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The Securities and Exchange Board of India (“SEBI”), through its circular dated 16.06.2026 (“AIF Circular”)1 , has introduced a framework permitting Alternative Investment Funds (“AIFs”) and their schemes to retain liquidation proceeds beyond the end of their permissible fund life in specified circumstances.
The salient features of the AIF Circular are as follows:
(i) Retention of liquidation proceeds: An AIF or its scheme may retain liquidation proceeds beyond the end of its permissible fund life if any one of the following conditions are satisfied:
(a) where the AIF or scheme has received a litigation, tax, regulatory or similar notice indicating a potential liability.
(b) where at least 75% of the investors by value consent to retention on account of anticipated litigation or tax liabilities. In such cases the manager of AIF shall disclose the amount being retained and estimated time period for which it is proposed to be retained to the investors of the fund while seeking their consent for retention.
(c) where amounts are retained towards residual winding-up related operational expenses, subject to prescribed conditions and timelines. In such cases, the time period for such retention shall not exceed 3 years from the end of permissible fund life of the AIF. Further, the implementation standards for standardising the operational heads under which monies may be retained, shall be formulated by the Standard Setting Forum of AIFs in consultation with SEBI.
(ii) All monies retained shall be invested in accordance with Regulation 15(1)(f) of the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”).
(iii) Whenever the liabilities are satisfied and the retained monies are distributed to the investors of the fund, the scheme shall be wound up in terms of Regulation 29 of AIF Regulations.
(iv) Inoperative Fund Status: The AIF Circular also provides a mechanism for eligible AIFs to obtain an “Inoperative Fund” status. An AIF may apply for such status where one or more of its schemes have retained monies in accordance with the AIF Circular, or where it seeks to retain its registration solely in anticipation of a favourable outcome in pending litigation. Upon being categorised as an Inoperative Fund, the AIF cannot launch new schemes or charge management fees and monies so retained shall be invested in accordance with Regulation 15 (1) (f) of the AIF Regulations. Further, the inoperative fund shall apply to SEBI for surrender of its certificate of registration only after the liabilities are satisfied and the pending retained monies are distributed to the investors in all its schemes.
(v) Annual Reporting Requirements: Further, AIFs that retain monies beyond their permissible fund life and AIFs designated as Inoperative Funds are required to submit an annual status report to SEBI and investors detailing retained amounts, outstanding liabilities and the status of resolution thereof.
The AIF Circular is also applicable to venture capital funds registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996.
The AIF Circular has come into effect on the date of notification, i.e., 16.06.2026.
Footnote
1 Retention of liquidation proceeds: An AIF or its scheme may retain liquidation proceeds beyond the
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