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Strengthening Trust in the Alternative Investment Funds (AIF) Ecosystem: SEBI's Proposal for Regulatory Enhancement


The Securities and Exchange Board of India (SEBI) aims to reinforce trust in the Alternative Investment Funds (AIF) ecosystem by addressing instances of circumvention of financial sector regulations. This consultation paper introduces measures to prevent misuse while ensuring minimal impact on legitimate AIF investments.

Executive Summary:

The AIF industry has witnessed significant growth, reaching INR 3,53,352 Crore in investments by September 30, 2023. However, concerns have arisen due to instances where AIFs were structured to circumvent financial sector regulations, eroding trust in the system. To maintain sustained capital formation, SEBI proposes measures to prevent such circumvention, introducing a requirement that AIFs, their managers, and key management personnel ensure adherence to financial sector regulations. The proposed verifiable standards will be formulated by the Industry Standards Forum for AIFs in consultation with SEBI.

Background and Issues Identified:

Robust Growth: The AIF industry has experienced consistent growth, connecting sophisticated investors with enterprises in need of risk capital.

Light-Touch Regulatory Regime: AIFs have a relatively lighter regulatory regime compared to other SEBI-registered investment channels, leading to instances of circumvention.

Identified Modus Operandi: Instances of circumvention include ever-greening of loans by regulated lenders, circumvention of FEMA norms, and circumvention of QIB regulations.

Narrow and Connected Investors: Many circumvention cases involve single or closely connected investors with majority contributions, raising concerns. SEBI has identified circumventions have already assumed significant levels (over INR 30,000 Crore out of investments of approximately INR 3.5 Lakh Crore) and SEBI has not yet completed its thematic inspections.

Global Developments:

Global regulatory concerns in the private equity industry, as highlighted by the IOSCO-CER report and new SEC rules, underscore the need for proactive measures.

Proposed Regulatory Approach:

SEBI proposes a proportionate, risk-based approach to address concerns while facilitating ease of doing business. The introduction of a general obligation and specific verifiable standards, formulated by the pilot Standards Forum for AIFs, is suggested. It is proposed to introduce a general obligation in the existing SEBI (Alternative Investment Funds) Regulations, 2012 (“SEBI (AIF) Regulations, 2012”) that would require AIFs, managers and their key management personnel to ensure that their operations and investments do not facilitate circumvention of regulations administered by any financial sector regulator.

It may be noted that, vide circular no. SEBI/HO/AFD-1/PoD/P/CIR/2023/053 dated April 10, 2023, SEBI has prescribed guidelines with respect to excusing or excluding an investor from an investment of AIF. As per the said circular, manager of an AIF may exclude an investor from participating in a particular investment opportunity, if the manager of the AIF is satisfied that the participation of such investor in the investment opportunity would lead to the scheme of the AIF being in violation of applicable law or regulation or would result in material adverse effect on the scheme of the AIF.

Consultation with Stakeholders:

AIPAC recommended the introduction of the proposed general obligation and specific implementation standards by the Standards Forum for AIFs. SEBI will consider any required glide-path for implementation.


Introduce a provision in the SEBI (AIF) Regulations, 2012, requiring AIFs, managers, and key management personnel to conduct specific due diligence to prevent circumvention of financial sector regulations. The framework and principles guiding these standards will be prescribed by SEBI.

In conclusion, SEBI's proposal aims to restore trust in the AIF ecosystem, balancing regulatory concerns with the need for legitimate investments. Stakeholders and the public are invited to provide comments and inputs on this crucial initiative.

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