SEBI'S Discussion Paper On Co-Investment

The Securities and Exchange Board of India (“SEBI”) has proposed a set of far-reaching reforms through its recent consultation paper[1] on providing flexibility to AIFs to offer Co-Investment opportunities to investors within the Alternative Investment Funds (“AIFs”) structure under SEBI (Alternative Investment Funds) Regulations, 2012.

The key proposal is the introduction of a new structure called the Co-Investment Vehicle (“CIV”), designed to streamline and regulate co-investment opportunities within the AIF ecosystem.

Challenges with existing framework

In its consultation paper, SEBI notes that various representations made by stakeholders during FY 2020–21 highlighted significant challenges in the way co-investments were being structured and managed. Currently, co-investments are typically executed outside the AIF structure, often through Portfolio Management Services (PMS) arrangements. Stakeholders pointed out that this leads to regulatory and compliance ambiguity, especially around oversight and investor protection. Some of the challenges presented by the PMS route are as follows:

(a) Regulatory complexity: such as fund managers must obtain separate PMS registrations, leading to increased compliance burdens.

(b) Operational inefficiencies: such as managing co-investments outside the AIF structure which results in fragmented operations and potential conflicts of interests. Further, the requirement for each co-investor to hold the asset individually creates significant challenges for the investee company, resulting in a cluttered cap table populated by numerous direct shareholders.

(c) Investor Disparity: The PMS route can lead to preferential treatment for certain investors, undermining the principle of equitable treatment within AIFs, which provides for co-investors exiting the investment at the same time as the AIF. However, the PMS route may allow some co-investors to negotiate preferential terms.

Key Proposals in the Consultation Paper

SEBI's consultation paper aims to address these challenges by introducing the CIV framework, with the following key features:

A. Establishment of CIVs

SEBI has proposed the creation of CIVs as distinct schemes under an existing AIF structure. These vehicles would be specifically formed to facilitate co-investment opportunities in unlisted portfolio companies. By allowing co-investments within the AIF regulatory umbrella, SEBI aims to reduce reliance on external PMS arrangements and simplify the investment process. The CIV structure would enable fund managers to manage co-investments in a streamlined and transparent manner while remaining under SEBI’s supervision.

B. Eligibility and Participation

Participation in CIVs will be restricted to accredited investors only who are already existing investors (limited partners) in the parent AIF. This ensures alignment of interests and prevents external parties from selectively accessing deals. Furthermore, each CIV must match the category of the AIF under which it is registered i.e., either Category I or Category II to ensure consistency in investment strategy and risk profile.

C. Operational Guidelines

Each co-investment opportunity will require the launch of a separate CIV scheme, and prior intimation must be given to SEBI before such a scheme is activated. Further, CIVs will be required to maintain separate bank accounts, demat accounts, and PANs to ensure that every scheme is fully ring-fenced. This segregation is intended to enhance clarity for investors and regulators alike, and to protect against cross-liability among co-investment schemes.

A shelf Private Placement Memorandum (“PPM”) must be filed by the AIF at the time of registration of the AIF, setting out the framework for such schemes. Existing AIFs will also be allowed to file shelf PPM for the above purpose.

Additionally, SEBI proposes that investors in a CIV provide a Power of Attorney (“PoA”)to the AIF manager or designated representative, enabling the manager to act on their behalf in executing and managing investments unlike under PMS route, where the managers had to request for a PoA separately from each PMS client. This facilitates smoother decision-making and reduces procedural delays.

D. Exemptions and Flexibility

To enhance the appeal and practicality of the CIV framework, SEBI has proposed several exemptions from existing AIF regulations. CIVs would not be subject to minimum tenure requirements, sponsor investment commitments, or investment diversification norms. They would also be exempt from lock-in and minimum tenure requirements applicable to standard AIF schemes.

E. Advisory Services

Vide the consultation paper, SEBI has proposed removing the current restriction that prevents AIF managers from providing advisory services in listed securities where their AIFs have invested. If implemented, this change would allow AIF managers greater flexibility in offering advisory services across listed markets, irrespective of the AIF’s investment status in the security. This proposal reflects SEBI’s broader effort to modernize its regulatory approach and provide fund managers with a more permissive operating environment.

Looking Ahead: Implications, Challenges, and the Road Forward

SEBI’s proposed CIV framework represents a significant step toward formalizing and streamlining co-investments within the AIF ecosystem. By integrating co-investments under a regulated structure, it promises greater transparency, operational efficiency, and investor protection. The segregated schemes aim to maintain alignment of interests and simplify cap tables, while regulatory relaxations make the framework more flexible and suited to deal-specific needs.

However, some challenges remain, including the operational complexity of launching separate schemes for each co-investment, and difficulties around co-terminus exits. Additionally, restricting participation to accredited investors may limit broader access and capital mobilization. Going forward, market participants can expect SEBI to refine these proposals through stakeholder feedback and issue detailed guidance to address practical concerns. If successfully implemented, the CIV framework could elevate India’s co-investment landscape to global standards, fostering greater investor confidence and unlocking new avenues for capital deployment.

[1]https://www.sebi.gov.in/reports-and-statistics/reports/may-2025/consultation-paper-on-providing-flexibility-to-aifs-to-offer-co-investment-opportunities-to-investors-within-the-aif-structure-under-aif-regulations_93883.html