Securities Exchange Board of India (SEBI) vide notification dated May 05, 2021, has removed certain restrictions and has provided regulatory flexibility for venture capital and angel funds investing in start-ups. The said regulations shall be known as Securities Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2021. As per SEBI's Alternative Investment Fund (AIF) Regulations, venture capital funds are those that invest in activities based on new products, new services, technology or intellectual property rights or new business models. These Category I AIF also receive tax benefits and incentives from the government since they are generally perceived to have positive spillover effects on economy.

The following amendments have been made through the above said regulations:

  • SEBI approves the insertion of definition of 'Start-up' and removal of the list of restricted activities or sectors from the definition of 'Venture Capital Undertaking'.
  • AIFs, including Fund of AIFs, permitted to simultaneously invest in units of other AIFs and directly in securities of investee companies.
  • AIF manager is required to ensure compliances with conditions related to investment, fund documents and applicable laws under all circumstances.
  • SEBI rationalizes regulatory requirements and prescribes a code of conduct for key management personnel of AIF and its manager, including the members of the investment committee.

The above amendments were proposed in the Securities Exchange Board of India (SEBI) in its board meeting dated March 25, 2021. The government had proposed the regulatory reforms to further safeguard the interests of the investors and strengthen fund raising activities.



The amended regulations have provided the definition of 'Start-up'. The Venture Capital Fund (VCF), under the AIF Regulations is set up as a sub-category of a Category I AIF and includes angel fund (Angel Fund). Even though the AIF Regulations allow Angel Funds to invest in the 'Venture Capital Undertakings' (VCUs) or 'startups', the AIF Regulations do not define the term 'Startup'. Thus, the definition of start-up was inserted – 'Startup' means a private limited company or limited liability partnership which fulfills the criteria for Start-up as specified by the Department of Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.

Further, the Venture Capital Undertaking (VCU) was also defined as domestic company which is not listed on recognized stock exchange at the time of making investments.


SEBI also eliminated the list of restricted activities from the definition of VCU provided under Regulation 2(1) (aa) of the AIF Regulations. Under the existing framework, Non-Banking Financial Companies (NBFCs) and companies engaged in gold financing companies, inter-alia, are not covered within the ambit of VCUs. Thus, this amendment should not only boost investments in the start-up space but also make Category I AIFs more productive for managers and investors.


The AIF Regulations permit a fund of Category I AIFs to invest in units of other Category I AIF of same category, and fund of Category II AIFs to invest in the units of other Category I as well as Category II AIFs, provided that in each case, no investment shall be made in the units of other Fund-of-Funds (FoFs). Further, SEBI has now permitted AIFs, including FoFs, to simultaneously invest in units of other AIFs as well as directly in securities of investee companies, subject to certain prescribed conditions.

SEBI has also allowed an AIF to invest in units of AIFs managed/sponsored by the same AIF manager/ sponsor subject to the prior approval of at least 75% of the investors by the value of their investment in such AIF.


SEBI in the amended regulations has prescribed the scope of the responsibilities of the AIF Key Management Personnel, trustee, trustee company, directors of the trustee company, designated partners, or directors of AIF through Code of Conduct. A separate Code of Conduct has been laid down under the Fourth Schedule of the AIF Regulations.

The Code of Conduct specifies the working of AIFs, for Managers of Alternative Investment Funds and key management personnel of Managers and Alternative Investment Funds and Code of Conduct for members of the investment committee, trustee, trustee company, directors of the trustee company, directors, or designated partners of the Alternative Investment Fund.


SEBI's amendments w.r.t. AIF Regulations reflect the efforts undertaken by the financial regulator to not only provide flexibility to the AIF managers in running their fund operations effectively but at the same time ensure that their fiduciary responsibilities towards the investors are not compromised with. Further, these efforts should play an important role in the growth of start-ups in India by expanding the available pool of capital for these entities as well as catalyze the formation of new Category I AIFs.

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