AIF Sponsor and Investment manager obligations under SEBI regulations

India’s alternative investment fund industry reached ₹15.74 lakh crore in cumulative commitments as of June 2026, and SEBI has responded by tightening what it expects from the two most accountable parties in every fund: the sponsor and the investment manager. These are not interchangeable roles. The sponsor sets up the fund, bears the founding risk, and holds a continuing financial stake. The investment manager makes the day-to-day decisions, owes fiduciary duties to investors, and carries the compliance and conduct obligations that run for the life of every scheme. Understanding where each obligation sits, and on whom, matters enormously before you structure your fund, appoint your team, or launch your first scheme. This article sets out each obligation in full, mapped to the relevant regulation and master circular provision, so you can build a compliant governance framework from the start.

How does SEBI define the sponsor and investment manager in an AIF?

The sponsor is the entity or person who sets up the AIF. The investment manager is the entity or person who manages the fund’s investments. These definitions come from Regulation 2 of the SEBI (Alternative Investment Funds) Regulations, 2012 (the AIF Regulations), and they carry materially different obligation profiles, though the same entity may perform both roles simultaneously.

Under Regulation 2(1)(w), the sponsor means any person or persons who set up the alternative investment fund and includes the promoter in case of a company and the designated partner in case of a limited liability partnership. Under Regulation 2(1)(q), the manager means any person or entity who is appointed by the AIF to manage its investments. The manager may be a body corporate, LLP, or any other person.

The AIF itself is the registered entity (typically a trust, company, LLP, or body corporate) and it holds the SEBI certificate of registration. The sponsor is the settlor of that trust (in trust-form AIFs) or the founding promoter. The investment manager operates under a management agreement with the AIF and draws a management fee against that arrangement.

SEBI permits the sponsor and investment manager to be the same entity. When they are, both sets of documents, eligibility declarations, and net worth evidence are required for that single entity. The trustee, however, must be independent. It cannot be an associate of the sponsor or manager. This independence requirement sits in Regulation 4(b) of the AIF Regulations and is non-negotiable regardless of fund structure.

What is the practical distinction between sponsor and manager duties?

The sponsor’s core obligations are founding obligations: establishing the fund, meeting the continuing interest requirement, and bearing accountability for fund setup. The manager’s obligations are operational and fiduciary: managing investments, exercising skill and care, meeting reporting timelines, maintaining investor confidentiality, and complying with the code of conduct under Schedule III of the AIF Regulations. Where both roles sit in one entity, all obligations run on that entity simultaneously.

What eligibility criteria must the sponsor and investment manager satisfy?

Both the sponsor and the investment manager must satisfy the fit-and-proper person criteria as a condition of registration and on an ongoing basis for the life of the fund. This is prescribed under Regulation 7 of the AIF Regulations read with Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

SEBI’s January 2025 FAQ update extended this requirement: disciplinary history declarations must now cover not just the sponsor or manager entity itself but also any person who directly or indirectly holds 10% or more of the shares or voting rights of the sponsor or manager. In practice, this means that a corporate shareholder of the investment manager holding above 10% (even if that shareholder is itself a subsidiary of a listed company) must be included in the disciplinary history chain. Failing to map this chain correctly is the single most common cause of application delays in new AIF registrations.

For the investment manager specifically, Regulation 4(f) requires that the manager have the necessary infrastructure to effectively manage the fund. SEBI interprets this to include: adequate office premises, systems for risk management and reporting, and qualified manpower. At least one key personnel must hold a professional qualification in finance, accountancy, business management, commerce, economics, capital markets, or banking under Regulation 4(g) of the AIF Regulations.

Net worth requirements for the investment manager are set by SEBI’s Master Circular (SEBI/HO/AFD-1/AFD-1-PoD/P/CIR/2024/39 dated 07/05/2024):

AIF Category	Minimum net worth of investment manager
Category I AIF	₹5 crore
Category II AIF	₹5 crore
Category III AIF	₹10 crore
Angel Fund (sub-category)	₹5 crore

The net worth must be maintained on an ongoing basis. A drop below the threshold requires immediate intimation to SEBI and a remediation plan.

For the sponsor, there is no prescribed minimum net worth in the AIF Regulations. However, the sponsor must demonstrate the continuing interest requirement (discussed below) and must not be in default of any obligation to any securities market regulator in India or abroad.

What does “fit and proper” mean in practice for AIF purposes?

Fit and proper is assessed against Schedule II of the SEBI Intermediaries Regulations 2008, which looks at integrity, track record, financial soundness, and competence. SEBI evaluates whether the applicant, sponsor, or manager has been convicted of any offence involving moral turpitude; whether any regulatory action has been taken against them in India or abroad; whether they have been declared insolvent; and whether they have outstanding dues to any investor. The assessment is prospective. Any adverse development after registration can trigger a review of fit-and-proper status.

What is the continuing interest (skin in the game) obligation?

The continuing interest obligation is the clearest expression of the sponsor-manager accountability framework. Under Regulation 10(d) of the AIF Regulations, either the manager or the sponsor, or both together, must maintain a continuing interest in the AIF of not less than 2.5% of the corpus or ₹5 crore, whichever is lower, in the form of investment in the fund. For Category III AIFs, this threshold is higher: 5% of the corpus or ₹10 crore, whichever is lower.

Three critical mechanics govern this requirement:

First, the continuing interest cannot be funded through the waiver of management fees. SEBI made this explicit because a waiver does not represent real financial exposure. Only a cash investment into the fund corpus counts. Second, the commitment made by the sponsor or manager at the time of declaring the first close cannot be reduced, withdrawn, or transferred after the first close. SEBI’s circular dated 17/11/2022 (Circular I on first close timelines) tightened this to prevent sponsor or manager contributions from being used merely to hit the minimum corpus threshold and then withdrawn. Third, the AIF’s corpus at the time of declaring its first close must not be less than the minimum corpus prescribed for that category.

Continuing interest thresholds by AIF category:

Category	Continuing interest requirement	Form
Category I AIF	2.5% of corpus or ₹5 crore (lower of two)	Cash investment into fund
Category II AIF	2.5% of corpus or ₹5 crore (lower of two)	Cash investment into fund
Category III AIF	5% of corpus or ₹10 crore (lower of two)	Cash investment into fund
Angel Fund	2.5% of corpus or ₹50 lakh (lower of two)	Cash investment into fund

The flexibility to place the continuing interest with either the sponsor or the manager, or split between them, is deliberately preserved in the AIF Regulations. In many funds, particularly those where the investment manager is an asset-light entity, the sponsor holds the continuing interest. SEBI is indifferent to this arrangement as long as the aggregate meets the threshold and the investment is in cash.

A point that practitioners often miss: the continuing interest must be maintained at the scheme level, not at the fund level. If an investment manager runs multiple schemes under one registered AIF, the obligation attaches separately to each scheme.

What fiduciary duties does the investment manager owe under Regulation 21?

The investment manager’s fiduciary obligations are the most substantive in the AIF regulatory framework. Regulation 21(1) of the AIF Regulations sets out the overarching statement: the manager and sponsor shall be responsible for all activities of the AIF and shall ensure compliance with all applicable regulations, as well as with the terms of the fund documents. This is joint responsibility. Both parties carry it.

Regulation 21(3) then places a specific and standalone fiduciary obligation on the manager alone: the manager must act in a fiduciary capacity towards its investors. This is the same duty that applies to trustees in a trust relationship: a duty of loyalty, care, and undivided attention to investor interests. In the context of an AIF, it means the manager cannot subordinate investor returns to its own commercial interests, cannot favour one investor over another without disclosed and agreed grounds, and must make investment decisions on the basis of merit rather than relationships.

The specific fiduciary obligations that flow from Regulation 21 include:

• Acting in the best interest of the AIF and its investors in investment decisions
• Maintaining an arm’s length relationship with investee companies and avoiding conflicts of interest
• Disclosing any personal interest in any transaction entered into by the AIF
• Ensuring that the AIF’s assets are managed in accordance with the investment objectives, strategy, and terms disclosed in the Private Placement Memorandum (PPM)
• Not engaging in transactions that benefit associates of the manager at the expense of investors

The code of conduct in Schedule III of the AIF Regulations reinforces these obligations. The code applies to the AIF, its manager, trustees, directors, and employees. It prohibits manipulation of the securities market, front-running, use of inside information, and misrepresentation to investors or SEBI. Violations of the code of conduct are treated as violations of the AIF Regulations and attract penalties under Section 15HB of the Securities and Exchange Board of India Act, 1992.

What are the investment restrictions the investment manager must enforce?

Investment restrictions are a direct expression of the manager’s obligations and sit in Regulation 15 of the AIF Regulations. Category I and II AIFs cannot invest more than 25% of their investable funds in a single investee company. Category III AIFs cannot invest more than 10% of investable funds in a single investee company. The manager is responsible for enforcing these concentration limits at the time of each investment decision and reporting any breach immediately to SEBI and to investors.

Category I and II AIFs cannot borrow funds or leverage, except for temporary purposes for up to 30 days (not more than four times in a year, and not more than 10% of investable funds). Category III AIFs may use leverage as per the terms of their PPM, subject to SEBI-prescribed limits. The investment manager must maintain a clear record of all leverage positions and report these in half-yearly portfolio reports submitted through the SEBI Intermediary (SI) Portal.

What are the NISM certification requirements for the investment team?

The investment manager must ensure that at least one member of its key investment team holds a valid NISM certification. The requirement was first introduced by a SEBI notification dated 10/05/2024 (SEBI/LAD-NRO/GN/2024/176), which mandated the NISM Series-XIX-C: Alternative Investment Fund Managers Certification Examination for all applications for registration or scheme launch filed after that date.

SEBI issued a revised gazette notification on 25/06/2025, which superseded the May 2024 notification and introduced category-specific certification options:

AIF Category	Acceptable NISM certification
Category I AIF	NISM Series-XIX-C or NISM Series-XIX-D
Category II AIF	NISM Series-XIX-C or NISM Series-XIX-D
Category III AIF	NISM Series-XIX-C or NISM Series-XIX-E

NISM Series-XIX-D (Category I and II AIF Managers) and Series-XIX-E (Category III AIF Managers) were both launched on 01/05/2025. These are purpose-built examinations for each category rather than the generalist Series-XIX-C that applied under the earlier framework. All three certifications are valid for three years and must be renewed before expiry.

The certification must be documented in the Compliance Test Report (CTR) that the manager prepares annually under Para 15.2 of the 2024 Master Circular. The CTR must be submitted to the trustee and sponsor (for trust-form AIFs) or to the sponsor (for other forms) within 30 days from the end of the financial year, that is, by 30 April each year.

For existing schemes as on 25/06/2025, the compliance timeline tracks the updated notification. The obligation applies to all new AIF registrations and scheme launches filed after 25/06/2025. Managers with schemes pending SEBI approval as on that date must satisfy the certification requirement before commencing fund management activities.

What disclosure and transparency obligations apply?

Disclosure is a standalone obligation under Regulation 23 of the AIF Regulations. The manager must ensure transparency and make disclosures to investors as specified in the PPM. These are not discretionary. Failure to disclose any of the items specified in Regulation 23(1) is a regulatory breach, regardless of whether investors suffered financial harm.

Regulation 23(1) requires disclosure of:

• Financial, risk management, operational, portfolio, and transactional information regarding fund investments
• All fees paid or payable to the manager or sponsor, and any fees charged to the AIF or to any investee company by an associate of the manager or sponsor
• Any inquiries or legal actions by regulatory bodies in any jurisdiction against the AIF, manager, or sponsor
• Any material liability arising during the fund’s tenure
• Any breach of the PPM or investor agreement
• Any change in control of the sponsor, manager, or investee company
• Any change in the constitution or legal status of the manager, sponsor, or AIF
• Any change in the fee structure or charging basis

SEBI has also specified, through Chapter XIII of the 2024 Master Circular, that the AIF must appoint a Compliance Officer. The Compliance Officer must ensure adherence to the SEBI Act, the AIF Regulations, and all applicable circulars. The Compliance Officer must be an employee or director of the manager but cannot be the CEO or equivalent. The roles are required to be separate. Any non-compliance observed by the Compliance Officer must be reported within 7 days from the date of observation (Para 13.1.1 of the 2024 Master Circular). Key personnel of the manager, including the Compliance Officer, must be disclosed in the PPM, and any changes must be communicated to SEBI promptly.

The 2024 Master Circular defines Key Management Personnel (KMP) of the manager to include: members of the key investment team as disclosed in the PPM; employees involved in decision-making including the Managing Director, CEO, CIO, and Whole Time Directors or equivalent; and any other person the AIF or manager declares as KMP (Para 13.1.2 of the 2024 Master Circular). The manager’s obligations under the AIF Regulations are discharged through the KMP, making the composition and conduct of the KMP a direct regulatory concern, not merely an internal governance matter.

The investment manager is also required to constitute an Investment Committee to approve investment decisions and ensure compliance with fund policies. The Investment Committee may include internal members (employees or partners of the manager) and external members with investor approval. One restriction that fund managers regularly miss: non-resident Indian (NRI) citizens are currently not permitted to act as external members of the Investment Committee, pending RBI clarification on their status under exchange control laws (Regulation 20(7) of the AIF Regulations read with Chapter 14 of the 2024 Master Circular). For Large Value Fund (LVF) schemes where each investor commits at least ₹70 crore, investors may waive the Investment Committee requirement by providing an undertaking in the format specified under Annexure 11 of the 2024 Master Circular, confirming they have an independent ability to conduct investment due diligence themselves.

What are the periodic reporting obligations of the investment manager?

SEBI overhauled the AIF reporting framework through circular no. HO/19/28/(1)2026-AFD-SEC3/I/6176/2026 dated 04/03/2026, superseding Clause 15.1 of the 2024 Master Circular. The revised two-tier structure replaced the earlier detailed quarterly regime.

The current reporting obligations are:

• Annual Activity Report (AAR): comprehensive submission covering investment strategy, sector allocation, investor composition, fund performance, leverage, valuation practices, and compliance status. Filed online through the SI Portal within 30 calendar days from the end of March each year. The first AAR was due by 31/05/2026 for FY ending March 2026.
• Quarterly Activity Report (QAR): a lighter filing submitted within 15 calendar days of the end of each June, September, and December quarter. No QAR is required for the March quarter since the AAR covers that period fully.
• Annual report with audited financial statements: within 180 days from the end of the financial year.
• NAV reporting to depositories: the investment manager, through the AIF’s Registrar and Transfer Agent (RTA), must upload the latest available NAV for each ISIN of AIF units to the depository system within 30 days from the date of valuation. This obligation was introduced by SEBI circular HO/19/34/11(8)2025-AFD-POD1/I/4335/2026 dated 06/02/2026 and must be reflected in the CTR.
• Quarterly investor complaint data: within 7 days from quarter-end.
• AIF Data Repository (ADR) filing (Category III AIFs): quarterly, within 7 days from quarter-end.
• Annual PPM compliance audit: completed within six months of financial year-end.
• CTR: submitted to trustee and sponsor by 30 April each year.

The NAV reporting obligation builds directly on the dematerialisation mandate. Since AIF units are now in demat form, SEBI requires their valuation to be reflected within the same depository infrastructure rather than remaining only in fund-level records and investor communications. The AIF manager is personally responsible for ensuring timely and accurate NAV uploads.

What are the manager’s valuation obligations?

The investment manager is responsible for ensuring fair and independent valuation of the AIF’s investment portfolio. SEBI mandated a standardised approach to valuation through Chapter 22 of the 2024 Master Circular, replacing the earlier patchwork of fund-specific methodologies. The core requirements are:

• The valuation methodology for each asset class must be disclosed in the PPM before the fund accepts investor commitments
• Valuations must be conducted by an independent SEBI-empanelled valuer. The manager cannot self-value.
• The manager is responsible for ensuring the valuer meets SEBI’s eligibility criteria and receives all information necessary to value each investment correctly
• Any deviation from the stated valuation methodology requires disclosure to investors and must be reported to SEBI
• Valuation data must be reported to SEBI-empanelled benchmarking agencies in the format and timelines prescribed

The manager’s obligation extends to monitoring the independence of the appointed valuer. Where the valuer has a relationship with the manager, the investee company, or any investor that could compromise independence, the manager must disclose this and, if the conflict is material, appoint a replacement valuer. This is an area SEBI has flagged specifically in its governance consultation papers as being under-enforced in practice.

What due diligence obligations were introduced in April 2024?

The April 25, 2024 amendment to the AIF Regulations (notified by SEBI through the SEBI (Alternative Investment Funds) (Amendment) Regulations, 2024) introduced one of the most consequential additions to the sponsor-manager obligation framework: a general obligation on AIFs, their investment managers, and key management personnel of the manager to exercise specific due diligence with respect to their investors and their investments, to prevent facilitation of circumvention of the laws.

This amendment was driven by SEBI’s January 2024 consultation paper, which found that over ₹30,000 crore in AIF investments were potentially being used to circumvent foreign direct investment restrictions. The mechanism exploited the fact that downstream investment classification under Indian exchange control law was based on the domicile of ownership and control of the AIF’s manager or sponsor, not the ultimate beneficial owner of the fund. Foreign investors were therefore setting up AIFs with domestic managers or sponsors to invest in sectors prohibited for FDI, or to invest beyond permitted FDI sectoral limits.

The resulting obligation in Regulation 21A of the amended AIF Regulations requires the manager and key management personnel to:

• Conduct due diligence on each investor to identify beneficial ownership and source of funds
• Assess whether any investment, directly or indirectly, facilitates circumvention of applicable laws including FEMA 1999, PMLA 2002, and SEBI regulations
• Maintain records of this due diligence and make them available to SEBI on demand
• Report any identified circumvention attempt to SEBI without waiting for a specific query

The standard for this due diligence is not prescribed with precision in the amendment itself. SEBI indicated it would specify detailed implementation standards through circulars and through the Standard Setting Forum for AIFs (SFA). Pending such specification, managers are expected to apply a risk-based approach, with enhanced scrutiny for investors from high-risk jurisdictions, investors with opaque ownership structures, and investments in sectors where FDI restrictions apply.

What are the custodian and dematerialisation obligations?

The sponsor or manager of an AIF must appoint a SEBI-registered custodian for the safekeeping of the AIF’s securities. This obligation was significantly expanded by SEBI through the SEBI (Alternative Investment Funds) (Amendment) Regulations, 2024 notified on 05/01/2024, read with the SEBI circular dated 12/01/2024 (SEBI/HO/AFD/PoD/CIR/2024/5). Prior to this amendment, mandatory custodian appointment applied only to Category III AIFs and to Category I and II AIFs with a corpus exceeding ₹500 crore. The January 2024 amendment extended the requirement to all AIFs regardless of corpus size.

The custodian appointment deadlines under the 2024 circular:

AIF type	Custodian appointment deadline
Category III AIFs (all corpus sizes)	Already applicable before 2024
Category I and II AIFs — corpus above ₹500 crore	Already applicable before 2024
Category I and II AIFs — corpus up to ₹500 crore	By 31/01/2025 for existing schemes
All new AIF schemes launched after 05/01/2024	Before making the first investment

An associate of the sponsor or manager may act as the custodian, but only subject to conditions on independence and conflict management specified in the AIF Regulations and SFA implementation standards. The custodian provides periodic reports to SEBI on the AIF’s investments held under custody, in the format specified by the SFA.

The January 2024 amendment also introduced a mandatory dematerialisation requirement. All investments made by an AIF on or after 01/10/2024 must be held in dematerialised form. For investments made before that date, the requirement applies where: (a) the investee company has been mandated under applicable law to facilitate dematerialisation of its securities; or (b) the AIF, alone or with other SEBI-regulated entities, exercises control over the investee company. Investments covered by either condition that were made before 01/10/2024 were required to be held in demat form by 31/01/2025.

The dematerialisation obligation is operationally significant for Category II funds investing in unlisted private companies, where many investee companies have not yet set up demat infrastructure. The investment manager is responsible for ensuring the investee company obtains ISIN and establishes demat issuance before the AIF’s investment is made or the applicable deadline passes, whichever is earlier.

A change in the sponsor or manager of an AIF, or a change in control of either entity, requires prior SEBI approval, not just intimation. This was tightened by SEBI’s November 2022 circular framework, which introduced a prior approval requirement for both change of sponsor or manager and change in control of those entities. Prior to this, only change in control required prior approval.

The process under Chapter 19 of the 2024 Master Circular:

1. The AIF must approach SEBI with a detailed application disclosing the proposed change, the identity of the incoming sponsor or manager, the basis on which the incoming entity satisfies fit-and-proper and eligibility criteria, and a confirmation that investor interests will not be adversely affected.
2. SEBI evaluates the application and, if satisfied, grants in-principle approval. This approval is valid for three months.
3. If the change involves a scheme of arrangement under the Companies Act, 2013 (such as a merger or demerger of the manager entity), SEBI in-principle approval must be obtained before filing with the National Company Law Tribunal (NCLT).
4. After the NCLT or other approvals are in place, the AIF must inform SEBI of the final change and update all fund documents accordingly.

From a practical standpoint, change in control of the investment manager is the highest-risk event in an AIF’s lifecycle from a regulatory perspective. Investors often have step-in rights triggered by such changes under the LPA, creating a parallel commercial negotiation that must run alongside the SEBI approval process. Managers should build a 4-6 month runway for this process rather than treating it as a 30-day formality.

What are the co-investment and conflict of interest obligations?

The investment manager faces specific restrictions on co-investing alongside the AIF. Under the AIF Regulations and the code of conduct in Schedule III, a manager or sponsor that co-invests in the same investee company as the AIF cannot be offered more favourable terms than the AIF itself receives. This includes pricing, governance rights, information rights, and exit preferences.

SEBI approved a Co-Investment Vehicle (CIV) Scheme framework at its board meeting dated 18/06/2025. Category I and II AIFs may now offer co-investment opportunities to investors through a separate CIV Scheme launched within the AIF structure, without the investment manager requiring a separate Portfolio Management Services (PMS) registration. A distinct CIV Scheme must be launched for each co-investment in an investee company. The co-investment restrictions on pricing and terms continue to apply to CIV Schemes: the AIF and the co-investing participants must receive the same terms, and the manager cannot offer the CIV Scheme investors preferential pricing or governance rights relative to the main fund’s investment.

If the manager or sponsor co-invests, they must disclose this to all investors in the AIF before the investment is made. The disclosure must cover the identity of the co-investor, the terms on which they are investing, and any differential treatment that exists between the AIF’s investment and the co-investment. Undisclosed co-investment on better terms is treated by SEBI as a conflict of interest violation under the code of conduct.

The investment manager must also maintain an arm’s length relationship with companies controlled by or associated with the manager or its personnel. Investments by the AIF in such companies require enhanced disclosure and, in some cases, investor consent as specified in the PPM. The SFA has published implementation standards on conflict of interest management that all managers are expected to follow alongside the Regulations.

Common obligations that sponsors and managers get wrong

1. Treating the sponsor’s continuing interest as a registration formality. The continuing interest obligation is ongoing, not a one-time compliance box to tick at registration. It must be maintained throughout the life of the scheme, at the scheme level, in cash. Managers who allow the sponsor’s co-investment to be redeemed early, or who treat a management fee waiver as equivalent to a cash investment, are in breach of Regulation 10(d). SEBI’s inspection teams check this at every routine inspection.

2. Missing the 10% controller disclosure chain in fit-and-proper declarations. The January 2025 FAQ update extended disciplinary history disclosures to entities holding 10% or more of the manager or sponsor. Many applications still submit declarations only at the immediate entity level. Undisclosed adverse history at the 10%-plus shareholder level is not merely a paperwork gap. It is a misrepresentation in a regulatory filing, with penalties under Section 15HB of the SEBI Act, 1992.

3. Not segmenting NISM certification by AIF category. The June 2025 notification introduced Series-XIX-D for Category I and II, and Series-XIX-E for Category III. A manager running both Category II and Category III schemes must verify that the certifying key personnel holds the appropriate certification for each scheme type. A single Series-XIX-C holder is sufficient for cross-category coverage only until their next renewal cycle, after which category-specific certifications apply.

4. Conflating fund-level and scheme-level continuing interest. An investment manager running three schemes under one registered AIF cannot aggregate the sponsor’s or manager’s investment across all three schemes to satisfy the continuing interest requirement. The 2.5% or 5% threshold applies scheme by scheme. This is a recurring gap in multi-scheme fund structures.

5. Delaying the April 2024 due diligence documentation. The due diligence obligation under Regulation 21A is not prospective. It applies to existing investor relationships as well as new ones. Managers who have not yet conducted and documented beneficial ownership analysis for their existing LP base are carrying live regulatory exposure. SEBI has indicated that this area will be covered in thematic inspections.

6. Missing the custodian appointment and demat obligations. Many Category I and II managers running smaller corpus schemes treated the pre-2024 custodian threshold of ₹500 crore as a permanent exemption. It is not. The January 2024 amendment extended mandatory custodian appointment to all AIFs. For schemes launched after 05/01/2024, the custodian must be appointed before the first investment, not by a calendar deadline. Separately, all investments on or after 01/10/2024 must be held in demat form. Investment managers making equity investments in unlisted companies need to confirm ISIN availability at the investee level before executing the transaction, or the demat holding obligation cannot be satisfied.

Case study

Situation: Series A venture fund manager based in Mumbai, targeting ₹300 crore corpus, Category II AIF, single scheme, mixed domestic and offshore LP base.

Challenge: The proposed sponsor was a holding company with a 15% shareholder that had received a SEBI show-cause notice three years earlier in an unrelated matter. The key investment team had one NISM Series-XIX-C certified member, but SEBI’s June 2025 notification had just superseded the old framework, and no one had checked whether the new Series-XIX-D applied to pending applications. Additionally, two foreign LPs had committed via Mauritius-based entities with opaque ultimate beneficial ownership.

What Treelife did: Restructured the sponsor entity to bring the 15% shareholder below the 10% threshold before filing. Confirmed with NISM that existing Series-XIX-C certification remained valid for the pending application under the grandfathering provisions of the June 2025 notification. Conducted a full beneficial ownership analysis for the two Mauritius LPs and obtained KYC documentation up to the natural person level, documented under Regulation 21A.

Outcome: Clean SEBI registration in 47 days from filing, no SEBI queries on the sponsor disciplinary chain, and a compliant due diligence file that passed the fund’s first LP audit without exception.

FAQ’s on AIF sponsor and investment manager obligations

Q: Can the sponsor and investment manager be the same entity in an AIF?
A: Yes. SEBI permits one entity to act as both sponsor and investment manager. When this is the case, the entity must satisfy both sets of eligibility criteria , including separate documentation for the sponsor role and the manager role, and the continuing interest obligation and fiduciary duties both fall on that single entity.

Q: Is there a minimum net worth requirement for the AIF sponsor?
A: The AIF Regulations do not prescribe a minimum net worth for the sponsor. The sponsor must satisfy the fit-and-proper criteria and demonstrate the ability to fund the continuing interest requirement. Net worth thresholds are prescribed only for the investment manager: ₹5 crore for Category I and II managers, and ₹10 crore for Category III managers.

Q: What is the penalty for breach of the code of conduct by the investment manager?
A: Violations of the code of conduct in Schedule III of the AIF Regulations are treated as violations of the AIF Regulations and attract penalties under Section 15HB of the SEBI Act, 1992. Section 15HB provides for penalties of up to ₹1 crore or three times the profit made from the violation, whichever is higher.

Q: Does the NISM certification obligation apply to the sponsor’s personnel?
A: No. The certification obligation under the June 2025 SEBI notification applies to at least one key personnel in the key investment team of the manager, not the sponsor. If the sponsor and manager are the same entity, the obligation applies to the combined entity’s investment team.

Q: How long does SEBI take to approve a change in control of the investment manager?
A: SEBI does not publish a fixed timeline, but in practice, in-principle approval takes 60-90 days from the date of a complete application. The in-principle approval is valid for three months. Managers should build a total runway of 4-6 months for the full process including post-approval documentation and fund document amendments.

Q: Can the manager waive its management fee to satisfy the continuing interest requirement?
A: No. The AIF Regulations explicitly prohibit the continuing interest from being held through the waiver of management fees. Only a direct cash investment into the fund corpus qualifies. This applies to both the sponsor and the manager.

Q: What must the investment manager disclose if it or an associate charges fees to an investee company?
A: Regulation 23(1)(b) requires disclosure of any fees charged to the AIF or to any investee company by an associate of the manager or sponsor. This includes monitoring fees, transaction fees, break-up fees, or any other charges extracted at the investee level. The disclosure must be made to all investors and must be reflected in the PPM.

Q: Does the April 2024 due diligence obligation apply to existing AIFs or only to new registrations?
A: The obligation under Regulation 21A applies to all AIFs, both existing and new. SEBI has not prescribed a specific catch-up deadline for existing funds to complete beneficial ownership documentation, but the obligation is live from the date of the amendment (25/04/2024). AIFs that have not yet conducted this analysis should treat it as an urgent compliance action.

Q: What triggers mandatory SEBI approval versus mere intimation for a change in sponsor or manager?
A: Following the November 2022 circular framework, both a change in the sponsor or manager and a change in control of the sponsor or manager require prior SEBI approval. Intimation alone is no longer sufficient for either type of change. The only scenario where intimation (rather than approval) applies is a minor internal restructuring that does not alter the controlling persons or the effective management of the fund.

Q: Can an NRI or foreign national act as the investment manager of a domestic SEBI AIF?
A: Yes, subject to conditions. The investment manager must be incorporated in India, but it may be foreign-owned or controlled. The classification of downstream investments by the AIF as foreign or domestic under FEMA 1999 will, however, be determined by the ownership and control of the investment manager. A foreign-controlled manager will result in downstream investments being classified as foreign, which triggers FDI sectoral restrictions at the investee level. This is the mechanism that SEBI’s April 2024 amendment was designed to address.

Q: If the investment manager is replaced mid-fund, does the new manager inherit all disclosure and reporting obligations?
A: Yes. Regulatory obligations attach to the role, not the entity currently holding it. The incoming manager assumes all outstanding reporting obligations from the date of SEBI approval of the change. In practice, Treelife recommends that the transition agreement between the outgoing and incoming manager include a comprehensive regulatory handover protocol covering all pending SEBI filings, outstanding investor queries, and the CTR for the partial financial year.

Q: What happens if the manager’s net worth falls below the prescribed minimum after registration?
A: The manager must immediately intimate SEBI of the shortfall and submit a remediation plan. Continued operation below the minimum net worth threshold is a violation of the AIF Regulations and can result in SEBI directing the fund to appoint a replacement manager. Managers facing a temporary shortfall due to a mark-to-market loss on investments should take legal advice before the financial year-end reporting cycle to assess their position.

Q: Are the co-investment restrictions the same across all AIF categories?
A: The core rule is that the manager or sponsor cannot receive more favourable terms than the AIF in a co-investment, and this applies to all categories. Category-specific variations exist in the scope of permitted co-investment vehicles and the disclosure requirements. Large Value Funds (LVF), which are schemes with minimum investment above ₹70 crore per investor, have lighter disclosure norms under the LVF framework, but the arm’s length and no-better-terms restriction applies regardless of category.

Q: Is the Compliance Officer a separate appointment from the investment manager’s key investment team?
A: Yes. The Compliance Officer is a distinct role under Chapter XIII of the 2024 Master Circular. The Compliance Officer need not be part of the key investment team, but they must have sufficient seniority and access to fund information to discharge their duties. The Compliance Officer’s name and contact details must be disclosed in the PPM, and any change in the Compliance Officer must be communicated to SEBI.

Q: What are the obligations of the sponsor and manager if the AIF winds up before its stated tenure?
A: An early wind-up requires investor consent (typically 75% by value of commitments) and a formal notice to SEBI. The manager remains responsible for executing an orderly wind-up, realising investments at fair value, and distributing proceeds. Under the SEBI (Alternative Investment Funds) (Amendment) Regulations, 2026 (notified 18/04/2026) and the subsequent SEBI circular dated 16/06/2026, AIFs may now retain liquidation proceeds beyond the permissible fund life in three situations: where there is a demonstrable litigation notice, tax demand, or regulatory claim; where there are anticipated liabilities requiring 75% investor consent by value; and for residual operational expenses for a maximum of three years. Funds retaining proceeds may apply to SEBI for Inoperative Fund status under the new Regulation 10A, which permits them to surrender their registration while retaining residual obligations. Inoperative Funds are prohibited from making new investments, launching new schemes, or charging management fees. They are also exempted from the annual compliance test report, annual and quarterly activity reports, PPM audit, NISM certification requirements, and custodian obligations during the inoperative period.

Regulatory references

• SEBI (Alternative Investment Funds) Regulations, 2012 — Regulations 2, 4, 7, 10(c), 10(d), 10A, 15, 20, 21, 21A, 22, 23, 29
• SEBI (Alternative Investment Funds) (Amendment) Regulations, 2024 — notified 05/01/2024 — custodian appointment and dematerialisation
• SEBI (Alternative Investment Funds) (Amendment) Regulations, 2024 — notified 25/04/2024 — Regulation 21A, due diligence obligation
• SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025 — notified 18/11/2025 — Accredited Investors only fund framework
• SEBI (Alternative Investment Funds) (Amendment) Regulations, 2026 — notified 18/04/2026 — Regulation 10(c) threshold reduction, Regulation 10A Inoperative Fund, Regulation 29 distribution flexibility
• SEBI Circular on AIF winding-up and Inoperative Fund framework — dated 16/06/2026
• SEBI Circular on revised AIF reporting framework (AAR and QAR) — SEBI Circular No. HO/19/28/(1)2026-AFD-SEC3/I/6176/2026 dated 04/03/2026
• SEBI Circular on NAV reporting of AIF units to depositories — SEBI Circular No. HO/19/34/11(8)2025-AFD-POD1/I/4335/2026 dated 06/02/2026
• SEBI Circular on dematerialisation and custodian — SEBI/HO/AFD/PoD/CIR/2024/5 dated 12/01/2024
• SEBI Master Circular for Alternative Investment Funds — SEBI/HO/AFD-1/AFD-1-PoD/P/CIR/2024/39 dated 07/05/2024 — Chapters XIII, XIV, XV, XIX, XXII
• SEBI NISM Certification Gazette Notification — SEBI/LAD-NRO/GN/2025 dated 25/06/2025 (superseding SEBI/LAD-NRO/GN/2024/176 dated 10/05/2024)
• SEBI Circular on first close timelines and change in control — SEBI/HO/AFD-2/CIR/P/2022/169 dated 17/11/2022 (Circular I) and SEBI/HO/AFD-2/CIR/P/2022/174 dated 23/11/2022 (Circular II)
• SEBI (Intermediaries) Regulations, 2008 — Schedule II (fit and proper criteria)
• SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007 — Regulation 3
• Securities and Exchange Board of India Act, 1992 — Section 15HB (penalties)
• Standard Setting Forum for AIFs (SFA) — Implementation standards on conflict of interest management, custodian reporting, and valuation

External sources

• Securities and Exchange Board of India
• National Institute of Securities Markets — NISM