SEBI Introduces 'Inoperative Fund' Framework, Allows AIFs to Retain Winding-Up Proceeds

The Securities and Exchange Board of India (SEBI) has issued a framework allowing Alternative Investment Funds (AIFs) to retain part of their winding-up proceeds beyond the permissible fund life in certain situations, as per a filing dated June 16, 2026.  

The regulator has also introduced an 'Inoperative Fund' category for funds that are unable to complete the closure process because of pending liabilities or ongoing legal matters. 

Retention Linked to Pending Claims 

Under the framework, AIFs can hold back liquidation proceeds if they have received any communication indicating a possible tax, regulatory or legal liability.  

This may include notices, summons, show-cause notices, reassessment orders, investigation-related communications or claims from regulators, tax authorities, courts, law enforcement agencies, investors or counterparties. The provision also covers liabilities that may arise from ongoing proceedings. 

Investor Approval Required 

Funds may also retain money for expected litigation or tax-related obligations if at least 75% of investors by value approve the proposal.  

While seeking approval, the fund manager must disclose the amount proposed to be retained and the expected duration of retention.  

SEBI has also allowed funds to retain money for residual winding-up expenses, provided the amount is supported by invoices or records of similar past expenses. Such retention for operational costs cannot exceed 3 years after the permissible fund life ends. 

Inoperative Fund Status Framework 

AIFs with schemes retaining funds beyond their tenure and intending to surrender their registration can apply for 'Inoperative Fund' status.  

Funds waiting for the outcome of pending litigation may also seek this status even if no proceeds have been retained.  

Such funds will not be permitted to launch fresh schemes or charge management fees and must submit annual reports on retained funds and outstanding liabilities to SEBI and investors. 

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Conclusion 

After pending liabilities are settled and the retained amounts are distributed to investors, the scheme will be wound up under the AIF Regulations. The same framework will also apply to Venture Capital Funds registered under the earlier SEBI regulations. 

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