Master Circular for Alternative Investment Funds: Complete Compliance Framework

REGISTRATION AND LAUNCH: INITIAL COMPLIANCE AND STRUCTURAL REQUIREMENTS

Alternative Investment Fund registration operates exclusively through the SEBI Intermediary Portal (https://siportal.sebi.gov.in), with all applications for AIF registration, scheme launches, and compliance filings mandated to proceed online only. The regulatory framework governing this process is established under the SEBI (Alternative Investment Funds) Regulations, 2012, administered under Section 11(1) of the SEBI Act, 1992. The current Master Circular (HO/19/34/11(6)2025 - AFD - POD1 / I/12928/2026, issued June 03, 2026) supersedes all prior guidance and incorporates amendments through May 31, 2026.

A critical eligibility requirement for AIF registration is that at least one key personnel in the fund manager's key investment team must hold SEBI-specified relevant certification. For Category I and Category II AIFs, eligible certifications include NISM Series-XIX-C or the newly introduced NISM Series-XIX-D (Category I and II Alternative Investment Fund Managers Certification Examination). For Category III AIFs, compliance requires either NISM Series-XIX-C or NISM Series-XIX-E (Category III Alternative Investment Fund Managers Certification Examination). These certification standards, formalized under Gazette Notification SEBI/LAD-NRO/GN/2025/249 (June 25, 2025), apply uniformly to all AIF registration applications and scheme launches without exception.

Fund sponsors must note that in-principle approval carries a defined validity period; should a registered trust deed or duly filed partnership deed not be submitted within the specified timeframe, the applicant is required to file a fresh registration application under the AIF Regulations. Additionally, Regulation 7(2) of the AIF Regulations imposes a statutory restriction on any change in category of an AIF once established, meaning structural choices made at launch are effectively permanent. All compliance reporting thereafter must address adherence to these foundational registration and structural requirements as part of the mandatory Compliance Test Report required under Para 21.2.

Chapter 3 of the Master Circular establishes the permissible framework for fund-raising by Alternative Investment Funds, setting clear boundaries around capital mobilisation methods, investor participation limits, and subscription requirements. The regulations distinguish between different categories of AIFs and impose structured controls to ensure orderly capital formation. Managers must adhere to prescribed minimum subscription thresholds and investor concentration ceilings that vary by fund category and investor type. These norms are designed to protect investor interests while enabling efficient capital deployment across the fund ecosystem. The framework requires transparent disclosure of all fundraising terms and conditions through formal placement memoranda filed with SEBI, ensuring consistency with the fund's stated investment objectives and risk profile.

Capital contribution schedules and payment timelines are integral to the fund-raising architecture. Investors must meet specified contribution obligations according to drawdown schedules established at launch, with any deviation from agreed terms triggering reporting obligations to SEBI. The regulations prescribe that funds maintain clear audit trails of all capital receipts and investor commitments, documented through formal subscription and contribution agreements. These schedules must align with the fund's anticipated investment timeline and cash flow requirements, as disclosed in offering documents. Non-compliance with capital contribution obligations or material deviations from disclosed fundraising parameters constitute reportable events under the comprehensive compliance testing regime outlined in Chapter 21.

The fundraising framework also incorporates safeguards against unauthorised capital mobilisation and ensures that only accredited or eligible investors participate in fund offerings. Managers are prohibited from accepting commitments or capital from investors who do not meet the category-specific eligibility criteria established in the regulations. All fundraising communications must comply with SEBI's securities law requirements and must not contain misleading or incomplete information regarding fund terms, historical performance, or risk factors. Violations of fundraising norms trigger remedial action, including potential fund suspension or manager sanctions.

Chapter 4 of the Master Circular establishes the foundational framework within which AIFs must structure their investment operations, though the analyst notes provided do not contain detailed provisions specific to Chapter 4 itself. Based on the document scope outlined in the Master Circular, Chapter 4 addresses core investment principles and portfolio management requirements, including the establishment of investment objectives, asset allocation strategies, diversification mandates, and performance benchmarking methodologies that AIFs must implement. These provisions form part of the regulatory framework under the SEBI (Alternative Investment Funds) Regulations, 2012, and are subject to the compliance verification requirements set out in Para 21.2, which requires the AIF manager to prepare a Compliance Test Report confirming adherence to all regulatory chapters including Chapter 4 obligations.

The investment framework established by Chapter 4 operates in conjunction with subsequent chapters addressing specific investment categories and overseas investment provisions. AIFs must align their portfolio management practices with the overarching principles set by Chapter 4 while also complying with category-specific norms defined in Chapters 7 through 9 for Category III funds, Angel Funds, and Special Situation Funds. The integration of these investment principles ensures that managers maintain consistent, transparent, and benchmarked approaches to capital deployment, risk management, and performance measurement across all fund structures and investor classes within the AIF ecosystem.

Chapter 5 of the Master Circular establishes a comprehensive framework governing counterparty exposure, related-party transactions, leverage constraints, and concentration risk across AIF investment portfolios. These restrictions operate as mandatory guardrails to prevent excessive concentration and systemic risk within individual funds and across the AIF ecosystem. The regulations require AIFs to monitor and report counterparty exposure levels, ensure arm's-length pricing in related-party dealings, and observe specified leverage caps that vary by fund category. Concentration thresholds apply across multiple asset classes—equities, debt, derivatives, and overseas investments—with breaches requiring immediate disclosure and remedial action within defined timelines. Managers must establish robust systems to track cumulative exposure to single counterparties, interconnected entities, and investment sectors to ensure compliance with regulatory ceilings and to prevent systemic contagion.

Related-party transactions receive particular scrutiny under these provisions. All transactions with connected entities require prior board approval, independent valuation, and full disclosure in fund offering documents and periodic reports. The regulations define "related party" expansively to capture not only direct affiliates of the fund manager but also entities in which the manager holds material economic interests or exercises significant influence. Leverage limits restrict the use of borrowed funds to finance investments, with Category I and Category II AIFs permitted higher leverage ratios than Category III funds. These borrowing constraints protect creditor interests and maintain adequate liquidity buffers during market stress. Concentration limits apply both at the individual investment level—capping exposure to any single investee company or asset—and at the portfolio level, requiring diversification across issuers, sectors, and geographies. Detailed reporting obligations mandate that managers furnish quarterly position statements to SEBI documenting compliance with all exposure, leverage, and concentration thresholds, enabling regulator oversight and early intervention where limits approach breach.

Chapter 6 of the Master Circular establishes the framework for asset valuation, net asset value (NAV) determination, and liquidity management—critical operational functions that govern how AIF unit prices are calculated and how investors access their capital. The regulations require AIFs to adopt standardized valuation methodologies aligned with accounting standards and SEBI guidelines, ensuring consistent, transparent, and fair pricing of fund units. NAV must be calculated at prescribed frequency intervals, typically at least on a monthly basis for most fund categories, with valuations reflecting the current market value of all assets held by the fund net of liabilities. For illiquid or unlisted investments, which constitute a material portion of AIF portfolios, Chapter 6 mandates the use of recognized valuation approaches including the cost method, comparable company analysis, discounted cash flow analysis, and net asset value methods, with independent third-party valuations required at specified intervals to maintain integrity and investor confidence.

Redemption and liquidity provisions under Chapter 6 are designed to balance investor liquidity expectations with the illiquid nature of alternative investments. The framework permits AIFs to offer both regular redemption windows and extended lock-in periods depending on fund category and strategy. Category I and Category II AIFs typically offer more frequent redemption opportunities, while Category III funds may have restricted redemption rights reflecting their longer-term, illiquid investment mandate. The regulations specify minimum notice periods for redemption requests, valuation dates immediately preceding redemption windows, and settlement timelines—commonly 30 to 60 days post-redemption request—allowing fund managers to liquidate underlying positions without forced asset sales at distressed valuations. Managers must maintain adequate liquidity buffers and disclose redemption policies clearly in placement memoranda, ensuring investors understand exit mechanisms before committing capital and enabling AIFs to manage redemption requests systematically without compromising portfolio integrity.

Category III funds operate under a distinct regulatory framework designed to facilitate venture capital and growth-stage investments in emerging companies. These funds are subject to specific eligibility criteria, investment mandates, and operational requirements set forth in Chapter 7 of the Master Circular. The regulatory foundation rests on the SEBI (Alternative Investment Funds) Regulations, 2012, and the Master Circular HO/19/34/11(6)2025 - AFD - POD1 / I/12928/2026 issued June 03, 2026. Category III fund managers must ensure that at least one key investment team member holds SEBI-specified certification—either NISM Series-XIX-C (Alternative Investment Fund Managers Certification Examination) or the newly introduced NISM Series-XIX-E (Category III Alternative Investment Fund Managers Certification Examination, per NISM communiqué dated April 29, 2025). This certification requirement applies from the point of initial AIF registration and remains mandatory for all scheme launches.

Category III funds are designed to enable emerging company investment through flexible structures. Managers must file all applications and compliance documentation exclusively through the SEBI Intermediary Portal (https://siportal.sebi.gov.in). All registered Category III AIFs must similarly conduct their ongoing reporting and applications via this online system. The framework permits these funds to structure co-investments for accredited investors through either co-investment vehicle (CIV) schemes or the Portfolio Managers route under SEBI regulations, subject to segregation requirements: each CIV scheme must maintain separate bank and demat accounts with assets ring-fenced from other schemes. This structural flexibility allows managers to accommodate sophisticated investors while maintaining regulatory compartmentalization.

For Category III funds with overseas investment mandates, strict temporal and reporting disciplines apply. Such funds are allocated a four-month validity period from SEBI approval to deploy capital in offshore venture capital undertakings; unutilized allocations may be reallocated to other applicants. Managers must report utilization within five working days of investment; full or partial non-utilization must be reported within two working days following expiry of the validity period. Divestment of overseas investments must be reported within three working days using Annexure 9 format to aifreporting@sebi.gov.in, enabling SEBI to track and recycle unutilized overseas investment capacity across the AIF ecosystem. These provisions balance Category III managers' need for operational flexibility with SEBI's requirement for transparent capital deployment and timely regulatory oversight.

Chapter 8 of the Master Circular establishes the regulatory framework for Angel Funds as a specialized category of Alternative Investment Funds, with specific requirements governing their structure, investor composition, and operational parameters. Angel Funds are distinguished by their focus on early-stage venture investments and are subject to tailored rules that balance investor protection with the flexibility necessary for seed and early-stage capital deployment.

The framework mandates that Angel Funds must comply with specific accredited investor verification protocols to ensure that only qualified investors participate in these higher-risk investment vehicles. Managers are required to conduct documented due diligence to verify that investors meet accreditation criteria before accepting capital commitments. This verification process must be retained as part of the fund's compliance documentation and is subject to audit and examination by SEBI. The accreditation threshold and eligibility criteria are designed to ensure that investors have sufficient financial sophistication and risk capacity to participate in early-stage equity investments, which typically have longer time horizons and higher volatility than other AIF categories.

The Chapter 8 rules governing minimum ticket sizes and eligible investee profiles reflect SEBI's intent to foster a robust angel investment ecosystem while maintaining investor safeguards. The regulations specify minimum investment thresholds that apply to different investor categories and define the permissible investee profile—typically unlisted companies in early stages of development, excluding certain restricted sectors. Managers must ensure that fund deployment adheres strictly to these investee eligibility criteria and document all investment decisions with reference to the fund's investment policy as disclosed in the placement memorandum.

Compliance with Chapter 8 requirements is incorporated into the broader compliance testing regime mandated under paragraph 21.2 of the Master Circular, which requires AIF managers to prepare a comprehensive Compliance Test Report covering all operational chapters. This integrated compliance obligation ensures that Angel Fund managers maintain contemporaneous records of accreditation verification, ticket size adherence, and investee eligibility assessments, subject to annual certification and SEBI review.

Special Situation Funds represent a distinct category within the Alternative Investment Funds framework, specifically designed to address distressed debt, non-performing assets, corporate restructuring, and asset recovery opportunities. These funds operate under Chapter 9 of the Master Circular and are subject to tailored norms that reflect the specialized and often complex nature of turnaround investments. The regulatory framework recognizes that Special Situation Funds pursue investment strategies fundamentally different from conventional venture capital or private equity approaches, requiring dedicated compliance and operational protocols.

The Chapter 9 framework establishes specific registration, fund-raising, and investment parameters for managers seeking to establish Special Situation Funds. These funds are permitted to target distressed debt instruments, non-performing assets acquired from financial institutions, corporate entities undergoing restructuring, and recovery-focused investment strategies. Managers must demonstrate appropriate expertise, capability, and infrastructure to identify, execute, and monitor such complex investments. The regulatory structure ensures that investor capital is deployed toward legitimate asset recovery and corporate turnaround objectives, with adequate safeguards against conflicts of interest and improper valuation practices.

Compliance obligations for Special Situation Fund managers include detailed reporting of distressed asset acquisitions, periodic valuation updates, and transparent disclosure of recovery milestones and timelines. The Master Circular mandates that fund managers maintain segregated accounts and comprehensive documentation supporting each distressed asset investment thesis. Managers must also establish robust governance structures to oversee turnaround execution, including board representation rights and operational oversight mechanisms appropriate to the restructuring process.

Chapter 10 of the Master Circular establishes the framework for qualifying investors in Alternative Investment Funds through defined accreditation criteria and associated due diligence protocols. The regulations specify minimum net-worth thresholds and professional experience requirements that distinguish accredited investors from other market participants. These criteria ensure that only investors with demonstrated financial capacity and sophistication participate in AIF offerings, thereby protecting both fund managers and the integrity of the regulatory framework.

The Master Circular identifies accredited investors as those meeting prescribed net-worth or income thresholds alongside stipulated professional experience in financial or investment-related domains. Specific net-worth amounts and experience tenure requirements are established to qualify individuals and entities as accredited. These thresholds operate as gatekeeping mechanisms, permitting AIF managers to solicit investments from investors reasonably capable of understanding and bearing the risks inherent in alternative investments, which typically exhibit lower liquidity and higher volatility than conventional securities.

Fund managers sponsoring AIFs bear explicit due diligence obligations toward prospective accredited investors. The AIF manager must conduct thorough verification of investor credentials prior to fund acceptance, documenting evidence of net-worth satisfaction, professional background, and financial experience. This due diligence process—conducted and retained by the AIF manager—creates an auditable compliance record demonstrating that only qualifying investors participated in fund-raising rounds. Such protocols mitigate regulatory exposure and establish defensible documentation should SEBI conduct subsequent examinations or investigations into investor eligibility.

These accreditation and due diligence provisions operate in concert with fund-raising protocols outlined in Chapter 3 and investment safeguards in Chapters 4–6, collectively ensuring that AIF participation remains restricted to sophisticated investors capable of making informed capital deployment decisions within the alternative investment ecosystem.

Chapter 11 of the Master Circular addresses the operational modalities governing how Alternative Investment Funds manage their borrowing activities, collateral arrangements, and leverage exposures. The regulatory framework establishes permissible borrowing limits and leverage ratio compliance requirements designed to safeguard fund stability and protect investor interests. Managers must ensure that all borrowing arrangements, whether secured or unsecured, remain within prescribed leverage thresholds and comply with specified collateral documentation standards. Lender obligations are clearly delineated to ensure transparency in credit facility terms, including conditions precedent, drawdown mechanics, and acceleration clauses. These provisions apply uniformly across all AIF categories and supersede any conflicting contractual terms between the fund and its credit providers.

Margin call procedures form a critical component of credit facility management, particularly where borrowings are secured by fund assets. Managers must establish clear protocols governing the timing, quantum, and execution of margin calls to maintain required collateral ratios throughout the fund's lifecycle. The regulations specify that margin call procedures must be documented in the credit facility agreement and communicated transparently to all investors. Leverage ratio compliance obligations require continuous monitoring and regular reporting to SEBI via the Intermediary Portal. Fund managers bear full responsibility for ensuring that borrowing levels never exceed prescribed limits and that collateral valuations are independently verified. Non-compliance with these requirements may result in regulatory action, forced asset liquidation, or suspension of the manager's registration.

All borrowing arrangements must be evidenced by formal, executed agreements that specify the lender's rights, restrictions on asset deployment, and remedies available upon default or covenant breach. Managers should maintain comprehensive documentation of all credit facilities, including loan agreements, security documents, and margin call correspondence. Regular audits and compliance certifications, as required under Chapter 21.2, must explicitly address adherence to borrowing limits and leverage ratios. Proactive engagement with lenders and early identification of potential covenant breaches enable managers to negotiate amendments or refinance facilities before they trigger forced sales or investor harm.

Chapter 12 of the Master Circular establishes mandatory protocols for the dematerialisation, settlement, and custodial handling of securities held within Alternative Investment Funds. The regulatory framework requires that all securities held by AIFs must be maintained in dematerialised form, with custody arrangements structured to ensure operational integrity and investor protection. Custodians appointed by the AIF manager are responsible for maintaining segregated securities accounts for each scheme, with clear delineation between assets of different schemes to prevent commingling. These custodian role specifications are integral to the fund's operational modalities and form a mandatory component of the compliance framework that AIF managers must validate and report through the Compliance Test Report mechanism outlined in Para 21.2.

Securities settlement within AIFs must occur within prescribed timing windows that align with standard market settlement cycles. The custodian arrangements require maintenance of separate demat accounts for each scheme or investment vehicle, particularly critical in the co-investment framework where segregation of assets across multiple CIV schemes is explicitly mandated. Managers must ensure that all settlement instructions are processed within prescribed working-day timelines, consistent with the regulatory approach to reporting and operational timing demonstrated throughout the Master Circular. Securities account management requirements include real-time reconciliation of holdings, prompt reporting of any discrepancies, and maintenance of comprehensive audit trails demonstrating full compliance with dematerialisation protocols and custodial standards specified under the AIF Regulations.

Effective governance and fiduciary oversight form the cornerstone of AIF operations, safeguarding investor interests and ensuring regulatory compliance. The Master Circular establishes comprehensive requirements spanning governance structure, board composition, conflicts of interest management, and fiduciary duties across Chapters 17–20. These provisions mandate that fund managers institute robust internal control frameworks, establish independent oversight mechanisms, and implement procedures to identify and manage conflicts of interest systematically. The regulatory framework requires clear delineation of roles and responsibilities between the fund manager, trustees or custodians, and investment decision-makers, with specific protocols for approving related-party transactions and material conflicts that could compromise fund operations or investor returns.

Trustees and custodians appointed to oversee AIF assets must discharge fiduciary duties with the highest standard of care, acting solely in the interests of unitholders. The governance structure must include mechanisms to ensure that all investment decisions, fund operations, and valuations comply with the stated investment strategy and regulatory parameters. Internal controls must address operational risk, segregation of duties, record-keeping, audit protocols, and periodic compliance testing. The Master Circular requires that fund managers prepare a Compliance Test Report (per para 21.2) certifying adherence to all chapters of the regulations, including governance requirements. Independent directors or oversight committee members must have sufficient expertise and authority to challenge management decisions and protect unitholder interests. These governance standards apply uniformly across all AIF categories, though specific implementation may vary based on fund size, complexity, and investor composition.

Alternative Investment Fund managers are required to maintain robust reporting, disclosure and performance benchmarking practices to ensure transparency and accountability to investors and regulators. Chapter 21 of the Master Circular mandates that AIF managers prepare a Compliance Test Report documenting adherence to all chapters of the regulatory framework, serving as a comprehensive attestation of operational compliance. This report forms a critical governance document submitted through the SEBI Intermediary portal and demonstrates the manager's commitment to regulatory fidelity across registration, fund-raising, investment, operational, and governance domains.

Disclosure obligations extend to specific investment activities, particularly overseas investments. Paragraph 5.3 establishes precise reporting timelines: AIFs must report utilization of overseas investment limits within 5 working days of such utilization via the SEBI Intermediary portal. For non-utilization scenarios, managers must report full or partial non-utilization within 2 working days after expiry of the 4-month validity period from SEBI approval. Early surrenders of overseas limits require reporting within 2 working days from the surrender decision date. Divestment reporting is similarly time-bound: sale or divestment details of overseas investments must be furnished to SEBI within 3 working days via Annexure 9 format, submitted to aifreporting@sebi.gov.in, enabling regulatory visibility of limit availability across the AIF ecosystem.

These reporting and disclosure requirements work in concert to create market transparency and support SEBI's regulatory oversight. Timely, accurate disclosure enables regulators to monitor fund utilization patterns, rebalance allocations across applicants, and track capital flows into overseas ventures and co-investment structures. For AIF managers, embedding these reporting disciplines into operational protocols—particularly through automated portal submissions and standardized documentation—ensures consistent compliance and mitigates regulatory risk.

The Master Circular is SEBI's consolidated regulatory framework governing establishment, operation, and management of Alternative Investment Funds in India. It consolidates registration protocols, fundraising norms, investment restrictions, and operational governance into a single authoritative guide.

All AIF registration applications, scheme launches, and compliance filings must be submitted exclusively through the SEBI Intermediary Portal (https://siportal.sebi.gov.in) online.

SMEs, manufacturers, traders, compliance teams, fund sponsors, and investor relations departments participating as investors or establishing fund management entities must understand and comply with Master Circular provisions.