SEBI Gives Investors More Flexibility to Co-Invest with AIFs

SEBI just made a big move to boost India’s private investment scene. At its board meeting on June 18, the market regulator introduced reforms that make it easier for investors to co-invest with Alternative Investment Funds (AIFs). The goal? Smoother processes, more flexibility, and stronger institutional participation in unlisted asset deals.

Why This Matters: Co-Investments Needed a Fix

Currently, if an investor wants to invest more money in an unlisted company that an AIF has already backed, they must do so through separate routes, typically via Portfolio Management Services (PMS). But PMS isn’t exactly seamless. It comes with heavy paperwork, strict compliance rules, and limited flexibility in how advice is given.

This cumbersome process has often slowed things down, making it difficult for Indian fund managers to close large deals as efficiently as their global counterparts.

The Problem with the Old Way

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

A SEBI working group flagged multiple issues with the PMS route. High costs, slow paperwork, and coordination problems surrounding when investors can exit were just a few of the red flags—all of this created friction for investors and fund managers alike.

SEBI’s answer? The Co-Investment Vehicle (CIV). It’s a new structure that allows accredited investors to invest through a separate scheme, but still under the same Alternative Investment Fund (AIF) umbrella (Category I or II).

Here’s what the CIV model looks like in action:

• It runs as a registered scheme under the same AIF and files a "shelf PPM" with SEBI at the start.
• Each CIV is tied to a specific investee company and has its own bank account, demat account, and PAN.
• Only accredited investors are eligible to join, ensuring a clean and controlled environment.
• Rules around diversification, tenure, and sponsor commitments are more relaxed, making it ideal for focused investments.
• The CIV wraps up when the main AIF does, ensuring both stay in sync.

By formalising CIVs, SEBI is reducing red tape and giving local fund managers a competitive edge to match global deal execution standards.

Another Win: Lifting the Ban on Investment Advice

SEBI also removed a significant restriction that had prevented AIF managers from advising clients on listed securities in the co-investment space. Why was that a problem? It created unnecessary silos, especially when investors had different but related portfolios.

Now, as long as you’re an accredited investor and the asset isn’t a thinly traded stock (to avoid conflicts of interest), your AIF manager can offer advice across listed and unlisted investments. That’s a significant boost to their advisory role, building more trust with investors.

What the Industry Is Saying

The market response has been largely positive. Moneycontrol noted how the advisory ban lift helps streamline operations. Live Mint highlighted how the CIV model provides select AIF investors with an easier path to invest more. Republic World even bundled it into a set of “big-bang reforms” that also included new rules for startup ESOPs and PSU delistings.

These Changes Are Part of a Bigger Picture

This isn't just a one-off move. SEBI is implementing several reforms to modernise and enhance the investor-friendliness of India’s capital markets. At the same board meeting, SEBI also:

Eased rules around ESOPs for startup founders, allowing them to hold on to stock options even after an IPO (with a 1-year wait).
Introduced a smoother delisting process for public sector undertakings (PSUs).
Simplified investment rules for Foreign Portfolio Investors (FPIs) focused on government bonds.

SEBI is thinking big and reimagining the entire market environment to be more efficient, flexible, and globally competitive.

What This Means for You

• If You’re an AIF Manager or Sponsor: You’ll be able to close deals faster, co-invest bigger, and expand your advisory offerings. That means more business and more value for your clients.
• If You’re an Accredited Investor: You’ll get access to top-tier deals alongside AIFs, with more flexibility on how and when you invest or exit.
• If You’re a Portfolio Company: CIVs can make your cap table cleaner (fewer direct investors) and bring in long-term capital from sophisticated backers.

A Few Watchouts

The CIV model sounds great, but it needs to be implemented with care:

• SEBI will need to stay strict about governance to avoid misuse.
• AIF managers must clearly explain CIV mechanics to investors.
• Listed securities advice can still be tricky, especially in low-liquidity stocks, so SEBI recommends ongoing monitoring.
• CIVs come with additional setup costs (such as separate accounts and PANs), but the long-term flexibility may be worth it.

Looking Forward

SEBI is already working on making AIF onboarding even smoother, especially when it comes to accreditation through KYC Registration Agencies (KRAs). Combine that with these co-investment reforms, and the doors to India’s AIF ecosystem are set to open wider for more investors.

SEBI’s push to launch CIVs and allow listed-asset advice isn’t just regulatory housekeeping; it’s a fundamental upgrade. It brings Indian investment practices closer to global standards, removes bottlenecks, and opens new doors for both managers and investors.

Done right, the CIV could become a go-to model not only in India but also in other emerging markets. It’s about speed, clarity, and alignment - all the essentials for smart investing in today’s fast-paced world.