Capital calls and drawdowns in AIFs: process, defaults and remedies

An Alternative Investment Fund does not collect an investor’s full commitment upfront. It calls capital in tranches, through a formal notice, as investment opportunities arise. This commitment-drawdown model is central to how private equity, venture capital, and credit funds operate in India, but it also creates a specific point of operational and legal exposure: what happens when a limited partner does not fund a call. The Securities and Exchange Board of India has tightened the regulatory architecture around this exact question over 2024, 2025, and 2026, and fund managers who have not updated their contribution agreements and PPMs against these changes are carrying more risk than they realise.

What is a capital call, and how does it differ from a drawdown?

A capital call is the formal notice issued by an AIF’s investment manager to a limited partner (LP), requesting payment of a specified portion of that investor’s total capital commitment. A drawdown is the resulting transfer of funds by the LP in response to that notice. The two terms get used interchangeably in practice, but the distinction matters contractually: the capital call is the manager’s contractual demand, and the drawdown is the investor’s performance of that demand. The gap between the two, typically 10 to 15 business days, is where default risk lives.

Under the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF raises capital by issuing units through private placement, and investors sign a contribution agreement committing a total amount rather than transferring it in full. The manager then calls that committed capital in tranches, tied to specific investment opportunities, management fees, or fund expenses. This structure lets the fund avoid holding idle cash and lets LPs avoid the drag of un-deployed capital sitting in a low-yield account, but it depends entirely on LPs honouring calls on schedule.

Why AIFs don’t collect commitments upfront

The commitment-drawdown model exists because AIF investment cycles are unpredictable in timing. A Category II private equity fund might identify its next deal in month three or month fourteen of its investment period, and there is no way to know which in advance. Collecting the full corpus at fund closing would leave that capital sitting uninvested for months, dragging down the fund’s overall IRR through cash drag alone, before a single rupee has actually been put to work. Calling capital only when a specific opportunity or expense is imminent keeps every rupee the fund holds productively deployed or about to be deployed. The trade-off is that the fund’s entire operational reliability depends on investors being able and willing to fund a call within the notice window, which is exactly the point at which the process becomes a legal and operational risk rather than just an accounting convenience.

What must a capital call notice legally contain?

A capital call notice must align exactly with the terms already disclosed in the fund’s Private Placement Memorandum (PPM) and the investor’s contribution agreement. SEBI does not prescribe a fixed statutory template for the notice itself, but the underlying disclosures it must reflect are mandated.

At minimum, a compliant capital call notice includes:

• Investor identification and reference number for the specific call
• The scheme name, where the AIF runs multiple schemes under one registration
• The pro-rata amount due, expressed both in absolute terms and as a percentage of total commitment
• The purpose of the call: a specific investee company, management fees for a stated period, or fund operating expenses
• The payment deadline, calculated from the date of notice
• The designated bank account, which must be the scheme’s own segregated account rather than a pooled or manager-controlled account
• A statement of consequences on default, cross-referencing the relevant clause in the contribution agreement

Every one of these fields must trace back to a disclosure already made in the PPM. SEBI’s Master Circular framework treats mismatches between the PPM, the contribution agreement, and the actual notice as a compliance failure independent of whether the LP eventually pays.

How much notice must LPs receive, and how is the amount calculated?

Market practice across Indian AIFs converges on a notice period of 10 to 15 business days between the capital call and the payment deadline, set out in the contribution agreement rather than fixed by regulation as a single number. The amount called is calculated on a pro-rata basis: each investor pays a share of the total call proportional to their share of total fund commitments, not their share of capital already drawn down.

A worked example: an AIF with ₹250 crore in total commitments needs ₹20 crore for an investee company and an additional ₹1.25 crore for that quarter’s management fees, for a total call of ₹21.25 crore. An investor who committed ₹10 crore, or 4% of the fund, receives a call for 4% of ₹21.25 crore, or ₹85 lakh, regardless of how much of their commitment has already been drawn in prior tranches.

This pro-rata mechanic is no longer just good practice. Regulation 20(21) of the AIF Regulations, inserted by the SEBI (Alternative Investment Funds) (Fifth Amendment) Regulations, 2024 (notified 18 November 2024), makes it a statutory requirement: investors in a scheme must have rights, pro rata to their commitment, in every investment and in every distribution of proceeds from that investment, except where SEBI has specified an exemption. Regulation 20(22), inserted by the same amendment, adds that all other investor rights must be pari passu, meaning on equal footing, subject to a narrow list of permitted differential terms.

What happens the moment an LP misses a capital call?

A missed capital call is treated as a contractual default, not an administrative delay, from the moment the payment deadline passes. The immediate consequences, before any formal remedy is invoked, typically include:

• Interest begins accruing on the unpaid amount from the due date, at a rate specified in the contribution agreement
• Distribution rights are suspended for that investor pending resolution
• The investor’s pro-rata rights under Regulation 20(21) fall away for that specific investment. SEBI’s circular dated 13 December 2024, which clarified the exemptions to the pro-rata mandate, expressly states that the obligation to maintain pro-rata rights does not apply where an investor has defaulted on their pro-rata contribution to that investment. This is a materially significant point: default does not just trigger a penalty, it removes a regulatory protection the investor would otherwise have.

None of this requires the manager to go to court or invoke a formal default clause. It happens automatically under the terms most contribution agreements already carry, and now under the regulation itself for the pro-rata point.

What remedies does an AIF have against a defaulting investor?

Once a default is formally declared under the contribution agreement, typically after a cure period following the missed deadline, the manager has a set of remedies. Not all are available in every fund, since the applicable set depends on what was disclosed in the PPM at the time of onboarding. The remedies fall into three practical tiers, roughly ordered by how quickly a manager reaches for them.

Immediate remedies: interest, suspension, and loss of pro-rata protection

These apply automatically, without the manager invoking anything formally, and typically kick in the moment the payment deadline passes:

• Default interest accrues on the unpaid amount from the due date, at a rate specified in the contribution agreement, usually a fixed annual percentage or a spread over a reference rate
• Voting and information rights are suspended for the defaulting investor pending resolution
• Pro-rata protection under Regulation 20(21) falls away for that specific investment, per SEBI’s 13 December 2024 exemption circular

None of these three requires court intervention or even a formal notice beyond what the contribution agreement already specifies. They are the fund’s first line of defence and, in most cases, enough to prompt a defaulting investor to cure before the situation escalates.

Escalated remedies: dilution, forfeiture, and unit transfer

If the default is not cured within the contractual window, managers move to remedies that permanently change the defaulting investor’s position in the fund. Unit dilution reduces the defaulting investor’s proportional interest, often calculated against a discounted valuation rather than the fund’s current NAV, which compounds the penalty. Forfeiture goes further: a defined percentage of units already held, commonly cited in market practice as 25 to 50%, is forfeited outright to the fund or reallocated among non-defaulting investors. Where the PPM permits it, the fund can also sell or transfer the defaulting investor’s units to existing investors or a third party to cover the shortfall directly, effectively exiting that investor from the scheme rather than penalising their existing position.

Court and manager-level remedies: specific performance and shortfall borrowing

Two remedies sit outside straightforward unit adjustments. Specific performance is a court-enforced remedy: the manager seeks an order compelling the investor to fund the call, typically pursued through arbitration where the contribution agreement provides for it, since arbitration resolves contractual interpretation disputes faster than civil litigation. Separately, the manager itself can borrow to bridge the shortfall left by the default under SEBI’s Master Circular framework, recovering the cost from the defaulting investor rather than the fund at large. This last remedy is the one most likely to be missing from an older PPM, since it was only introduced through an August 2024 circular and is now codified in the Master Circular’s Chapter 14.

Table: capital call default remedies available to Indian AIFs

Remedy	What it does	Typical basis
Default interest	Interest charged on the unpaid amount from the due date until payment or resolution	Contribution agreement, disclosed in PPM
Suspension of rights	Voting and information rights suspended until the default is cured	Contribution agreement
Loss of pro-rata protection	Investor’s pro-rata right in that specific investment falls away	Regulation 20(21), per SEBI’s 13 December 2024 exemption circular
Unit dilution	Defaulting investor’s proportional interest in the fund is reduced, often at a discounted valuation	Contribution agreement
Forfeiture	A defined percentage of units already held is forfeited to the fund or reallocated to non-defaulting investors	Contribution agreement; family office guidance suggests 25 to 50% of existing units is common market practice
Specific performance	Manager seeks a court order compelling the investor to fund the call	Contribution agreement, enforced through civil courts or arbitration
Sale or transfer of defaulting investor’s units	Units are sold to existing investors or a third party to cover the shortfall	Contribution agreement, subject to PPM transfer conditions
Manager borrowing to cover shortfall	The AIF itself borrows to bridge the gap left by the defaulting investor, recovering the cost from that investor	SEBI Master Circular, para 14.1.3 (Category I and II only)
CIV disqualification	Investor is barred from co-investing in the same portfolio company through a Co-Investment Vehicle	SEBI’s September 2025 CIV framework, Regulation 17A

Most funds layer two or three of these together rather than relying on one: interest plus suspension of rights as an immediate response, with dilution or forfeiture as the escalated remedy if the default is not cured within a stated window.

How does the remedy set differ by AIF category?

The manager-borrowing remedy is the clearest category-specific divergence, and it is a recent one.

Under paragraph 14.1.3 of SEBI’s Master Circular, Category I and II AIFs may borrow to meet a shortfall in a drawdown amount caused by investor default, subject to four conditions: the intent to borrow must already be disclosed in the PPM; borrowing is only permitted when an investment opportunity is imminent and a drawdown call has gone unfulfilled; the amount borrowed cannot exceed the lowest of 20% of the proposed investment, 10% of investable funds, or the uncommitted drawdown balance; and the cost of borrowing is charged only to the defaulting investor, not spread across the fund. A 30-day cooling-off period applies between two borrowing episodes, which prevents this from becoming a standing credit facility.

Category III AIFs do not have this option. SEBI’s clarification on Category III borrowing limits is direct: Category III AIFs may not borrow for investments at all, and the existing 2x NAV leverage cap for actual investment deployment remains unchanged and separate from any shortfall-borrowing mechanism. A Category III manager facing a defaulted call must rely on the contractual remedies (interest, dilution, forfeiture, specific performance) without the borrowing bridge available to Category I and II funds.

This distinction matters at the drafting stage. A Category III PPM that borrows language on shortfall borrowing from a Category II template will disclose a remedy the fund cannot actually use.

A side-by-side default scenario: Category II versus Category III

The practical difference shows up clearly when the same default happens in two funds of different categories. Take two AIFs, each facing a ₹2 crore shortfall from a defaulting investor with an investment opportunity closing in five days.

The Category II fund can invoke the manager-borrowing remedy: it discloses the borrowing intent already in its PPM, confirms the shortfall is the lower of the three statutory caps, and borrows the ₹2 crore to close the deal on schedule, recovering the borrowing cost entirely from the defaulting investor once recovered. The deal closes on time and the non-defaulting investors are unaffected operationally.

The Category III fund facing the identical shortfall has no borrowing option. It must either delay the investment until it can reallocate the shortfall pro-rata among non-defaulting investors, which risks losing a time-sensitive opportunity, or accept a smaller position size than originally planned. Its only leverage over the defaulting investor is the contractual remedy stack: interest, suspension, and eventually dilution or forfeiture, none of which solves the immediate funding gap the way borrowing does for its Category II counterpart.

Where GIFT City IFSC funds sit differently

Funds set up in GIFT City’s International Financial Services Centre operate under the IFSCA (Fund Management Regulations), 2025, not SEBI’s AIF Regulations, since IFSC entities fall under the International Financial Services Centres Authority rather than SEBI. The commitment-drawdown mechanic itself is broadly similar in concept, and IFSCA has moved toward its own pari-passu principle for investor distributions through amendments proposed in late 2025. But the specific remedy toolkit discussed in this article, particularly the para 14.1.3 shortfall-borrowing mechanism and the Regulation 20(21) pro-rata carve-out on default, are SEBI-specific provisions that do not automatically extend to an IFSC fund. A GIFT City fund manager needs a contribution agreement and placement memorandum drafted against IFSCA’s own framework, not a copy-pasted SEBI template, to get an equivalent remedy set.

Where do capital call disputes typically arise?

The most common disputes are not about whether a call was missed, that is usually undisputed, but about three narrower questions:

Was the notice valid? If the call amount, purpose, or payment account deviates from what the PPM disclosed, an investor has grounds to argue the call itself was defective, independent of their non-payment.

Was the cure period honoured? Contribution agreements typically build in a cure window between the missed deadline and formal default declaration. Managers who move straight to dilution or forfeiture without documenting that the cure period lapsed expose the remedy to challenge.

Is the remedy proportionate to what was actually disclosed? A forfeiture percentage or dilution formula not clearly set out in the PPM at onboarding is difficult to enforce against an investor who can show they were not on notice of that specific consequence.

Contribution agreements increasingly build in arbitration or mediation clauses for exactly this reason: these disputes turn on interpretation of specific contractual language rather than broad questions of fact, and arbitration resolves that faster than civil litigation. Reputational consequences also play a real role in practice. In a market where LP relationships span multiple funds and vintages, a default that becomes known in the investor community can affect a family office’s or institution’s future access to co-investment opportunities, independent of any formal remedy invoked.

A defaulting investor’s strongest grounds for successfully contesting a remedy tend to be narrow and specific rather than broad:

• The notice amount, purpose, or payment account did not match what the PPM originally disclosed
• The contractual cure period was not documented as having actually lapsed before the remedy was invoked
• The specific remedy applied, particularly a forfeiture percentage or dilution formula, was not clearly disclosed to that investor at onboarding
• The call itself sought a differential right or preferential term not on SEBI’s approved list of permitted differential rights under the pari-passu framework

How do side letters and key-man clauses interact with a capital call default?

Two drafting features that sit outside the core contribution agreement can materially change how a default plays out in practice, and both are easy to overlook when the focus is on the remedy clause itself.

Side letters. SEBI’s pari-passu mandate under Regulation 20(22) significantly narrowed what a fund can offer a specific investor through a side letter, but a positive list of permitted differential terms still exists, including discretionary fee waivers or reductions for select investors. None of these permitted terms extends to capital call mechanics themselves: a side letter cannot lawfully give one investor a longer notice period, a lower default interest rate, or exemption from a specific remedy, since that would conflict with the pari-passu requirement that governs all investor rights other than the pro-rata investment right itself. Any side letter clause that touches default consequences differently for different investors is now a compliance risk in a way it was not before the November 2024 amendment.

Key-man clauses. A key-man clause, standard in most institutional-quality contribution agreements, triggers when a named investment professional whose track record anchored the fundraise departs the manager. The relevant interaction with capital call defaults runs in the opposite direction from what founders sometimes assume: a key-man trigger typically allows LPs to halt further capital calls entirely, or in some structures to force a vote on winding down the fund, rather than affecting how an existing default is resolved. A manager managing a live default should confirm no key-man trigger is pending, since invoking a harsh remedy against a defaulting LP while the fund’s own key-man provisions are in question weakens the manager’s position in any subsequent dispute.

Common mistakes that cost fund managers time and money

Disclosing a remedy in the contribution agreement that was never mentioned in the PPM. SEBI treats these as one integrated disclosure package. A dilution or forfeiture clause that appears only in the contribution agreement, without an equivalent in the PPM investors saw before committing, is vulnerable to challenge on the basis that the investor never had proper notice of it.

Applying the same shortfall-borrowing language across all three categories. As set out above, Category III funds cannot use this remedy. Using boilerplate PPM language that assumes it is available creates a disclosure that misleads investors about what protection the fund actually has.

Treating the cure period as optional. Skipping straight to a harsh remedy without documenting that the cure window ran its course is one of the most common grounds on which defaulting investors successfully contest a forfeiture or dilution decision.

Missing the pro-rata carve-out on default. Some managers continue treating a defaulting investor as entitled to full pro-rata rights in the affected investment, unaware that SEBI’s 13 December 2024 circular already exempts the fund from that obligation once default occurs. This can lead to unnecessary over-allocation to a non-paying investor.

Failing to update older PPMs against the November 2024 amendment. Funds registered before Regulation 20(21) and 20(22) came into force need to actively confirm how their existing differential rights and drawdown mechanics are treated under the transition provisions, rather than assuming legacy terms carry forward automatically.

Case study

Situation: A Category II private credit AIF based in Mumbai, three years into its investment period, with 40 LPs across HNI and family office investors.

Challenge: A mid-sized family office LP missed a ₹1.8 crore capital call tied to a time-sensitive investee opportunity. The fund’s PPM disclosed interest and dilution remedies but was silent on shortfall borrowing.

What Treelife did: Reviewed the contribution agreement and PPM to confirm which remedies were actually available and enforceable, documented the cure period timeline to support a defensible dilution calculation, and advised on updating the PPM ahead of the next scheme to include the shortfall-borrowing mechanism with correct para 14.1.3 conditions built in.

Outcome: The fund closed the investment on schedule using existing investor capital reallocated pro-rata among non-defaulting LPs, avoided a disputed dilution claim by having clean cure-period documentation, and entered its next fundraising cycle with a PPM that gives it the borrowing option this default had exposed as missing.

FAQ’s on Capital calls and drawdowns

Q: What is the difference between a capital call and a drawdown?
A: A capital call is the manager’s formal notice requesting payment. A drawdown is the investor’s actual transfer of funds in response. The terms are often used interchangeably, but the distinction matters when assessing whether a default has occurred.

Q: How much notice does an AIF have to give before a capital call payment is due?
A: Market practice is 10 to 15 business days, set out in the contribution agreement. SEBI does not mandate a single fixed period, but requires the period disclosed in the PPM to be honoured consistently.

Q: What are the tax implications of a delayed capital call payment?
A: Delayed payment itself has no direct tax consequence for the investor, but default interest received by the fund is typically treated as fund income and taxed according to the AIF’s category (pass-through for Category I and II, fund-level for Category III under Section 115UB of the Income Tax Act, 1961).

Q: Can an AIF charge a defaulting investor for the cost of covering a shortfall?
A: Yes. Under para 14.1.3 of SEBI’s Master Circular, where a Category I or II AIF borrows to cover a shortfall caused by a default, the cost of that borrowing must be charged only to the defaulting investor, not spread across the fund.

Q: How long does the capital call default resolution process typically take?
A: This depends on the contribution agreement’s cure period, typically 10 to 30 days, followed by the specific remedy invoked. Interest and rights suspension apply immediately; dilution, forfeiture, or specific performance proceedings can take weeks to months depending on whether the investor contests the remedy.

Q: What documentation does a fund need to enforce a default remedy?
A: A clean paper trail showing the original PPM disclosure of the remedy, the capital call notice itself, proof of the missed deadline, and documentation that any contractual cure period was allowed to lapse before the remedy was invoked.

Q: Does a capital call default affect an investor’s participation in other schemes of the same AIF?
A: Not automatically. Each scheme’s contribution agreement is typically a separate contract, though managers may build cross-default clauses that extend consequences across schemes where explicitly disclosed.

Q: What happens to a defaulting investor’s existing distributions?
A: Distribution rights are typically suspended for the defaulting investor pending resolution, and any amounts otherwise due may be set off against the outstanding call amount, subject to the terms of the contribution agreement.

Q: Can a co-founder or family member step in to cover a missed capital call on behalf of an investor?
A: Only if the contribution agreement and PPM permit substitution or assignment of the commitment, which requires the manager’s consent and compliance with the fund’s investor eligibility criteria, including the minimum investment threshold under Regulation 10(c).

Q: How does a capital call default affect an NRI investor differently?
A: The core contractual remedies apply identically, but an NRI investor’s default may also trigger FEMA-related reporting considerations for the fund if units are subsequently transferred, reallocated, or forfeited, since changes in foreign investor holdings can require intimation under applicable RBI reporting frameworks.

Q: What happens if a capital call is challenged as improperly issued?
A: If an investor successfully argues the notice deviated from PPM-disclosed terms, either in amount calculation, purpose, or payment account, the call itself may be treated as defective, which can delay or block the manager’s ability to invoke default remedies until a compliant notice is reissued.

Q: Are capital call defaults reported to SEBI?
A: There is no requirement to report individual investor defaults to SEBI in real time, but defaults and their resolution should be reflected in the fund’s periodic activity reports and can surface during SEBI’s review of the fund’s quarterly and annual filings.

Q: Can a fund exclude a defaulting investor from future investment opportunities entirely?
A: Yes, subject to the terms of the contribution agreement. Beyond the specific CIV co-investment disqualification under the September 2025 framework, managers may also build broader exclusion rights into the PPM for repeated or unresolved defaults.

Regulatory references

• SEBI (Alternative Investment Funds) Regulations, 2012, Regulation 10(c) (minimum investment threshold)
• SEBI (Alternative Investment Funds) (Fifth Amendment) Regulations, 2024, notified 18 November 2024 (Regulation 20(21) pro-rata rights, Regulation 20(22) pari-passu rights)
• SEBI Circular dated 13 December 2024, “Pro-rata and pari-passu rights of investors of AIFs” (default exemption to pro-rata obligation)
• SEBI Master Circular for AIFs, paragraph 14.1.3 (Category I and II shortfall borrowing conditions)
• SEBI’s September 2025 Co-Investment Vehicle framework, Regulation 17A (CIV disqualification on default)
• Income Tax Act, 1961, Section 115UB (pass-through and fund-level taxation of AIF income)

External sources

• Securities and Exchange Board of India
• SEBI Circulars
• Income Tax India
• Reserve Bank of India