SEBI Allows Greater Flexibility for AIFs with New Co-Investment Scheme

The Securities and Exchange Board of India (SEBI) has introduced new rules granting Alternative Investment Funds (AIFs) more flexibility to provide co-investment opportunities to investors within the AIF framework. The move, effective immediately, is aimed at simplifying operations and encouraging greater investor participation in private market opportunities.

What is Co-Investment?

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In the AIF sector, co-investment refers to giving investors an additional opportunity to invest in unlisted securities of a company where an AIF has already invested or is making an investment. These opportunities are typically extended to investors who meet objective eligibility conditions, such as minimum commitment size or strategic relevance.

Until now, co-investments were primarily facilitated through the Portfolio Management Services (PMS) route. With the new changes, SEBI has permitted Category I and Category II AIFs to offer co-investment opportunities to accredited investors via a newly introduced co-investment scheme (CIV scheme) under the AIF framework.

Structure and Rules of the CIV Scheme

The new framework requires that co-investments through a CIV scheme be managed by the AIF manager and carried out under strict guidelines:

1. Investors can make co-investments in an investee company only through either the PMS route or the CIV scheme, not both.
2. Managers must file a shelf placement memorandum outlining key terms of co-investments, governance structures, and regulatory frameworks.
3. Each CIV scheme must operate separate bank and demat accounts, with assets ring-fenced from those of other schemes.

An investor’s co-investment in a company via the CIV scheme cannot exceed three times their commitment to the AIF scheme. Exemptions are provided to multilateral or bilateral development financial institutions, state industrial development corporations, sovereign wealth funds, central banks, and government-controlled entities.

Investors who have defaulted on AIF contributions or are otherwise excluded are barred from co-investing.

Safeguards and Restrictions

SEBI has also set clear boundaries to prevent misuse of the new flexibility. CIV schemes cannot be used to give investors indirect exposure to restricted assets, to bypass regulatory disclosure requirements, or to invest in companies that are legally prohibited from accepting such investments. Furthermore, CIV schemes are not allowed to borrow or leverage funds.

The regulator emphasised that the CIV scheme will be subject to implementation standards created by a standard-setting forum of AIFs. This is designed to ensure that all investments are made for legitimate purposes and to safeguard investor interests.

Conclusion

With this regulatory amendment, SEBI has expanded the scope for co-investments within AIFs by introducing the CIV scheme alongside the existing PMS route. The framework strengthens governance, imposes strict limits, and ring-fences investor assets while offering more opportunities for participation in private markets. The move is expected to enhance ease of doing business for AIFs while ensuring robust investor protection