Alternative Investment Funds (AIFs) are becoming a major force in India’s investment landscape. From startups and private equity to real estate and hedge strategies, AIFs offer flexibility, sophistication, and tailored investment approaches. However, setting up an AIF isn’t just about strategy—it’s also about regulatory compliance.
The AIF registration process with SEBI comes with specific legal, structural, and operational requirements. Beyond registration, fund managers must adhere to strict compliance obligations to remain in good standing.
This blog provides a clear and actionable compliance checklist for AIFs in India—covering everything you need before and after your AIF registration with SEBI.
What is an AIF?
An Alternative Investment Fund (AIF) is a privately pooled investment vehicle established in India that collects funds from investors for investing under a defined investment policy.
SEBI categorizes AIFs into three broad types:
Category I: Includes infrastructure, SME, social venture, and venture capital funds
Category II: Includes private equity funds, debt funds, and funds that do not fall into Category I or III
Category III: Includes hedge funds or funds using complex trading strategies or leverage
Each category comes with distinct compliance requirements, but all AIFs must be registered with SEBI before launching or soliciting investments.
Pre-Registration Compliance Checklist for AIFs
Before you begin the AIF registration SEBI process, you must ensure the fund is structured and documented properly. Here’s what you need to prepare:
1. Legal Structure
Choose an eligible entity structure: Trust, Company, Limited Liability Partnership (LLP), or Body Corporate
Ensure the structure allows pooling of funds and collective investment
Register the entity with the relevant registrar (e.g., ROC for companies or LLPs, Trust registrar for trusts)
2. Sponsor and Manager Identification
Appoint a Sponsor (providing at least 2.5% of corpus or ₹5 crore, whichever is lower)
Appoint a Fund Manager (can be same as Sponsor)
Ensure fund manager has appropriate experience in fund management or related fields
3. Draft Key Documents
Private Placement Memorandum (PPM) detailing investment strategy, risk factors, fees, etc.
Trust Deed or LLP Agreement (depending on structure)
Investment Management Agreement between AIF and Manager
Contribution Agreement for investors
4. Custodian and Auditor Appointment
Appoint a Custodian (mandatory for Category III and for Category I/II with corpus over ₹500 crore)
Appoint a Statutory Auditor and Internal Auditor
5. Net Worth Requirements
Fund manager must meet minimum net worth criteria:
₹10 crore for Category III
₹2 crore for Category I and II
6. SEBI AIF Registration Application
Prepare and submit Form A along with:
Entity documents (e.g., incorporation certificate, PAN, etc.)
PPM and other fund documents
Details of Sponsor, Manager, and key personnel
Declaration of “fit and proper” status of key stakeholders
Payment of SEBI application fee (₹1 lakh)
Also Read: Why is it Important to Recover Shares from IEPF?
Post-Registration Compliance Checklist for AIFs
Once SEBI grants approval, the compliance journey begins. Failing to meet post-registration obligations can lead to penalties or suspension. Here’s a breakdown of ongoing compliance for AIFs:
1. Fund Launch and Capital Commitment
Raise minimum corpus of ₹20 crore within 12 months of SEBI approval (₹10 crore for Angel Funds)
Ensure Sponsor contributes minimum required commitment
Execute contribution agreements with investors
2. Disclosures and Reporting to SEBI
File Quarterly Reports in the prescribed format
Annual report to SEBI including fund-wise and scheme-wise details
Disclose:
Investor complaints
Risk management practices
Changes to investment strategy
Use of leverage (Category III)
3. Investor Disclosures
Provide PPM to all investors
Regular reporting on:
Portfolio composition
Valuation of investments
Fees and charges
Conflicts of interest
Annual financial statements and auditor’s reports
4. Valuation and Audit
Follow valuation norms as per PPM and applicable accounting standards
Annual audit of accounts and scheme-wise performance
Submit audited financials to SEBI
5. Custodian Operations
Category III AIFs must appoint SEBI-registered Custodians
Maintain segregation between fund and custodian operations
Ensure safekeeping of securities
6. Leverage Limits (Category III)
Maintain leverage below 2x of fund’s NAV
Implement risk management framework
Disclose leverage usage in reports to SEBI and investors
7. Investment Restrictions
Each AIF category comes with specific investment restrictions:
Category I and II:
Cannot borrow funds except for temporary funding (max 30 days, not more than 4 times a year)
Cannot invest more than 25% of corpus in a single investee company
Category III:
Allowed to use leverage
Subject to stricter risk controls
8. KYC and AML Compliance
Complete KYC of all investors as per SEBI guidelines
Maintain updated KYC records
Report suspicious transactions to Financial Intelligence Unit (FIU-IND)
9. Compliance Officer Appointment
Appoint a dedicated Compliance Officer responsible for ensuring adherence to AIF regulations
Acts as liaison with SEBI and regulatory authorities
10. Change Reporting
Report any changes to the following within 7 days:
Manager or Sponsor details
Key personnel
Control or ownership
Terms of PPM
Investment strategy
All changes must also be disclosed to existing investors.
Additional Compliance for Angel Funds
Angel Funds, a sub-category of Category I AIFs, have some tailored requirements:
Minimum investment of ₹25 lakh per investor
Investment only in startups (less than 3 years old)
Max investment of ₹10 crore per startup
Lock-in of 3 years on investments
Penalties for Non-Compliance
SEBI has the power to impose strict penalties on AIFs for:
Misleading disclosures
Violating investment norms
Delay or failure in reporting
Operating without valid registration
Penalties may include monetary fines, suspension of activities, or cancellation of registration. Thus, ongoing compliance is as important as registration itself.
Final Thoughts
Navigating AIF registration with SEBI and meeting post-registration compliance can be challenging, but it’s essential for building a legally sound and investor-trusted fund.
Whether you’re launching a private equity vehicle, a debt fund, or a hedge strategy, adhering to SEBI guidelines from the outset ensures long-term sustainability and regulatory security.
A proactive approach to compliance not only keeps your fund in good standing but also builds trust with investors, which is critical for growth and performance.
For fund managers, working with experienced legal advisors, compliance professionals, and fund administrators can significantly ease the burden and help you focus on what matters most—delivering returns.
Also Read: Eligibility Criteria for NBFC Registration Online
FAQs
1. How long does the AIF registration process take with SEBI?
On average, SEBI takes around 6 to 8 weeks to process and approve an AIF registration, provided all documentation is complete and satisfactory.
2. Can a single entity act as both Sponsor and Manager for an AIF?
Yes, a single entity can act as both Sponsor and Manager, but both roles must be clearly defined and meet respective compliance and net worth requirements.
3. Are AIFs required to file their financials with SEBI?
Yes, AIFs must submit audited financial statements annually, along with performance details and a compliance certificate, as part of their regulatory obligations.