AIF Stewardship Obligations in India: SEBI Policy Mandate, Code

When SEBI introduced the Stewardship Code in December 2019, it marked a deliberate shift in how institutional investors, particularly Alternative Investment Funds, were expected to behave as shareholders. No longer was it enough for an AIF to simply collect investor capital, deploy it, and report returns. Stewardship demanded something harder: a documented philosophy on how the fund would monitor, engage with, and exercise governance rights over its investments. For Indian AIF managers, this framework has become non-negotiable, but its scope, implementation, and intersection with conflict-of-interest management remain consistently misunderstood.

This article unpacks the full stewardship obligation framework for AIFs in India, starting from the founding SEBI Stewardship Code (CIR/CFD/CMD1/168/2019, December 24, 2019) through the 2024 Master Circular and the 2025 amendments creating AI-only Funds with carve-outs. We cover what stewardship actually requires, which AIFs must comply, how to build a defensible policy, manage conflicts of interest, and navigate recent regulatory relief.

What stewardship obligations mean under SEBI regulations

Stewardship, in SEBI’s formal definition, refers to the responsible and active management of the pooled capital entrusted to institutional investors. For AIFs, stewardship is not passive monitoring. It is active engagement with investee companies on matters of performance, strategy, governance, and material environmental, social, and governance (ESG) opportunities and risks.

This definition surfaces in Annexure 10 of the SEBI Master Circular for AIFs (SEBI/HO/AFD-1/AFD-1-PoD-2/P/CIR/2026/83, dated 03 June 2026). Under paragraph 13.4 of the Master Circular, all categories of AIFs must follow the Stewardship Code in relation to their investment in listed equities. The Code itself, issued under circular CIR/CFD/CMD1/168/2019, operationalises this duty through seven core principles and a mandatory policy framework.

The reasoning is sound: when an AIF controls a material stake in a listed company (even a single-digit percentage) it wields governance influence. SEBI’s position is that this influence should be exercised in a manner that protects not only the AIF’s own investors but also the broader market and the companies in which the fund invests. Passive shareholding, no matter how profitable, does not satisfy this duty.

Key document: SEBI (Alternative Investment Funds) Regulations, 2012, read with the Master Circular (June 2026) and the Stewardship Code (December 2019).

Which AIFs must comply with stewardship obligations

The Stewardship Code applies to all categories of AIFs: Category I (venture capital and private equity), Category II (real estate and infrastructure), and Category III (hedge funds and leveraged funds), but only in relation to their investments in listed equities.

This carve-out is significant. A Category II AIF that invests 100% in unlisted equity or real estate need not publish a stewardship policy unless its PPM permits listed equity investments. However, the regulation does not distinguish between the intent to invest and actual investment. An AIF whose PPM states “the fund may invest up to 15% in listed equities” must have a published stewardship policy in place before making any listed equity investment, regardless of whether it ever exercises that power.

Exception: AI-only Funds and Large Value Funds (LVFs) registered under the 2025 Amendment Regulations are exempt from the requirement to publish a stewardship policy, subject to conditions. These funds serve only accredited investors and are granted lighter-touch regulation. They must still comply with all other manager obligations (fit and proper standards, code of conduct, investment concentration limits, reporting to SEBI) but stewardship policy publication is waived.

For traditional Category I, II, and III AIFs, stewardship policy publication is mandatory if the PPM expressly permits or intends listed equity investment.

Core stewardship responsibilities: four pillars

The SEBI Stewardship Code operationalises stewardship through four core responsibilities. An AIF’s stewardship policy must articulate how the manager will discharge each.

1. Monitoring of investee company performance

The first pillar is monitoring. This refers to ongoing surveillance of the investee company’s operational and financial performance, strategy, and governance health.

Monitoring is not a one-time check. It implies a structured, periodic process. In practice, this means:

• Regular review of the investee company’s quarterly or annual results and disclosures (if listed).
• Tracking of material announcements, corporate actions, and regulatory filings.
• Assessment of financial metrics (profitability, cash generation, leverage, return on equity) against fund expectations.
• Evaluation of strategic execution: whether the company is hitting milestones, growing as promised, and managing competitive risks.
• Board and management changes, particularly if the fund has board representation.

An AIF manager is not expected to conduct deep operational due diligence on every investment every quarter. However, the monitoring should be proportionate to the fund’s stake and the company’s strategic importance to the portfolio.

For unlisted investments (which form the bulk of Category II and some Category I portfolios), monitoring occurs through board/partner representation, investor rights in the investment agreement, and periodic financial reporting. The stewardship policy should clarify how the manager will exercise these monitoring rights and how often.

2. Active engagement on governance, performance, and material ESG matters

Engagement is the action phase. It means the AIF manager will, when monitoring reveals risks or opportunities, initiate dialogue with the investee company’s board or management to address the concern.

Examples of engagement triggers:

• Concerns about financial underperformance or margin erosion beyond planned deviations.
• Governance risks: weak board independence, concentration of executive power, history of related-party transactions, or lack of disclosure.
• Material ESG risks: environmental liability exposure (pollution, waste), labour practices flagged in audits or media, or products facing regulatory scrutiny (tobacco, alcohol, fossil fuels).
• Strategic drift: the company moving in a direction misaligned with the fund’s thesis.
• Management succession risks: aging leadership without a clear succession plan.

The policy should specify the manager’s approach to engagement. Will the manager write directly to the board? Request a board meeting? Escalate through the audit committee or independent directors? These details matter because they show SEBI that engagement is not ad-hoc but structured.

Engagement also includes the fund’s approach to voting on shareholder proposals and resolutions. If the investee company is listed, the fund has voting power. The stewardship policy should disclose how the manager will vote on matters such as board elections, remuneration, related-party transactions, and shareholder activism proposals. The default assumption is that the manager votes in the economic interest of the fund and its investors, but the policy can disclose wider principles, such as support for independent directors or opposition to excessive executive pay.

3. Monitoring and promoting material ESG opportunities and risks

This pillar, added by SEBI to reflect global best practice in institutional investing, requires AIFs to proactively identify material environmental, social, and governance risks and opportunities in their portfolio and engage accordingly.

Material ESG risks are those that could materially impact the investee company’s financial performance or market valuation. A renewable energy company in a solar fund portfolio carries material environmental opportunity; a manufacturing business facing labor disputes carries material social risk; a company with underdeveloped board independence carries material governance risk.

The stewardship policy should:

• Articulate how the manager identifies material ESG risks and opportunities (e.g., through due diligence frameworks, ESG ratings, media monitoring, industry research).
• Commit to engaging on material ESG matters, particularly where the manager believes the company’s management is under-appreciating or mishandling the issue.
• Disclose the manager’s ESG priorities (e.g., “we prioritize climate risk and board diversity across our portfolio”) and rationale.
• Specify how ESG engagement will be documented and reported to investors.

For Category I funds (venture capital and private equity), ESG engagement is often intrinsic to value creation: improving workplace practices, environmental compliance, or governance standards can boost investee company valuation. For Category II (infrastructure, real estate), ESG is regulatory (environmental permits, labor compliance, building standards) and often contractual (lender requirements). For Category III (hedge funds), ESG integration is typically lighter but still required.

A critical point: SEBI does not mandate that the AIF pursue a specific ESG agenda (e.g., divest from fossil fuels) or that it achieve specific outcomes. The mandate is to have a documented approach and to report on implementation.

4. Identification and management of conflicts of interest

The fourth pillar addresses a real and pervasive challenge in Indian AIFs: conflict of interest.

A conflict of interest arises when the fund manager’s interest in a transaction, investee company, or decision diverges from the fund’s interest or the interests of the fund’s investors.

Common scenarios:

• The manager or its affiliate (sponsor, employees, or related entities) holds a competing investment in the same investee company. Voting in favour of a related-party transaction benefits the affiliate at the fund’s expense.
• The investee company is a subsidiary of the fund sponsor. A governance decision might prioritize the sponsor’s strategic objectives over the fund’s economic returns.
• An employee of the manager is simultaneously a board member or investor in the investee company. This creates conflicting loyalties.
• The manager is considering a follow-on investment in an existing portfolio company. A stewardship decision (e.g., voting against a management proposal) might jeopardize the follow-on opportunity.

SEBI’s requirement is not to eliminate conflicts (they are often unavoidable) but to identify them, disclose them, manage them through procedural safeguards, and document the process.

The stewardship policy should include:

• A clear definition of what constitutes a conflict of interest in the manager’s context (this varies by fund structure and sponsor type).
• A list of known conflicts or categories of conflicts (e.g., “investments in subsidiaries of the sponsor”).
• Procedures for identifying new conflicts as they arise.
• Conflict management mechanisms: abstention from voting, recusal from discussions, independent director approval, or investor consent.
• Documentation: minutes of decisions, evidence of disclosure to investors, records of voting decisions on conflicted matters.

Failure to manage conflicts of interest is a frequent SEBI enforcement trigger. The regulator does not punish the mere existence of a conflict but the failure to disclose it and manage it transparently.

Policy disclosure and public availability requirements

The Stewardship Code mandates that AIFs publish their stewardship policy in the same manner as their investment strategy and risk management policy: in the Private Placement Memorandum (PPM) filed with SEBI, and made available to investors and the public.

From the Master Circular, paragraph 13.3: “Each AIF shall place the policy on the discharge of stewardship responsibilities before the investors … The policy should be made public in a manner that ensures its availability to all stakeholders, either through the fund’s website or through SEBI’s website or through any other medium as directed by SEBI.”

This transparency requirement has three implications:

1. The policy must be substantive, not boilerplate. Vague statements (“we monitor our investments and engage on governance issues”) attract scrutiny.
2. The policy is filed as part of the PPM with SEBI through a merchant banker. Updates to the stewardship policy (if material) must be communicated to existing investors and, for material changes, may trigger investor consent requirements under Regulation 10 of the AIF Regulations.
3. The policy is subject to annual audit. Paragraph 11.4 of the Master Circular requires AIFs to conduct an annual audit of PPM compliance, including the stewardship policy. This audit must be carried out by an internal or external auditor or legal professional. The findings must be disclosed to the trustee/sponsor and form part of the Compliance Test Report (CTR) submitted to SEBI within 30 days of the financial year-end.

A defensible stewardship policy typically runs 3-5 pages and includes:

• Definition of stewardship and the fund’s approach.
• Principles underlying the fund’s stewardship (e.g., economic interest alignment, promotion of good governance, ESG integration).
• Monitoring framework: frequency, metrics, and triggers.
• Engagement approach: who initiates engagement, escalation procedures, escalation timelines.
• Voting policy for listed equity holdings: decision-making framework, considerations, and documentation.
• ESG framework: material ESG factors relevant to the fund’s strategy and how the manager integrates them.
• Conflict-of-interest identification and management procedures.
• Reporting to investors: what information and frequency.

The policy should be written for clarity to investors and potential investors, not to SEBI. A fund that can explain its stewardship approach in plain language is more likely to attract institutional capital and face fewer compliance challenges.

Investor voting records and engagement reporting

Stewardship obligations extend to reporting and transparency with investors.

SEBI’s March 2026 circular (circular no. HO/19/28/(1)2026-AFD-SEC3/I/6176/2026, dated 04 March 2026) revised the AIF reporting framework, replacing the old uniform quarterly filing with a two-tier structure. This directly affects how stewardship reporting is structured.

Under the revised framework:

The Annual Activity Report (AAR) is due within 30 calendar days of the financial year-end (31 March), submitted on the SEBI Intermediary Portal. This is the comprehensive annual submission covering investment strategy, sector allocation, investor composition, fund performance, valuation practices, and compliance status. The first AAR (for FY 2025-26) was due by 31 May 2026. The AAR is also where stewardship reporting for the full year is captured in depth.

The Quarterly Activity Report (QAR) is a lighter filing due within 15 calendar days from the end of each June, September, and December quarter. No QAR is required for the March quarter, as the AAR covers that period fully. The first QAR under the revised framework is due by 15 July 2026, covering the quarter ending 30 June 2026.

Within these filings, the AIF manager’s stewardship reporting should include:

1. A record of voting activities on matters at investee company shareholder meetings or board approvals where the fund held voting rights.
2. A narrative of engagement activities: which companies were engaged with on which issues, what the manager raised, what response was received, and what outcome was pursued.
3. For conflict-of-interest matters, disclosure of any conflicts managed during the period and how they were handled.
4. A summary of ESG monitoring and engagement activities carried out by the manager.

The AAR captures all four in depth on an annual basis. The QAR captures shorter-interval engagement updates at a lighter level of detail.

A frequent compliance gap: managers document engagement internally but fail to report it to investors on a regular cadence. SEBI’s expectation is that engagement is not merely internal governance but a commitment to investors that the manager will actively exercise influence on their behalf. The new AAR and QAR structure formalises this expectation into a named, auditable reporting obligation.

Conflict-of-interest management: identification, procedure, and documentation

Conflict-of-interest management deserves detail because it is the most commonly mishandled aspect of stewardship compliance and a frequent SEBI investigation trigger.

Identifying conflicts

A conflict of interest is not merely a possibility of divergent interests; it is a situation where the manager, an employee of the manager, or a related entity has an economic or strategic interest that could influence the manager’s stewardship decisions.

Categories of conflicts in Indian AIFs:

• Sponsor-related conflicts: The AIF sponsor (e.g., a family office, corporate strategic investor, or financial conglomerate) also holds capital in the same portfolio company or a competing investment. A governance decision that favors the sponsor’s interest at the expense of the fund’s returns is a conflict.
• Manager-employee conflicts: A partner or senior employee of the manager is also a board member or investor in an investee company. That person may resist stewardship actions (e.g., removal of a related-party executive) if it affects their own position.
• Affiliate conflicts: The manager’s affiliate (e.g., a sister fund, a related asset manager, or a service provider) holds a competing or complementary investment. Voting decisions might advantage the affiliate.
• Transaction-related conflicts: The manager is contemplating a follow-on investment in a portfolio company. Engaging with the board on performance issues might jeopardize the follow-on opportunity and the manager’s future fees.
• Career conflicts: The manager’s employee is being courted for a senior role at an investee company. The employee might resist stewardship actions that could harm the company’s short-term valuation or the executive’s prospects.

Managing identified conflicts

Once identified, the conflict must be managed. SEBI accepts multiple mechanisms:

1. Abstention: The manager abstains from voting or participating in the decision. This is the cleanest approach for binary votes (e.g., approval of a related-party transaction) but is not always available (e.g., board composition votes, where abstention means loss of governance influence).
2. Recusal: For internal discussions, the conflicted individual (e.g., a partner with a personal stake in the investee company) recuses themselves from deliberations about stewardship decisions on that company. The decision is made by non-conflicted managers or employees.
3. Independent director approval: Where the fund has established an investment committee or independent oversight board, the conflicted matter is escalated to non-conflicted members for approval. This is common in larger fund structures.
4. Investor consent: Material conflicts are disclosed to investors, and investor consent is sought for the stewardship decision in question. This is the heaviest approach but the most transparent. It is typically reserved for situations where the conflict is material (e.g., a related-party transaction or a decision that could significantly affect fund returns).
5. Structural firewalls: The manager establishes a Chinese wall between teams. A dedicated stewardship officer, separate from the manager who made the initial investment decision, handles stewardship on conflicted companies. This reduces (but does not eliminate) bias.

Documentation and disclosure

The critical requirement is documentation. SEBI reviews the manager’s conflict-of-interest log, the minutes of decisions on conflicted matters, and evidence of disclosure to investors.

A defensible approach includes:

• A conflict register maintained by the compliance officer, updated whenever a new conflict is identified.
• For each conflict, a record of: the date identified, the parties and investment affected, the nature of the conflict, and the management mechanism chosen.
• Meeting minutes reflecting the discussion of the conflicted matter and the decision taken (e.g., “The committee approved the manager’s engagement with Company X on governance issues despite the manager’s affiliate holding a competing stake in Company X’s parent, on the basis of abstention from voting on any shareholder matter involving Company X”).
• Investor communication: when material conflicts are managed through investor consent, evidence of disclosure and investor approval.
• Voting records: where the manager abstains on a conflicted matter, the voting record should reflect the abstention and the reason.

A failure to document conflicts is treated by SEBI as equivalent to failure to manage them.

Recent amendments: AI-only Funds and the lighter-touch regime

The November 18, 2025 Amendment to the AIF Regulations introduced a significant carve-out: AI-only Funds (Alternative Investment Funds limited to accredited investors) and LVFs (Large Value Funds) are exempt from the requirement to publish a stewardship policy.

This relief reflects SEBI’s judgment that accredited investors (typically institutional, sophisticated investors with capital of ₹1 crore or above and professional investment experience) do not require the same level of prescriptive stewardship regulation as retail or semi-professional investors.

However, exemption from stewardship policy publication does not mean exemption from stewardship duties. An AI-only Fund manager must still:

• Monitor and engage with investee companies on performance and governance (this obligation is implicit in the fiduciary duty to invest prudently).
• Manage conflicts of interest and document the process.
• Comply with all other governance, reporting, and code-of-conduct obligations under the AIF Regulations.

The distinction is regulatory: traditional AIFs face explicit stewardship obligations backed by a published policy that SEBI can audit and enforce. AI-only Funds face lighter-touch oversight but remain subject to SEBI’s general supervisory authority and can be investigated for breaches of fiduciary duty.

For a Category I, II, or III AIF considering migration to AI-only status (or launching new schemes as AI-only), the regulatory relief is real but the underlying obligations persist. The compliance calendar for stewardship reporting to investors remains discretionary (internal governance rather than mandatory disclosure), but the manager should still maintain documentation of engagement and conflict management for SEBI inquiries.

One further distinction on the CTR: AI-only Funds are exempt from the trustee or sponsor review loop that applies to traditional AIFs. Under the June 2026 Master Circular, an AI-only Fund prepares its CTR and reports any violations directly to SEBI, bypassing the 30-day trustee/sponsor comment window and the 15-day manager response window. This streamlines the compliance cycle for AI-only Funds but also means there is no internal check before a violation reaches SEBI. Compliance Officers of AI-only Funds should treat direct SEBI escalation as the baseline, not a fallback.

Compliance Test Report failures and SEBI enforcement cascade

The Compliance Test Report (CTR) is the primary mechanism through which stewardship violations surface and move from internal non-compliance to formal SEBI enforcement. Understanding this cascade matters because most AIF managers know the CTR exists but do not fully understand what happens when it flags a stewardship deficiency. The timeline for remediation is tighter than most assume.

What the CTR is and who is responsible

Under paragraph 21.2 of the AIF Master Circular (SEBI/HO/AFD-1/AFD-1-PoD-2/P/CIR/2026/83, 03 June 2026), the Compliance Officer of the AIF prepares the CTR at the end of each financial year. The CTR reports compliance or non-compliance with every chapter of the Master Circular, which includes paragraph 13.4 (Stewardship obligations). The CTR must be submitted to the sponsor and trustee within 30 days of the financial year-end, that is, by 30 April of each year.

Responsibility sits with two parties simultaneously:

• The Compliance Officer, who must report any non-compliance within 7 days of becoming aware of it (not only at year-end). This is an ongoing obligation, not just an annual one.
• The trustee or sponsor, who reviews the CTR and must submit their comments to the manager within 30 days of receipt. If the trustee or sponsor identifies a violation in the CTR, they are required to intimate SEBI as soon as possible.

Exception for AI-only Funds: AI-only Funds are exempt from the trustee or sponsor review loop. The manager of an AI-only Fund prepares the CTR and reports any violations directly to SEBI, without routing through the trustee or sponsor. This shortens the internal cycle but removes the internal check that often catches errors before they reach SEBI.

This dual reporting structure means that stewardship failures identified by the Compliance Officer (for example, an absence of a stewardship policy despite holding listed equities, or a conflict-of-interest not documented) cannot be quietly buried. The trustee or sponsor has an independent obligation to escalate.

The five-stage enforcement cascade

When a stewardship violation appears in (or is omitted from) the CTR, the following sequence typically follows:

Stage 1 — Internal identification (Day 0 to Day 30 of FY-end). The Compliance Officer identifies the stewardship deficiency during CTR preparation. If the deficiency is clear (e.g., no stewardship policy filed despite the PPM permitting listed equity investment), the Compliance Officer must report to SEBI within 7 days of becoming aware. If the deficiency is discovered during annual CTR preparation, it is flagged in the CTR itself.

Stage 2 — Trustee or sponsor review (Day 30 to Day 60 of FY-end). The trustee or sponsor receives the CTR. Under paragraph 21.2 of the Master Circular, they have 30 days to submit comments to the manager. If the violation observed is material (for example, failure to maintain a stewardship policy, undisclosed conflicts of interest, or absence of investor voting records), the trustee or sponsor must intimate SEBI independently, regardless of whether the manager remediated in the interim.

Stage 3 — Manager remediation (Day 60 to Day 75 of FY-end). The manager has 15 days from receipt of trustee/sponsor comments to make necessary changes and provide a response. During this window, the manager should: draft and file the stewardship policy (if missing), disclose conflicts to investors, produce voting records for the past year, and update the PPM.

However, remediation at this stage does not automatically prevent SEBI enforcement. If the violation was material and was not self-reported promptly (i.e., within 7 days of becoming aware), SEBI can still treat it as a regulatory breach and initiate an inquiry.

Stage 4 — SEBI inquiry or inspection. SEBI can initiate an inspection of an AIF at any time under Regulation 30 of the AIF Regulations. If the CTR flagged a stewardship violation, or if SEBI receives an investor complaint related to stewardship (e.g., investor claims the manager voted on a conflicted matter without disclosure), SEBI may issue a show-cause notice under Section 11B of the SEBI Act, 1992.

A show-cause notice requires the manager to respond within 21 days, explaining the violation, the remediation taken, and why a penalty should not be imposed. SEBI reviews the response and determines the appropriate action.

Stage 5 — Adjudication and penalty. If SEBI is satisfied that a violation occurred and was not adequately remediated, the matter is referred to an Adjudicating Officer under Section 15-I of the SEBI Act, 1992. The Adjudicating Officer considers factors including the severity of the breach, the harm to investors, whether the breach was intentional or negligent, and whether the manager remediated promptly. Penalties under Section 15HB range from ₹1 lakh to ₹25 crore or three times the wrongful gain, whichever is higher.

What triggers a lenient outcome

SEBI’s adjudication practice for stewardship violations, where these have been reported in past enforcement orders, reflects leniency when:

• The Compliance Officer self-reported the violation promptly (within 7 days of becoming aware).
• The manager filed a remediation plan within 30 days of the violation being identified.
• No investor suffered quantifiable harm from the violation.
• The violation was a policy gap (e.g., no formal stewardship policy) rather than active misconduct (e.g., voting on a conflicted matter for personal gain).
• The manager cooperated fully with the SEBI inspection and provided all records requested.

Aggravating factors that lead to higher penalties: concealment of conflicts, failure to disclose violations in the CTR, repeated violations across multiple financial years, evidence that the stewardship policy was published but never implemented, and investor complaints corroborating the violation.

Practical implication: treat the CTR as a risk management tool

Many AIF managers treat CTR preparation as a mechanical annual exercise, a box to check. This is the wrong posture. The CTR is also the manager’s single best opportunity to remediate proactively before a violation becomes a formal enforcement matter.

If, during CTR preparation, your Compliance Officer identifies a stewardship gap (for example, you held a listed equity stake for two years without a documented voting policy), the best course of action is:

1. Self-report to SEBI within 7 days.
2. File the remediated stewardship policy immediately (amend the PPM if required).
3. Prepare a gap disclosure for investors in the next quarterly fact sheet.
4. Document the remediation chronology in full.

Managers who take this approach consistently receive softer treatment than those whose violations are discovered through investor complaints or SEBI inspections.

Practitioner note

From live engagements with Indian AIF managers, three stewardship failures repeat:

1. Policy-practice gap: The published policy commits to quarterly investor reporting on engagement, but the manager produces annual fact sheets with no stewardship narrative. SEBI views this as material misrepresentation.

2. Conflict invisibility: A manager with a sponsor that also runs a complementary fund fails to document or disclose the conflict. When SEBI discovers it (through an investor complaint or inspection), the absence of documentation is treated as evidence of intentional concealment.

3. Outsourcing without oversight: A fund outsources governance monitoring to a third party, receives minimal reports, and loses track of what is being monitored. When SEBI asks, “What governance risks did you identify in Company X in the past year?”, the manager cannot answer.

Remedy: Treat the stewardship policy not as a compliance checkbox but as a operational manifesto. Draft it with your team, debate the specifics, and then stick to it. Investors who invest capital in a fund that commits to stewardship engagement are entitled to see that engagement documented and reported. The discipline of reporting also improves decision-making: if you must explain to investors why you engaged (or did not engage) with Company X on an ESG matter, you will be more intentional about the decision.

FAQ: common questions and compliance triggers

Q: Do I need a stewardship policy if my fund invests only in unlisted securities and has never invested in listed equities?

A: No. The Stewardship Code applies only to investments in listed equities. If your PPM does not permit listed equity investment and you have not made any listed equity investments, you are not required to publish a stewardship policy. However, if your PPM permits listed equity investment (even if you do not currently intend to exercise that permission), SEBI may argue that you are required to have a policy in place before making such an investment. The safest approach is to clarify in your PPM whether listed equity investment is permitted, and if so, establish and publish a stewardship policy before the fund is launched.

Q: What is the difference between stewardship obligations and code of conduct obligations?

A: Stewardship obligations are specific to how the fund monitors and engages with investee companies. The code of conduct, outlined in Schedule III of the AIF Regulations, governs the manager’s conduct more broadly: prohibitions on market manipulation, front-running, insider trading, misrepresentation to investors, and conflicts of interest across all activities. A manager can comply with the code of conduct (by not engaging in fraud or market abuse) while failing to comply with stewardship (by not documenting engagement or not managing conflicts). Both are required.

Q: I have a Category II fund with a single listed equity investment that I made five years ago. Do I retroactively need to publish a stewardship policy?

A: Yes. The Stewardship Code became effective on July 1, 2020, for all AIFs with listed equity investments. If you have held a listed equity investment since before that date without publishing a stewardship policy, your fund is in non-compliance. You should immediately:

• Draft and publish a stewardship policy (covering the fund’s approach going forward and, if possible, a retrospective narrative of how you have managed stewardship matters to date).
• Amend your PPM to include the policy and file the amendment with SEBI through a merchant banker.
• Include a disclosure in your next investor reporting acknowledging the delayed implementation and the steps taken to bring the fund into compliance.

Proactive remediation typically results in lighter SEBI treatment than discovery through an inspection.

Q: My fund sponsor also runs a competing fund that invested in the same company. How do I manage this conflict?

A: This is a material conflict of interest. You must:

1. Identify and document the conflict in your conflict register.
2. Establish a procedure: typically, the stewardship decision on Company X is made by a manager or investment committee member who has no role in the competing fund. Voting decisions on Company X are made independently for each fund, based on each fund’s economic interest.
3. If the stakes or the decision are material, disclose the conflict to your investors (typically in quarterly fact sheets or annual reports) and confirm that separate voting decisions will be made.
4. Document voting records separately for each fund on Company X shareholder matters.
5. If the company proposes a transaction that benefits one fund over the other, escalate to investor consent or independent oversight.

The risk is not the existence of the competing investment; it is the appearance that one fund is being favored at the other’s expense. Transparent procedures and documentation mitigate this risk.

Q: I don’t have enough time to attend all investee company board meetings. Can I delegate stewardship to an external governance consultant?

A: Yes, but with caveats. Regulation 21 of the AIF Regulations permits outsourcing of activities, including governance and stewardship responsibilities. If you outsource, you remain responsible for ensuring that the outsourced activities are carried out diligently. Your stewardship policy should specify:

• Which stewardship activities are outsourced (e.g., monitoring of financial performance, ESG engagement, voting recommendation analysis).
• The qualifications and accountability of the external party.
• How you verify that the external party is exercising stewardship diligently (e.g., monthly reports, meeting minutes, voting records).
• How conflicts of interest involving the external party are managed.

A frequent misstep: managers outsource stewardship and then lose visibility of what the consultant is doing. SEBI treats this as a failure of the manager’s stewardship duty.

Q: What should I include in my stewardship policy to avoid SEBI enforcement action?

A: A stewardship policy that satisfies SEBI should:

1. Articulate the fund’s investment strategy and how it relates to stewardship (e.g., “we invest in early-stage technology companies and expect to exercise board representation; stewardship focuses on scaling operations, governance maturity, and ESG integration”).
2. List the types of companies the fund targets and the anticipated stewardship approach for each (different for listed companies vs. unlisted investees).
3. Define stewardship responsibilities: monitoring, engagement, ESG integration, and conflict management.
4. Specify monitoring triggers: what metrics or red flags will prompt engagement?
5. Describe the engagement process: who initiates, escalation timelines, documentation.
6. Commit to investor reporting: frequency, content, and mechanisms.
7. Address conflicts of interest: how they will be identified and managed.
8. Explain how the policy will be reviewed and updated (typically annually or upon material changes to the fund’s strategy).

The policy should be specific to your fund, not generic. SEBI’s scrutiny tends to focus on whether the manager’s actual practices align with the published policy.

Q: Can I take a sector-specific stewardship approach? For example, we focus on healthcare and will publish a healthcare-specific stewardship policy.

A: Yes. Many specialized funds (healthcare, infrastructure, technology) tailor stewardship to their sector. Your stewardship policy can disclose that you prioritize certain ESG matters relevant to the sector (e.g., clinical trial governance for a pharma fund, environmental impact for a renewable energy fund) and that your engagement approach reflects sector risks. This is not only permitted but encouraged; it shows investors and SEBI that stewardship is thoughtfully integrated into your investment process.

Q: What are the penalties for stewardship non-compliance?

A: Violations of the Stewardship Code fall under Regulation 20 (General Obligations) of the AIF Regulations and attract penalties under Section 15HB of the SEBI Act, 1992. SEBI can impose penalties up to ₹25 crore or three times the wrongful gain derived from the violation, whichever is higher. In practice, penalties for stewardship policy violations are often in the range of ₹10-50 lakh for first-time breaches that are remediated quickly, and higher for repeated or egregious violations (e.g., failure to disclose conflicts, misrepresentation of stewardship practices to investors, or evidence of self-dealing).

Beyond financial penalties, SEBI can also suspend the fund’s registration or issue directions to the manager. For many managers, reputational damage is the costliest outcome: investor confidence erodes, fund raising becomes difficult, and follow-on fund launches may face extended scrutiny.

Q: How often should I review and update my stewardship policy?

A: At minimum, annually. A more rigorous approach is to review the policy:

• After any material change to the fund’s investment strategy or sector focus.
• Following investor feedback or complaints about stewardship engagement.
• After a SEBI inspection or inquiry related to stewardship practices.
• Following a significant corporate action at a major portfolio holding (e.g., a shareholder dispute, governance crisis, or change of control) where the manager’s stewardship approach was tested.

Material updates to the policy should be communicated to investors and, where the update represents a material change to the terms of the investment, may trigger investor consent requirements.

Q: I’m launching a new Category II fund. What is the minimum stewardship infrastructure I should put in place?

A: Before fundraising:

1. Draft a stewardship policy tailored to the fund’s strategy. If the fund targets unlisted real estate with minority stakes in listed REITs, the policy should address both contexts.
2. Establish a stewardship governance framework: who on your team is responsible for monitoring, engagement, and conflict management? For a small team, one person may wear all hats, but responsibility should be clear.
3. Create a conflict-of-interest register and a template for documenting stewardship decisions.
4. Document your monitoring cadence: how often will you review investee company performance? What metrics matter?
5. Establish investor reporting templates: what will you disclose quarterly or annually?
6. Include the stewardship policy in your PPM template and file it with SEBI.
7. Train your team on conflict identification and management.

This groundwork, completed before your first investor capital is deployed, makes ongoing compliance substantially easier and demonstrates to sophisticated investors that stewardship is a core operational discipline, not an afterthought.

Regulatory references

• SEBI (Alternative Investment Funds) Regulations, 2012 — Regulations 20 (General Obligations), 21 (Outsourcing), 29 (Distribution of Proceeds), 30 (Inspection).
• SEBI Circular CIR/CFD/CMD1/168/2019 (December 24, 2019) — Stewardship Code for Mutual Funds and AIFs.
• SEBI Master Circular for AIFs (SEBI/HO/AFD-1/AFD-1-PoD-2/P/CIR/2026/83, 03 June 2026, updated 16 June 2026) — Paragraph 13.4 (Stewardship obligations), Paragraph 21.2 (Compliance Test Report — preparation, submission, and violation escalation timelines), Chapter 21 (Reporting and Compliance). This supersedes the May 2024 Master Circular in full.
• SEBI Circular HO/19/28/(1)2026-AFD-SEC3/I/6176/2026 (04 March 2026) — Revised AIF reporting framework introducing Annual Activity Report (AAR, due within 30 days of March year-end) and Quarterly Activity Report (QAR, due within 15 days of June, September, and December quarter-ends).
• SEBI (Alternative Investment Funds) (Amendment) Regulations, 2026 (April 2026) — Reduction of minimum threshold under Regulation 10(c); introduction of Inoperative Fund status under new Regulation 29(10A).
• SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025 (November 18, 2025) — AI-only Fund and LVF provisions.
• SEBI Circular SEBI/HO/AFD-1/AFD-1-PoD/P/CIR/2024/140 (December 8, 2025) — Operational guidelines for AI-only Funds and LVFs.
• Schedule II, SEBI (Intermediaries) Regulations, 2008 — Fit and Proper person criteria.
• Schedule III, SEBI (Alternative Investment Funds) Regulations, 2012 — Code of Conduct for AIFs and managers.
• Section 11B and Section 15HB, Securities and Exchange Board of India Act, 1992 — SEBI’s power to issue directions and penalties for regulatory violations.

External sources

• SEBI
• Reserve Bank of India
• Ministry of Corporate Affairs