AIF Category II in India – A Complete Setup Guide [2026]

Introduction

Setting up an AIF Category II fund in India is one of those processes that looks straightforward on paper  and then quietly consumes six months of your life if you go in underprepared.

The regulatory framework is well-defined. SEBI’s AIF Regulations, 2012 have been around long enough that the process is predictable. But predictable doesn’t mean simple. Between entity formation, PPM drafting, SEBI queries, KIT certifications, sponsor structuring, and scheme launch mechanics, there are easily a dozen points where a misstep causes delays  or worse, a SEBI objection that forces you to restructure before you’ve even raised a rupee.

This guide is built for fund managers and sponsors who are past the “should we do this?” stage and into the “how do we actually do this, correctly, the first time?” stage. We cover the full setup process, legal structure decisions, SEBI registration step-by-step, PPM requirements, key personnel obligations, launch mechanics, and the ongoing compliance calendar you’ll live with for the life of the fund.

If you’re raising a PE fund, a debt fund, a real estate fund, or a fund of funds under the Cat II umbrella, this is your operational playbook.

What Is a Category II AIF?

Under the SEBI (Alternative Investment Funds) Regulations, 2012, a Category II AIF is defined as any fund that does not fall under Category I or Category III. In practice, this covers:

• Private equity funds
• Debt funds (including credit funds, distressed debt)
• Real estate funds
• Fund of Funds (investing in other AIFs)
• Infrastructure debt funds not qualifying as Cat I

Key Cat II Characteristics

Mandatory close-ended structure with minimum 3-year tenure. Cannot use leverage or borrow funds for investment purposes (except for meeting temporary shortfalls). No tax pass-through at fund level for income other than business income. Investments in listed and unlisted securities permitted. Minimum scheme corpus: ₹20 crore. Minimum investor commitment: ₹1 crore (other than employees/directors of the manager).

Step-by-Step Guide : Category II AIF Registration Process

The registration process has eight distinct stages. From the time you begin entity formation to receiving your SEBI certificate, expect 10–16 weeks if your documentation is clean and there are minimal SEBI queries.

Stage 1: Entity Formation

A Category II AIF must be established as a Trust, Limited Liability Partnership (LLP), Company, or Body Corporate. In practice, the overwhelming majority of Cat II AIFs in India are set up as trusts  specifically, an irrevocable private trust registered under the Indian Trusts Act, 1882 (or the relevant state Registration Act).

Why Trust? The trust structure gives maximum flexibility on investor rights, distributions, and governance. It is also the most SEBI-familiar structure and faces fewer regulatory uncertainties than LLP or company structures for pooled vehicles.

Key formation documents: Trust Deed (registered), PAN for the Trust, bank account in the trust’s name. The trust deed must explicitly prohibit public solicitation of funds.

Important: The trust deed must include specific language prohibiting public invitations to subscribe; this is a SEBI eligibility requirement. Any invitation to the public to subscribe to fund units disqualifies the entity from AIF registration.

Stage 2: Appoint Manager and Sponsor

Every AIF must have a Manager and a Sponsor. These can be the same entity. Here’s how they differ:

Role	Function	Key SEBI Requirement
Manager	Makes investment decisions, manages the fund day-to-day	Net worth ≥ ₹5 crore; NISM Series XIX-A or XIX-C + NISM Series III-C (Compliance Officer) by 1 January 2027 certified Key Investment Team (KIT)
Sponsor	Sets up the AIF, contributes seed capital	Minimum 2.5% of corpus or ₹5 crore (whichever is lower) as continuing interest
Trustee	Holds assets on behalf of investors (for trust structure)	Cannot be the Manager; must be independent or a SEBI-registered debenture trustee

NISM Certification Requirement: From May 2024, all Key Investment Team (KIT) members of the Manager must hold the NISM Series XIX-A or XIX-C (AIF) certification plus one additional NISM examination  specifically, NISM Series III-C for the Compliance Officer, with full compliance required by 1 January 2027. Existing AIF managers had until May 2025 to comply with the XIX-C requirement. This is now non-negotiable for new registrations to get KIT certifications sorted before filing.

Stage 3: Draft the Private Placement Memorandum (PPM)

The PPM is the most critical document in your registration file. It defines what the fund can and cannot do, and SEBI scrutinizes it closely. A weak or vague PPM is the single most common reason for SEBI queries and delays.

PPM must cover:

• Fund strategy, sectors, geographies, investment thesis  in specific, not generic terms
• Investment restrictions, concentration limits, co-investment policy
• Fee structure: management fee, performance fee (hurdle rate, carry, catch-up)
• Waterfall mechanism and distribution policy
• Governance: LPAC / advisory committee composition and powers
• Valuation policy (must reference SEBI-specified methodology)
• Risk factors specific to the strategy
• Conflict of interest policy
• Exit strategy and fund wind-up provisions

PPM Drafting Caution: Avoid using generic template language lifted from other AIFs. SEBI has increasingly flagged PPMs with strategy descriptions that are too broad or inconsistent with the fund’s stated investment focus. Your legal team should tailor the PPM to your specific thesis.

Stage 4 : PPM Due Diligence by Merchant Banker

Before filing on the SEBI SI Portal, the PPM must undergo due diligence by a SEBI-registered Merchant Banker. This is a mandatory step introduced to ensure that the PPM meets all disclosure and compliance standards before formal submission.

The Merchant Banker reviews the PPM for:

• Adequacy and accuracy of disclosures regarding the fund strategy, risks, and fee structure
• Compliance with Schedule II of the SEBI (AIF) Regulations, 2012
• Consistency between the investment thesis, restrictions, and the stated category
• Adequacy of conflict of interest and related-party disclosures

Upon completion, the Merchant Banker issues a due diligence certificate that must be included in the Form A filing package. Ensure this step is planned into your pre-filing timeline, as it can take 2–3 weeks.

Tip: Engage your Merchant Banker early  ideally in parallel with PPM drafting  so the due diligence process does not delay your filing date.

Stage 5: File on SEBI SI Portal  Form A

The application is filed online on SEBI’s Intermediary (SI) Portal at siportal.sebi.gov.in. Steps:

1. Create entity account on SI Portal; SEBI generates a Login ID
2. Click ‘Fresh Registration’ under the AIF tab
3. Fill Form A per Schedule I of SEBI (AIF) Regulations, 2012
4. Upload all supporting documents (see checklist below)
5. Pay application fee of ₹1,00,000 + 18% GST (online, exact amount  no rounding)

Document Checklist for Form A :

Document	Notes
Trust Deed / LLP Agreement / MOA-AOA	Registered; must include anti-solicitation clause
Private Placement Memorandum (PPM)	Final draft with Merchant Banker due diligence certificate; will be reviewed by SEBI
Investment Management Agreement	Between AIF (Trust) and Manager
KYC documents of all entities	AIF, Manager, Sponsor, Trustees  PAN, registration certs
Net worth certificate of Manager	CA-certified; must show ≥ ₹5 crore net worth
NISM Certification of KIT members	Series XIX-A or XIX-C + NISM Series III-C (Compliance Officer) by 1 January 2027
Fit & Proper declaration	For all key persons
Bank account details of AIF	Trust bank account, account opening letter
Sponsor continuing interest undertaking	Commitment of minimum 2.5% or ₹5 crore
Merchant Banker Due Diligence Certificate	Mandatory  certifying PPM compliance with SEBI AIF Regulations

Stage 6: SEBI Review  Handling Queries

After filing, SEBI’s Investment Management Department reviews the application. If queries are raised (which is common, especially for first-time managers), you will receive them on the SI Portal. Typical SEBI query areas include:

• Strategy clarity  if the investment thesis is too broad or ambiguous
• Manager’s track record or relevant experience
• PPM provisions that appear inconsistent with Cat II restrictions
• KIT qualifications and team sufficiency
• Conflict of interest disclosures

Respond to queries within the timeline specified by SEBI (usually 21–30 days). Multiple rounds of queries are possible. Having a SEBI-experienced legal advisor handle the query response significantly reduces turnaround time.

Stage 7: Pay Registration Fee and Receive Certificate

Once SEBI is satisfied, you will receive an in-principle approval and an invoice for the registration fee. Category II AIF registration fee is ₹10,00,000 (non-refundable). Upon payment on the SI Portal, SEBI issues the Registration Certificate. The certificate is valid until the fund is wound up  there is no periodic renewal requirement, but the fund must remain in continuous compliance.

Stage 8 : Launch Your First Scheme

An AIF may launch multiple schemes under the same registration. For the first scheme of a new AIF, no additional scheme fee is payable to SEBI. For subsequent schemes, ₹1,00,000 must be paid at least 30 days prior to the scheme launch, along with a scheme-specific placement memorandum filed with SEBI.

Scheme launch triggers: Final PPM to investors, execution of Contribution Agreements (side letters), capital drawdowns as per the drawdown schedule, and appointment of custodian.

Fund Structure: Key Decisions Before You Register

Before filing, you need to lock down several structural decisions that will be hard (and SEBI-process-intensive) to change later.

Legal Structure: Trust vs. LLP

Factor	Trust	LLP
Most common?	Yes  dominant structure for Cat II	Less common; used for specific tax/investor structures
Investor rights	More flexible  defined by Trust Deed	Defined by LLP Agreement
Tax treatment	Pass-through for eligible income (capital gains, interest)	Similar pass-through treatment
Foreign investors	More familiar structure globally; easier for FPI onboarding	Possible but less preferred
Governance	Trustee provides oversight; LPAC common	Designated partners; governance via agreement

Single-Scheme vs. Multi-Scheme

You can register one AIF and run multiple schemes under it  each with different strategies, investor bases, or vintages. This is common for managers who plan to raise successive funds. The advantage is one registration umbrella; the challenge is maintaining clean separation between schemes in terms of books, investor reporting, and SEBI filings.

Domestic vs. International Feeder Structure

If you are raising capital from offshore investors (FPIs, family offices, endowments), consider whether a GIFT IFSC feeder fund structure makes sense. A GIFT IFSC AIF-equivalent (registered with IFSCA under the Fund Management Regulations 2025) feeding into a domestic Cat II AIF can offer tax and regulatory advantages for foreign LPs. Treelife advises on GIFT IFSC setups separately.

Custodian Requirement

A custodian is now mandatory for all Category II AIFs, irrespective of corpus size. This requirement applies from the point of scheme launch and is no longer conditional on the ₹500 crore threshold. Custodians must be SEBI-registered.

Updated Requirement: The custodian appointment requirement for Category I and II AIFs has been revised and is now compulsory irrespective of the scheme corpus. The earlier threshold of ₹500 crore no longer determines custodian applicability for Cat II AIFs.

Ongoing Compliance Obligations

Registration is the beginning. Cat II AIFs carry significant ongoing compliance obligations  quarterly, annual, and event-based. Missing any of these can result in SEBI notices, penalties, and investor trust issues.

Quarterly SEBI Reporting

Every AIF scheme must submit a quarterly report to SEBI within 7 calendar days from the end of each quarter. The report covers fund corpus, number of investors, portfolio details, drawdown status, and NAV. From 2024, filings must also be made on the AIF Data Repository (ADR) platform, which aggregates AIF data for SEBI’s market surveillance.

Annual Compliance Test Report (CTR)

From May 2024 (per SEBI Master Circular), the Manager must prepare an annual Compliance Test Report (CTR) and submit it along with the annual compliance certificate. The CTR is a self-assessment of compliance across all SEBI AIF Regulation provisions. A compliance professional or internal audit must sign off on it.

Valuation Policy

Cat II AIFs must value their portfolio at fair value, using SEBI-prescribed methodologies. Listed securities are marked to market. Unlisted securities must be valued using recognized approaches (DCF, market multiples, etc.) consistently applied and independently reviewed annually.

PPM Amendments

Any material change to the fund strategy, fee structure, key personnel, or other PPM provisions requires filing an updated PPM with SEBI and notifying existing investors. SEBI review of amendments can take 4–8 weeks. Plan strategy changes well in advance.

Investor Obligations

Category II AIFs can have up to 1,000 investors per scheme (excluding accredited investors in Accredited Investor-only schemes, which have no such cap under the 2024 Third Amendment). Each investor (other than employees/directors of the manager) must commit a minimum of ₹1 crore.

Common Mistakes in AIF Category II Setup

1. Vague investment strategy in the PPM

SEBI expects a well-defined, specific investment thesis  not a laundry list of sectors and instruments. A PPM that says ‘the fund may invest in equity, debt, real estate, or any other asset class’ will generate queries. Be specific about your mandate.

2. Underestimating the net worth requirement for the Manager

The Manager entity must have a minimum net worth of ₹5 crore at the time of registration  and must maintain it on an ongoing basis. Many first-time managers set up a new company as the Manager and discover they need to capitalize it adequately before filing.

3. KIT members not NISM-certified before filing

NISM Series XIX-A or XIX-C certification takes time, and KIT members must also ensure the NISM Series III-C (Compliance Officer) requirement is met by 1 January 2027. If your key investment team is not certified at the time of filing, SEBI will raise it as a query  and you cannot use the waiting period productively. Get all required certifications in place before you file.

4. Sponsor continuing interest  structuring it wrong

The sponsor’s 2.5% or ₹5 crore (whichever is lower) continuing interest must be in the form of units of the AIF  not a loan or a cash deposit. First-time managers sometimes structure this incorrectly, requiring restructuring that delays the timeline.

5. Not accounting for the 30-day scheme filing window

You cannot launch a second (or third) scheme immediately after registration. For each subsequent scheme, a placement memorandum must be filed with SEBI at least 30 days prior to launch. Build this into your fundraising calendar.

6. Missing the AIF Data Repository (ADR) filing requirement

The ADR filing is a 2024 addition that many older AIF compliance checklists don’t include. It is now a mandatory quarterly obligation. Ensure your compliance calendar captures it explicitly.

7. Not completing PPM due diligence by a Merchant Banker before filing

A Merchant Banker due diligence certificate is now a required document for Form A submission. Skipping or delaying this step will result in an incomplete filing. Engage your Merchant Banker in parallel with PPM drafting.