SEBI Proposes Easier Exit Rules For AIFs Stuck In Tax And Legal Disputes

The Securities and Exchange Board of India (SEBI) has proposed a more flexible framework for Alternative Investment Funds (AIFs) that are trying to wind up their schemes or surrender their registrations. The move is aimed at helping funds that are unable to complete closure because money remains locked due to pending legal cases, possible tax demands, or unavoidable expenses.

SEBI released a consultation paper on February 5, 2026, and has invited public comments on the proposals until February 26, 2026.

Why is SEBI Proposing Changes?

Under current rules, AIFs must liquidate their assets and distribute the proceeds within a defined period known as the permissible fund life, after settling all liabilities.

However, SEBI noted that several AIFs continue to hold back small amounts even after the fund life ends. This is often due to:

• ongoing litigation
• expected tax notices or demands
• remaining operational expenses

Because of this, funds struggle to follow the existing surrender and closure process.

When AIFs May Be Allowed To Retain Funds

SEBI has proposed allowing AIFs to retain money beyond permissible fund life in specific situations, such as:

• Pending litigation or tax notices: Funds may retain amounts if there is clear proof of receiving notices from regulators or authorities.
• Anticipated liabilities: AIFs may retain funds for expected liabilities if 75% of investors (by value) agree.
• Operational expenses:Funds may retain money for operational costs, backed by valid documents, for up to three years.

These changes aim to ensure funds can remain compliant even when closure is delayed for genuine reasons.

‘Inoperative Funds’ Category And Reduced Compliance

AIFs that meet these conditions may be classified as “inoperative funds”. SEBI has suggested that such funds should face lower compliance requirements, including:

• discontinuation of certain regulatory filings
• no permission to launch new schemes
• a ban on charging management fees

SEBI also clarified that surrender applications from such funds will only be processed once the AIF reaches a NIL bank balance, meaning all liabilities are fully settled.

Other Proposed Regulatory Amendments

SEBI has also proposed amendments to Regulation 29(7) of the AIF Regulations, 2012. This would allow more flexibility in distribution terms, based on conditions specified by SEBI from time to time.

The proposals were reviewed and recommended by SEBI’s Alternative Investment Policy Advisory Committee (AIPAC), following repeated concerns raised by industry stakeholders.

Read more: Bombay HC Ruling: Premium Taken Means Claims Must Be Honoured.

Conclusion

SEBI’s proposal could make AIF wind-ups smoother and more practical, especially for funds stuck due to long-running tax or legal matters. By allowing limited fund retention, introducing the “inoperative funds” category, and reducing compliance burdens, the regulator aims to balance investor protection with operational reality. Investors and stakeholders can submit their feedback before February 26, 2026.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.