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Alternative Investment Funds (Second Amendments) Regulations, 2021

Alternative Investment Funds (Second Amendments) Regulations, 2021

The capital market regulator, SEBI, vide notification on May 5, 2021, removed certain restrictions and provided regulatory flexibility for venture capital and angel funds investing in the start-ups. These regulations will be called Securities Exchange Board of India Alternative Investment Funds (Second Amendments) Regulations, 2021.

What are Venture Capital Funds?

According to the SEBI’s Alternative Investment Fund Regulations, venture capital funds are those that invest in activities based upon the new products, technology, new services or intellectual property rights or new business models.

The category I Alternative Investment Fund receives tax benefits and incentives from the government as they are said to have a positive spill-over effects on the economy.

Securities Exchange Board of India Alternative Investment Funds (Second Amendments) Regulations, 2021: Amendments

The following amendments have been made, which were proposed in SEBI board meeting on March 25, 2021:

  • Insertion of Start-up definition and removal of the list of restricted activities or sectors from “Venture Capital Undertaking” definition;
  • Alternative Investment Funds allowed to simultaneously invest in units of other AIFs and directly in securities of the investee companies;
  • Alternative Investment Fund manager must ensure that conditions pertaining to the investment, fund documents and applicable laws are complied with under all circumstances;
  • SEBI has rationalized regulatory requirements and prescribed a code of conduct for KMP of AIF and its manager, including the members of investment committee.

Lets’ discuss these amendments one by one.

Definition of Start-up

The regulations have provided for the definition of Start-up. The Venture Capital Fund under the Alternative Investment Fund Regulations[1] is set up as a sub-category of a Category I AIF and includes angel fund.

Although the Alternative Investment Fund Regulations permit angel funds to invest in the Venture Capital Undertakings or start-ups, the AIF Regulations don’t define Start-up. Therefore its definition was introduced.

Start-up refers to a private or limited liability partnership that satisfies the criteria for the start-up as defined by the DPIIT, Ministry of Commerce and Industry.

Moreover, the Venture Capital Undertaking was defined as domestic company not listed on the recognized stock exchange while making investments.

Removal of the list of restricted activities

SEBI has removed the list of restricted activities from the Venture Capital Undertaking definition defined under Regulation 2(1) (aa) of AIF Regulations. Under the extant framework, NBFCs and companies engaged in the gold financing companies are not covered under the Venture Capital Undertakings.

Therefore this amendment is expected to enhance investments in the start-up and also make category I AIFs more productive for managers and investors.

Simultaneously invest in units of other Alternative Investment Funds

The AIF regulations allow a fund of category I AIFs to invest in the units of other Category I AIF of the same category and fund of Category II AIFs to invest in the units of other Category I and Category II, AIFs if in each case, no investment is made in the units of other FoFs.

Moreover, SEBI has also allowed AIFs, including FoFs, to invest in units of other AIFs simultaneously and directly in securities of investee companies, subject to certain conditions.

SEBI has permitted AIF to invest in the units of AIFs managed/sponsored by the same AIF manager/sponsor provided a prior approval of minimum 75% of the investors by the value of their investment in such AIF.

Code of conduct for KMP of Alternative Investment Funds and its manager

SEBI has also prescribed for the scope of responsibilities of the AIF KMP, trustee, Trustee Company, designated partners, trustee company’s directors, or directors of AIF through the Code of Conduct. A separate Code of Conduct has been provided under the IV Schedule of the AIF Regulations.

The code of conduct provides the functioning of the AIFs, for AIF managers and KMP of managers and AIFs and Code of Conduct for members of the investment committee, trustee, trustee company’s directors, designated partners of the AIF.


The amendments made by SEBI in respect of Alternative Investment Funds (Second Amendments) are expected to provide flexibility to the managers of AIFs in operating their fund effectively. Further, it can ensure that the fiduciary responsibilities towards the investors are uncompromised. It can play a major role in the development of start-ups in India by enhancing the pool of capital for these entities and promote the formation of new category I AIFs.

Read our article:Analysis of Amendment in SEBI Guidelines for Investment Advisers

Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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