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SEBI’s New Co-Investment Framework for AIFs Explained: Rules, Benefits & Key Changes 

On September 9, 2025, SEBI issued an important circular, introducing a new Co-Investment framework for Alternative Investment Funds (AIFs). This reform brought a major change in how co-investments are structured, governed, and implemented in India’s AIF system. It makes the investment process more transparent, regulated, and safe for investors.  

The concept of Co-Investment framework for AIFs is not new in India, implying it was already in practice. But without a clear regulatory framework, it led to uncertainty and operational issues. Many investors wanted to participate directly in certain deals, but there was a lack of specific and clear rules for it.  

So, SEBI’s intervention filled gaps with the introduction of the Co-investment Framework for AIFs. It has also increased confidence and transparency in the market by aligning it with SEBI AIF regulations.  
 
Read this article to know more about the AIFs, how they work in India, what is co-investment, key changes in co-investment in AIFs, their rules, benefits, and more. 

How do Alternative Investment Funds (AIFs) work in India?  

An Alternative Investment Fund (AIF) is an investment scheme collecting funds from investors (Indian or Foreign) to invest in assets other than shares or mutual funds. These include private equity, startups, real estate, or infrastructure projects. 

SEBI has divided AIFs into the following three categories-  

• Category I AIFs: It generally invests in startups, SMEs, social ventures, and infrastructure. A venture capital fund (angel funds) is a subcategory. To know about Category I AIF compliance updates, have a look at our Category I AIF compliance calendar.  

• Category II AIFs: It follows a structure similar to private equity, real estate funds, debt funds, and funds of funds. To know about Category II AIF compliance updates, have a look at our Category II AIF compliance calendar.  

• Category III AIFs: They use complex strategies and are allowed to leverage borrowing for hedge funds and private investment in public equity (PIPE) funds. To know about Category III AIF compliance updates, have a look at our Category III AIF compliance calendar.  

These funds are managed as per SEBI rules for Alternative Investment Funds. Co-investment allows a large investor to directly participate in a specific company. This increases the potential for returns.  

What is Co-Investment in AIF? 

Co-investment in AIFs permits investors to invest directly in the specific portfolio alongside the AIF. In this case, the investment is not made in the entire fund but in a specific deal. 

Traditional Method: An investor invests in an AIF, and the fund manager invests that money in different companies.  

With Co-investment: An investor can invest separately and specifically in a particular company, along with the AIF. The investment runs parallel to the AIFs’ investment in the same company.  

In this method, investors and fund managers can choose specific opportunities. It gives exposure to investors for specific deals, management fees, and potential returns. Also, the fund managers have access to more capital and large deals.  

However, earlier, there were no clear rules for this arrangement. Therefore, SEBI has created a specific SEBI co-investment framework for AIFs so that the risks are reduced, and the rules are clear for all parties. 

Why has SEBI Launched the new Co-Investment Framework for AIFs?  

Co-investment in India was done through the PMS (Portfolio Management Services) route. This route was not convenient in all cases, especially when investing in unlisted companies, as there were various limitations. 

In addition, investor protection and transparency were also important. If there was a risk of conflict of interest when there was investment in the same deal on different terms. 

So, SEBI has brought a new and clear Co-Investment framework for AIFs. It has laid down clear rules on investment conditions, exit timing, and cost sharing to promote ease of doing business. 

It has brought the Indian investment environment closer to international standards. So, the trust relationship between fund management and investors has been strengthened. 

Regulation 17A in SEBI AIF Regulations, 2012 

SEBI has given a legal basis to this new system by adding Regulation 17A. This is an important addition to the SEBI AIF Regulations, 2012. Under Regulation 17A, the AIF manager remains fully responsible for execution, governance, and regulatory compliance of CIV investments.  

As per this regulation, investors of Category I and Category II AIFs can co-invest under certain conditions. The framework clearly outlines the co-investment structure and process. It has been designed in coordination with the SEBI AIF guidelines. Most importantly, this regulation has come into effect from the date of issuance of the circular. So, AIF managers must now create structures and ensure AIF compliance with these rules. 

Key Features and Conditions of the Co-Investment Framework for AIFs 

The new Co-investment Framework for AIFs introduced by SEBI is a clear and regulated structure. In this section, we will understand the key rules, conditions, and practical aspects of this framework. 

1. Approved Routes for Co-Investment: PMS vs. CIV Scheme 

Co-investment in India was primarily done through the PMS (Portfolio Management Services) route. In this method, investors would open a separate PMS account and invest in specific companies. However, this route had some limitations, especially in the case of investments in unlisted companies. 

The new SEBI co-investment framework for AIFs has brought about a major change in this system. Now, AIF managers can choose to use the Co-Investment Vehicle (CIV) scheme. This operates as a separate scheme within the AIF. 

This gives managers more flexibility. They can decide which route is suitable for PMS or CIV depending on the situation. 

2. Mandatory Submission of Shelf Placement Memorandum (PPM) 

The AIF manager must submit a Shelf Placement Memorandum (PPM) to SEBI before offering co-investment through the CIV scheme. This document serves as the foundation of the entire co-investment structure. 

The Shelf PPM must clearly specify the terms, structure, governance, risks, and investment process of the co-investment. This allows investors to understand the rules under which they are investing beforehand. 

This requirement ensures transparency and accountability with SEBI AIF guidelines. It also plays a crucial role in avoiding any future confusion or disputes. 

3. Separate Legal and Accounting Structure for CIV Schemes 

SEBI has clearly stated that each CIV scheme must have a separate legal and accounting structure. The assets of the CIV scheme cannot be mixed with the main AIF or any other scheme. 

Therefore, each CIV scheme must have its own bank account and demat account. This process is called “ring-fencing”. 

This protects the investors. The arrangement ensures that problems in one scheme do not affect other schemes or the main AIF. This system helps mitigate risks in accordance with SEBI AIF regulations. 

4. Investment Limit and 3x Cap Explanation 

A crucial aspect of the Co-investment Framework for AIFs is the limit placed on investments. According to the rules, an investor can co-invest through the CIV scheme up to a maximum of three times the amount they have invested in a company through the AIF. 

However, some institutions are exempt from this cap. These include sovereign wealth funds, government agencies, and bilateral and multilateral development financial institutions. 

This helps to maintain balance, ensuring that co-investors do not gain disproportionately high influence or control, and the transparency of the AIF structure is preserved. 

5. Restrictions on Eligible Co-Investors 

SEBI has added an important condition here. If an investor is identified as excused, excluded, or defaulting in their participation in the AIF’s investment, they will not be allowed to co-invest in that company. 

If someone fails to fulfill their commitment in the main AIF investment, they will also be excluded from the co-investment facility. 

This rule helps maintain investment discipline. It also ensures that responsible and committed investors benefit from the Co-investment Framework for AIFs. 

6. Prohibition on Leverage or Borrowing 

SEBI has clearly stated that no CIV scheme can directly or indirectly borrow or use leverage. This rule is extremely important for risk control. 

While leverage can increase returns, it also significantly increases risk. Therefore, the CIV scheme is kept completely unleveraged according to SEBI AIF regulations. 

This makes the co-investment structure more stable and protects investors from unnecessary risks. 

7. Alignment of Investment Terms and Exit Timelines 

Another important aspect of this framework is that co-investors cannot receive better terms than the main AIF. The entry price, rights, and other terms must be the same.  

Furthermore, the exit from the co-investment must be co-terminus with the exit from the AIF scheme. Co-investors cannot exit separately. 

This rule helps maintain fairness and alignment of interests among all investors. 

8. Expense Sharing, Return, and Profit Distribution 

All expenses will be shared between the CIV scheme and the main AIF scheme on a proportionate basis. Each scheme will bear expenses according to its respective investment. 

The same principle applies to the distribution of returns or profits. Investors will receive profits in proportion to their contributions. 

In some cases, the sponsor or manager may receive additional returns or carried interest, but this must be according to predetermined and disclosed terms. This maintains transparency within the SEBI co-investment framework for AIFs. 

Key Benefits of SEBI’s Co-Investment Framework for AIFs 

The key benefits of SEBI’s Co-investment framework for AIFs range from enhanced clarity, better structure, and are as follows:  

Greater Flexibility for Accredited Investors 

The Co-Investment framework allows experienced and qualified investors to participate directly in specific deals. This allows them to invest not only in the fund but also in companies of their choice. 

Increased Transparency and Control 

Separate CIV schemes, segregated accounts, and clear rules make the investment process more transparent. This reduces misunderstandings and conflicts of interest. 

Simplified and Organized Structure 

Compared to the complexities of PMS, co-investment through CIV schemes is much more organized and controlled. 

Better Alignment of Interests 

The risks and rewards of the main AIF and co-investors are shared with entry on the same terms and exit at the same time. 

Risks, Challenges, and Practical Considerations 

Co-investment arrangements involve certain regulatory, operational, and structural considerations that fund managers should assess carefully during planning and implementation. See below.  

Increased Compliance Burden

Managing CIV schemes requires separate accounting, reporting, and monitoring. This creates additional responsibilities for managers. 

Reduced Exit Flexibility

Co-investors cannot exit separately or prematurely. They have to wait until the AIF’s exit. 

Drafting and Implementation Risks

Ambiguities in Shelf PPMs or internal documents can lead to regulatory or investment-related problems in the future.

Need for Strategic Decisions 

Co-investment is not suitable for all deals. Therefore, each investment needs careful consideration before utilizing Co-investment in AIFs. 

Impact of Co-Investment Framework for AIFs on Fund Managers, Sponsors, and Investors 

This Co-investment framework for AIFs has brought about some operational changes for fund managers, sponsors, and investors.  

• Fund managers now need to manage CIV schemes, maintain separate accounts, and ensure regular compliance. 

• For sponsors, it is a well-structured opportunity to build deeper relationships with large investors. It increases the attractiveness of the fund if used correctly. 

• From the investors’ perspective, they can now co-invest in a more controlled and transparent environment.  

This framework strengthens India’s alternative investment ecosystem and increases market confidence in the SEBI co-investment framework. 

When is this SEBI Circular Effective? 

This SEBI circular has come into effect immediately from the date of its issuance, i.e., 9 September, 2025. No separate transition period has been provided. AIF managers must now align their structures, documentation, and internal processes with the new regulations. Adherence to this framework is mandatory for all ongoing and future co-investment offerings. 

Conclusion 

SEBI’s new Co-investment Framework for AIFs represents a significant change in India’s alternative investment landscape. It expands opportunities for investors while simultaneously strengthening transparency and regulation. 

However, to fully leverage these benefits, proper structuring, clear documentation, and compliance are crucial. There can be challenges in drafting the Shelf PPM, setting up the CIV scheme, and maintaining ongoing compliance, which can create significant risks. 

Enterslice can assist you throughout this entire process, from AIF structuring, AIF audit and Shelf PPM preparation to CIV compliance and ongoing SEBI regulatory advisory. This framework can become a powerful tool for your investment strategy with the right guidance. So, contact Enterslice today for hassle-free compliance.  

All You Need To About SEBI Co-Investment Framework for AIFs