INTRODUCTION

Alternative Investment Funds (“AIFs”) have emerged as one of India’s most important investment vehicles for sophisticated investors seeking exposure to private markets. Over the years, the AIF regime has evolved significantly over the years to accommodate complex investment structures and facilitate greater investor participation.

In an effort to respond to market feedback regarding co-investment opportunities and with the objective of improving the ease of doing business, streamline procedures, and strengthen risk management, Securities and Exchange Board of India (“SEBI”) has notified the Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2025[1] (“AIF Amendment, 2025”), to reshape how co‑investment can be offered.

What is co-investment in an AIF?

Co-investment is an investment made by a manager / sponsor of a Category I or Category II Alternative Investment Fund (“Eligible Funds”) in unlisted securities of investee companies where such an Eligible Fund makes investment.

Traditionally, these co-investments were facilitated through the co‑investment portfolio managers under SEBI (Portfolio Managers) Regulations, 2020[2] (“Portfolio Managers Regulations”) (“PMS Route”). A working committee was set up by SEBI to review compliance requirements under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012[3] (“AIF Regulations”) and provide recommendations with the objective to simplify the AIF Regulations. The working committee also highlighted certain operational and regulatory inefficiencies in the current PMS Route. To address these inefficiencies, SEBI has introduced the concept of co-investment schemes (“CIV Schemes”) to facilitate co-investment under the AIF Regulations. SEBI’s objective behind this amendment is to enhance ease of doing business for AIFs and their investors and provide an alternative option to the PMS Route. The AIF Amendment, 2025 was subsequently followed by a detailed circular outlining the operational procedures for AIFs launching CIV Schemes for accredited investors.

This amendment aims to reduce compliance burden, increase co‑investment flexibility and provide a more seamless mechanism for investors and fund managers to collaborate on specific investment opportunities. Prior to this amendment, investors desirous to co‑invest alongside AIFs were required to invest through co‑investment portfolio manager, which required fund managers to obtain a separate registration thereby increasing cost and administrative complexities.

Fund managers now have two ways i.e., CIV Scheme under the AIF Regulations and co-investment framework under the PMS Route to structure their co-investments and potentially achieve high returns in high growth companies or sectors as well as in new age companies, or innovation / tech driven sectors.

This article explores the evolution of regulations governing co‑investments, the rationale behind this new framework and the key provisions of this amendment.

BACKGROUND

Before the AIF Amendment, 2025, SEBI had already established a formal co‑investment route by amending the Portfolio Managers Regulations[4], to permit co‑investment through co‑investment portfolio managers (“CPMs”). Managers intending to offer co‑investment services through the PMS Route, were required to obtain a separate registration from SEBI as a CPM[5].

Simultaneously, the Standard Setting Forum for AIFs (“SSF”) prescribed that co‑investment rights can be offered as a differential right to select investors in its implementation standards[6]. This paved way for a clearer opportunity for managers to structure co‑investment access for investors.

The working committee highlighted certain issues in the PMS Route, including the following, due to which the PMS Route had not taken off thus mandating a need for a separate route under the AIF Regulations:

• The clients are entitled to terminate portfolio management contracts early and withdraw funds before completion of the tenure, which eventually creates misalignment and weakens the stability of the co‑investment structure.
• Portfolio managers offering non-discretionary services could invest in unlisted securities only up to 25% of the assets under management of the clients.
• Obtaining an additional SEBI registration as a Portfolio Manager not only increases the manager’s compliance costs but also restricts their ability in offering co‑investment rights to investors due to the conditions imposed under the PMS Regulations.
• Co‑investment services could only be offered to investors of funds with the same sponsor and who is being managed by the same CPM.

To address these concerns, the Working Group (“Working Group”) recommended the concept of co-investment schemes. Pursuant to this, SEBI issued a consultation paper in relation to co-investment opportunities to investors within the AIF structure under AIF Regulations (“Consultation Paper”) proposing a major overhaul of the existing co-investment framework under the AIF regime, which was later on approved by SEBI in the board meeting. This ultimately led to incorporating co‑investment within the statutory framework of the AIF Regulations.

Separately, International Financial Services Centres Authority (“IFSCA”) has also issued a circular[7] specifying operational aspects for co-investments by venture capital funds and restricted schemes operating in the International Financial Services Centres.

• ANALYSIS OF CURRENT STATUTORY FRAMEWORK

Key highlights of the framework governing CIV Schemes introduced through the AIF Amendment, 2025 are summarized below:

• Eligible Funds

The Category I or Category II Alternative Investment Funds are eligible to invest in unlisted securities of investee companies by launching CIV Schemes.

• Streamlined and scheme-centric compliances

For each co-investment, a separate CIV Scheme must be launched which can invest in only one investee company. This recognises that a CIV Scheme is usually a deal specific scheme and not a diversified pool.

• Eligible Investors

Only accredited investors of the Eligible Funds shall be eligible to invest in a CIV Scheme. Any accredited investor being excluded, excused or has defaulted is prohibited from making co-investments in an investee company through a CIV Scheme. Angel Funds are expressly barred from launching co‑investment schemes.

An investor’s total exposure in the investee company through all the CIV Schemes linked to an AIF cannot be more than 3 (three) times the amount that the investor has invested in the investee company through the main AIF scheme.

It may be noted that there is no similar restriction on the eligible investors or amount invested for co-investment under the PMS Route.

• Eligible Investments

A CIV Scheme cannot invest in units of AIFs or borrow funds directly / indirectly or engage in any kind of leverage. This ensures the scheme remains free from any structural risk. CIV Schemes can be set up only for making investment in unlisted securities of an investee company of the Eligible Funds.

• Terms of investment

The terms of co-investment in an investee company by a CIV Scheme shall not be more favourable as compared to the terms offered to the AIF. The co-investors must exit their investment in the investee company at the same time as the AIF, ensuring alignment with the fund’s exit timelines.

• Shelf Placement Memorandum (“SPM”)

The Eligible Fund needs to file a SPM through a merchant banker for launching CIV Scheme prior to offering the co-investment opportunities to the investors. The SPM shall consist of the principal terms relating to co-investments, governance structure, and regulatory framework.

Manager’s Responsibilities

The manager must protect interests of the stakeholders by ensuring that:

• the CIV Scheme does not make any investment resulting in the investors acquiring an exposure in the investee company indirectly, which they are not allowed to acquire directly;
• the CIV Scheme does not invest in a way that would trigger additional regulatory disclosures for the investors, provided if they had invested directly; and
• the CIV Scheme does not invest in any company that is not allowed to receive investment directly from such an investor.
  
• Exemptions under the AIF Regulations
  Following exemptions are granted to the CIV Schemes under the AIF Regulations:
• maintenance of minimum corpus;
• maintenance of continuing interest by the sponsor / manager;
• principal terms of the private placement memorandum (“PPM”);
• timeline for filing of the PPM;
• general investment conditions;
• few specific conditions in relation to Category I and Category II AIFs as provided under regulation 16 and regulation 17 of the AIF Regulations; and
• tenure of the AIFs.
  

KEY TAKEAWAYS

This amendment represents a landmark development in India’s alternative investment landscape. By enabling Category I and Category II AIFs to offer co‑investment opportunities within the AIF structure itself, SEBI has provided an alternative option to fund managers. Fund managers now have an option to either undertake co-investment through AIF route without requiring a separate registration under the PMS route thereby reducing cost or undertake co-investment through the PMS route with more flexibility on the category of investors and conditions. The co-investment guidelines under the AIF Regulations, enable accredited investors to participate directly in high‑growth opportunities, achieving both regulatory simplification and greater investor convenience.

By allowing Category I and II AIFs to co‑invest in opportunities within their own regulatory framework, SEBI has unlocked a new era of flexibility and sophistication in India’s private investment landscape. By incorporating co‑investment mechanisms within the AIF framework, SEBI has successfully streamlined the overall process, reduced compliance burdens and broadened strategic flexibility for both investors and fund managers. The introduction of mandatory SPM filings and oversight by the SSF ensures that this flexibility does not come at the cost of any regulatory breach. The inclusion of CIVs in the AIF framework has reduced licensing duplication and has aligned co-investments more closely with the fund’s tenure.

If implemented effectively, this framework is expected to significantly enhance collaborative investment opportunities and strengthen India’s position as a globally competitive private capital hub. As private markets continue to grow, co‑investments will play an increasingly important role in capital formation, and SEBI’s forward-looking reforms place India firmly on the path toward a more dynamic and investor-friendly alternative investment market.

Authors:

 Disclaimer: 

This article is intended for informational purposes only and does not constitute a legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This article is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial / quasi-judicial authorities may not take a position contrary to the views mentioned herein.

[1]  Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2025 – Link

[2] Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020- Link

[3] Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 – Link

[4]  Securities and Exchange Board of India (Portfolio Managers) (Fourth Amendment) Regulations, 2021 – Link

[5]  Regulation 3(1) of the SEBI (Portfolio Managers) Regulations, 2020

[6]  Implementation standards for offering of differential rights to select investors of an AIF dated 28^th January 2025 – Link.

[7] Framework to facilitate Co-investment by Venture Capital Scheme and Restricted Scheme – Link