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The startup ecosystem in India is very energetic and dynamic. Whether it’s disruptive technology, social entrepreneurship, or any other reason, the entrepreneurial nature of the country cannot be disputed, making it the third-largest startup economy globally.
Such exponential development, with a 12-15 per cent yearly growth rate and more than 1,59,157 DPIIT-certified startups at the end of January, 2025, is not only a testimony of bold entrepreneurs: it is also a narrative about ever more sophisticated funding models. As much as angel investors, traditional venture capitalists, and even corporate venture arms have contributed to this, a younger entity has gradually gained its position, changing the level of investments massively: the Alternative Investment Funds (AIFs).
Consider AIFs as advanced investment instruments that gather funds from sophisticated financiers by collecting resources from careful investors, primarily high-net-worth individuals (HNIs), family authorities, and institutional contributors, to make investments in a wide range of properties, often beyond the mainstream of stocks and bonds.
AIFs have brought a great change to the startup funding in India as they have shown tremendous growth at 35 per cent CAGR in the last five years. By March 31, 2024, the AIFs had gathered INR 11 trillion of commitments, investing more than INR 4 trillion of this amount, much of which into Indian startups. In particular, by FY24, 135 AIFs have invested INR 18,000 crores into startups. As of May 2025, there are 1550 registered alternative investment funds in the country.
This is through the growth of investor sophistication, the need to diversify portfolios, and the rising knowledge of the high-growth potential of the unlisted Indian equities, especially tech startups. The flexible nature of AIFs makes them well placed to take advantage of these trends.
Initially lightly regulated, SEBI has expanded to include tighter disclosure conditions, obligatory performance benchmarking, and obligatory internet registration, making AIFs responsible and open to domestic and foreign investors.
AIF funds have transformed the funding landscape of Indian startups by providing a wide spectrum that matches different stages of growth and risk appetite, categorized into three types of AIFs defined by SEBI.
Early and socially important is the first category of AIFs, which initiates early-stage and socially important funds, Venture Capital Funds that work with high-growth businesses that offer necessary early-stage seed money and mentorship.
The larger horses are Category II AIFs, including Private Equity and Debt Funds: they are well-endowed to invest in expansion, market entry, or pre-IPO financing of later-stage growth. Debt funds provide non-dilutive capital, a requirement for companies seeking to avoid equity dilution.
Category III AIFs are the most flexible in that they can use complex distributing strategies, such as a hedge fund that invests in listed and unlisted securities. Although they are not explicitly targeted at the early stage, they are nonetheless flexible and stable in the market. This heterogeneous system of AIFs provides specialized, strong financing, thereby enhancing the robustness of the Indian startup landscape.
AIFs can bring in much more than money to the Indian startups; the foreign groups are planning the strategic transformation of their growth. AIFs, particularly Category I and II, offer patient, long-lasting capital, releasing startups from the immediate profit burden and enabling further research.
These funds have access to a wide range of domestic and international investors, which, in addition to healthy capital, open up the world to networks, partners, and possible internationalization. They are systematized and are SEBI compliant in their investment processes, making their processes transparent, accountable and enhancing good governance of the startups. Additionally, certain AIFs are funding niche and impact investing, leading to an upturn in fields such as ESG compliance and social enterprises, as well, which explains why AIFs are making significant contributions to the Indian startup hub in numerous ways.
The dynamic growth of India AIFs is being underscored by the strength of the emerging regulatory framework of Alternative Investment Funds (AIFs) and the focus of SEBI on transparency as well as investor protection. Emerging 2024-2025 developments, such as due diligence lists, dematerialization of investment and co-investment systems, are an indication of a maturing, dense ecosystem. And doting on investors is also highlighted in the May 2025 consultation paper on co-investments that moved towards greater flexibility.
Regardless of this development, there is still a problem. The regulation may be intricate to new fund managers, and market volatilities require effective risk management. There should also be an improvement in investor awareness, and the pass-through taxation debate on Category III AIFs also needs to be cleared by the regulators.
However, AIF has a great future in the India startup and VC industry. The main drivers include the diversification needs, the simplification of operations in technology, and consistent technological guidance by the regulatory factor. The development of ESG-oriented AIFs and the expansion of the investor base, which can now include more retail investors, indicate that the industry is developing healthily. AIFs are playing a more significant role in forming the foundation of the Indian investment landscape.
AIFs can significantly influence the startup and venture capital landscape in India, which is driven by unending innovation. Well beyond the fringe, AIFs have taken centre-stage in startup capitalization, providing, by way of example, seed capital through angel funds and growth capital through private equity funds in addition to debt financing.
They are strong in their ability to pool patient capital that has a sophisticated source of investors who not only can offer them money but also strategic guidance and valuable networks. With India as a leading global centre of innovation on its agenda, AIFs are bridging critical investment shortfalls, making young companies more professional. They are pivotal in the future of fueling the unicorns and renewing the economy in India.
To get expert assistance in Alternative Investment Fund Registration in India and more insights into different categories of AIF, talk to our AIF consultants at Enterslice.
An AIF is a privately pooled investment vehicle established or registered in India. It raises funds by collecting money from sophisticated investors (Indian or foreign) and makes investments based on a specific investment policy to benefit the investors. In contrast to the old-fashioned investments that include mutual funds, AIF invests in other classes of assets, such as private equity, venture capital, real estate, and distressed assets.
Although a vast number of VC funds are in the form of AIFs (i.e., Category I AIFs), the term AIF is more far-reaching. AIFs can have a broader set of strategies (private equity, debt, hedge funds, infrastructure, social ventures) over and above early-stage equity, which is the usual characteristic of traditional VCs. AIFs also tend to be more diverse in addressing a set of sophisticated investors.
According to SEBI guidelines, the three significant types or categories of Alternative Investment Funds in India are mentioned below-Category I AIFs: University Startups, Early-stage Ventures (VC Funds, Angel funds), Small and Medium Enterprises, and those that would have a social impact (Social Venture funds, Infrastructure funds). The government usually grants them some incentives.Category II AIFs: Debt Funds and Private Equity funds are covered under this category of AIFs. They are the ones who usually invest in unlisted businesses at various stages, providing growth capital or financing through debt.Category III AIFs: Have various or complicated trading operations, including hedge funds, and they are even able to direct their funds to listed and unlisted securities. They are more flexible in operation.
There are several benefits of AIFs, including bringing together substantial capital from HNIs and institutions, leveraging fund management expertise, offering long-term patient capital, utilizing a diversified investment style, and operating within a regulated environment, which provides confidence to investors. They also expose the startups to a larger/deeper source of financing.
AIFs have knowledge, expertise, resources and networks of professionals and leaders to bring to their portfolio companies. Such mentoring and operational assistance may prove vital to startups that are going through the growth hurdles, expanding their businesses, and venturing into unfamiliar markets. They are systematically ready to go through future funding with their startups.
In India, the major regulator of the AIFs is SEBI (Securities and Exchange Board of India). It regiments the AIF Regulations, monitors its registrations, quantifies the investment strategies, disclosures, reporting, and protection of the investors. One of the goals that SEBI tends to achieve through its constant modification of the regulations is the promotion of transparency, streamlining of operations, and compliance.
The taxation of AIFs may be complicated, and it varies with regard to the type of AIF and the residency status of the investor. Typically, Category I and II AIFs tend to enjoy a so-called pass-through status in terms of taxation, which means that income generated by the fund is not taxed at the fund level, as it is again taxed at the investor level. Nonetheless, Category III AIFs are not given such pass-through status. Consequently, they are taxed both at the fund level and the level of the investors, which is a point of continued debate among the industry players. It is always recommended to seek help and consider consulting a tax specialist.
The main issues are regulatory compliance, which is extremely complicated, and market volatility of alternative asset classes, as well as the need to create awareness among investors in AIFs on the merits and risks involved in investing in AIFs. Completion of the pass-through taxation has also been an issue in the case of Category III AIFs.
Sure, AIFs can gather both Indian and foreign capital. This has enormously assisted in stimulating foreign direct investment (FDI) in the Indian startup environment that serves as a well-organized platform that gives overseas investors the framework to be part of the India development story.
The prospects are very bright. It is projected that AIFs will continue to grow strongly due to the ever-growing demand by investors for portfolio diversification, changes in technology in fund management, and the friendly SEBI regulatory reforms. They will only increase by their contribution through innovation, employment, and economic development through funding of high-potential start-up companies with long-term capital.
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