The Securities and Exchange Board of India (“SEBI”), in exercise of powers conferred under Section 11(1) of the SEBI Act, 1992, read with Regulation 17A(7) and Regulation 36 of the SEBI (Alternative Investment Funds) Regulations, 2012, vide Circular No. SEBI/HO/AFD/AFD-POD-1/P/CIR/2025/126,[1] dated September 09, 2025, has introduced a new framework enabling Category I and II Alternative Investment Funds (“AIFs”) to offer co-investment opportunities to accredited investors within the AIF structure itself, through the launch of separate Co-Investment Schemes (“CIV schemes”).
Key Highlights:
I. Introduction of CIV Schemes: SEBI has permitted Category I and II AIFs to offer Co-Investment facilities within the AIF structure by launching CIV schemes, in addition to the existing Portfolio Management Services (“PMS”) route.
II. Operational Framework: AIF Managers can use either the PMS route or CIV scheme route for co-investment in an investee company, not both. A Shelf Placement Memorandum (of which a template has been provided in annexure of the circular) must be filed, detailing governance, regulatory framework, and principal terms of co-investment.
III. Structural Safeguards: Each CIV scheme must maintain separate bank and demat accounts, assets must be ring-fenced from other schemes.
IV. Investment Limit: Investor’s co-investment via CIV schemes in a company must not exceed 3x their investment in the main AIF scheme, except for:
- Multilateral/ Bilateral Development finance institutions (DFIs)
- Government-owned entities
- Sovereign Wealth Funds and Central Banks
V. Restrictions and Compliance: Investors excused, excluded, or defaulting in main AIF scheme investment cannot co-invest via CIV in that company. CIVs must not invest in a manner that:
- creates indirect exposure the investor cannot hold directly;
- requires additional disclosure if done directly;
- breaches eligibility norms for direct investment in the investee.
Additionally, no leverage or borrowing is allowed by CIV schemes.
VI. Profit and Expense Sharing: Proceeds and rights from CIV investments are pro-rata, subject to carried interest or equivalent, if applicable. Co-investment expenses to be shared proportionally between AIF scheme and CIV scheme based on investment ratio.
VII. Implementation Standards: CIV schemes must comply with standards (if any) developed by the Standard Setting Forum of AIFs (SFA) in consultation with SEBI. These standards shall be published by industry associations like Indian Venture and Alternate Capital Association (IVCA), Private Equity Venture Capital Chief Financial Officer Association (PEVCCFO), and Trustee Association of India.
VIII. Compliance and Reporting: AIF trustees/ sponsors must ensure that the Compliance Test Report (CTR) includes adherence to this framework, as per Chapter 15 of the SEBI Master Circular for AIFs.
[1]https://www.sebi.gov.in/legal/circulars/sep-2025/framework-for-aifs-to-make-co-investment-within-the-aif-structure-under-sebi-alternative-investment-funds-regulations-2012_96506.html