEBU’s venture capital fund regulations.