The Securities and Exchange Board of India (SEBI) has introduced Regulation 17A under the Alternative Investment Funds (AIF) Regulations, 2012, marking a significant advancement for India's private capital markets. Notified on September 9, 20251, this regulation allows accredited investors in Category I and II AIFs to directly co-invest in unlisted securities alongside their funds, enhancing capital allocation and increasing deal efficiency. With AIF assets under management in India surpassing ₹4 lakh crore, this framework is poised to drive growth by aligning the strategies of investors and funds while strengthening governance. For businesses, fund managers, and high-net-worth individuals, Regulation 17A presents fresh opportunities to maximise returns in rapidly growing sectors such as start-ups, infrastructure, and private equity.
Market Catalysts and Regulatory Intent
India's AIF ecosystem has undergone rapid growth since the 2012 regulations, drawing in institutional and sophisticated investors seeking superior returns beyond conventional markets. Category I AIFs concentrate on socially impactful investments such as venture capital, infrastructure, and social enterprises, whereas Category II includes private equity and debt funds. Nonetheless, co-investments where investors allocate additional capital directly into deals alongside the fund have functioned in a regulatory grey zone, often channelled through distinct Portfolio Management Services (PMS).
SEBI's Second Amendment to the AIF Regulations, 2025, introduces Regulation 17A to formalise this practice, guaranteeing transparency and safeguarding investors. The rationale is based on industry feedback that emphasises the necessity for an integrated framework within AIF structures. By allowing co-investment schemes (CIV schemes), SEBI intends to simplify operational complexities, reduce conflicts of interest, and bolster accountability. This is further supported by a separate circular detailing operational procedures, which underscores equitable treatment and risk mitigation. For enterprises, this translates to improved access to varied funding sources, as AIFs can now integrate co-investments effortlessly, potentially reducing transaction costs and accelerating capital deployment.
The amendment also reclassifies angel funds as Category I, limiting their fundraising to accredited investors and enforcing minimum investment thresholds (₹10 lakh to ₹25 crore per start-up). This transition highlights SEBI's commitment to professionalising early-stage investments, excluding retail participation to curb risks.
Key Provisions of Regulation 17A
Regulation 17A defines co-investment as the financial contributions made by AIF managers, sponsors, or investors in the unlisted securities of investee companies where the AIF is also participating. It mandates that such co-investments must take place either through specialised CIV schemes under AIF regulations or through Co-Investment Portfolio Managers in accordance with PMS guidelines. A crucial requirement is the submission of a shelf placement memorandum to SEBI via a merchant banker, along with a payment of ₹1 lakh as specified in the Second Schedule. This document outlines the principal terms, governance structures, and regulatory considerations prior to presenting co-investment opportunities. Each CIV scheme must be launched separately for each co-investment, restricted to a single investee company, and it is prohibited from investing in AIF units or utilising borrowing/leverage.
Eligibility is limited to accredited investors i.e. those who fulfil the net worth or income standards outlined in SEBI's accreditation framework ensuring that only experienced participants are involved. Angel funds are expressly prohibited from initiating CIV schemes, consistent with their focus on high-risk, early-stage investments. The co-investment terms must not be more advantageous than those provided to the primary AIF scheme, with exits occurring simultaneously to avoid cherry-picking. Investors possess pro-rata rights in both investments and returns, with the exception of the carried interest allocated for managers or sponsors. Expenses are shared proportionately between the AIF scheme and the CIV scheme based on their respective investment ratios.
Operational Guidelines from SEBI Circular
The attached circular, which takes effect immediately, outlines detailed operational guidelines for the implementation of Regulation 17A. Managers are required to decide between PMS or CIV routes for co-investments in any investee company, ensuring that separate bank and demat accounts are maintained for each CIV scheme to safeguard assets.
A key restriction limits an investor's co-investment across CIV schemes to three times their contribution to the AIF's investment in the same investee. Exceptions are granted to multilateral institutions, state development corporations, and government entities, permitting unlimited exposure to foster public-private partnerships.
Investors who are excused, excluded, or defaulting on AIF commitments are not permitted to co-invest in that particular deal, encouraging commitment discipline. CIV schemes are prohibited from facilitating indirect exposures that investors could not hold directly, nor may they trigger additional disclosures or restrictions.
Compliance is required to the standards established by the AIF Standard Setting Forum, in collaboration with SEBI, to ensure legitimate use and prevent misuse. This framework strikes a balance between innovation and oversight, necessitating that managers quickly integrate these guidelines into their operations.
Implications for AIF Managers and Fund Sponsors
For AIF managers, Regulation 17A offers a double-edged opportunity: improved fundraising prospects through co-investments, accompanied by increased compliance requirements. Managers can secure larger commitments by providing direct access to high-conviction deals, which could boost assets under management and performance fees through carried interest.
Nonetheless, the requirement for distinct schemes for each co-investment necessitates strong administrative frameworks, including dedicated accounts and proportional expense distribution. Sponsors must guarantee alignment of interests, as their co-investments are bound by the same terms to reduce agency risks.
From a business standpoint, this could set apart competitive AIFs, particularly in private equity where co-investments frequently constitute over 20-30% of deal sizes on a global scale. Indian managers can now more effectively compete with their international counterparts, attracting foreign capital into local opportunities.
Benefits and Attached Risks for Investors
Accredited investors have the opportunity to significantly benefit, obtaining direct access to unlisted assets without the need for standalone structures, to optimise both tax efficiency and return profiles. The 3x leverage cap enables increased exposure to lucrative investments, while pro-rata rights guarantee fair treatment. Institutional investors, such as sovereign wealth funds, enjoy the advantage of having no limits, which supports large-scale investments in infrastructure or green initiatives. This could enhance liquidity in otherwise illiquid markets to promote portfolio diversification. However, risks include potential concentration if overly leveraged, along with operational challenges during exits. Investors must vet the governance of managers to prevent conflicts, as SEBI's framework emphasises transparency but depends on self-regulation.
Strategic Roadmap Ahead
This regulation is anticipated to invigorate India's private markets, which are projected to expand at an annual rate of 15-20%. Through the incorporation of co-investments, AIFs can expedite deal closures, providing advantages to start-ups and mid-market companies that require growth capital.
From a strategic perspective, companies should brace for heightened scrutiny in deal structuring, ensuring adherence to accreditation and limitations. Merchant bankers benefit from the filings of shelf memorandums, while legal and advisory firms experience demand for the implementation of frameworks.
Possible obstacles may arise from initial challenges in establishing standards, yet overall, it significantly enhances India's attractiveness as an investment locale, aligning with global best practices.
SEBI's Regulation 17A represents a significant advancement towards a more developed AIF ecosystem, merging flexibility with protective measures to promote sustainable growth. For managers and investors alike, it creates avenues for value generation, as long as they skilfully navigate the compliance landscape. As this framework beds in, it has the potential to greatly enhance India's standing in alternative investments, encouraging innovation and economic resilience. Companies that are in tune with these developments will be optimally positioned to take advantage of the changing opportunities.
Footnote
1. SEBI | Framework for AIFs to make co-investment within the AIF structure under SEBI (Alternative Investment Funds) Regulations, 2012. (n.d.).
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