Private Placement Memorandum for an AIF: Structure, Requirements, Drafting

The Private Placement Memorandum is the most consequential document an Alternative Investment Fund produces. Before a single rupee is raised, before the investment committee meets for the first time, before a contribution agreement is signed, the PPM must be filed with the Securities and Exchange Board of India (SEBI) and taken on record. It governs the relationship between the fund, its investors, and the regulator across the entire life of the scheme, sometimes a decade or more. A poorly drafted PPM does not just create compliance risk at the filing stage; it creates contractual exposure at every subsequent investor meeting, capital call, and exit. Fund managers who treat the PPM as a regulatory checkbox rather than a foundational operating document consistently face problems at the worst possible times.

What is a PPM and how is it different from an offering document in other structures?

A Private Placement Memorandum is the primary statutory disclosure document through which an AIF communicates all material information about the fund to prospective investors, and through which the fund establishes the terms on which it will raise and deploy capital. Under Regulation 11 of the SEBI (Alternative Investment Funds) Regulations, 2012, no AIF may raise funds from investors without filing a PPM with SEBI at least 30 days before the launch of any scheme.

The PPM is not a marketing document. It is the definitive contract between the fund and its investor base. Unlike a prospectus filed under the Companies Act 2013 or a public issue document, a PPM is circulated privately and only to investors who meet SEBI’s minimum investment threshold (₹1 crore per investor for most categories, with relaxations for accredited investors). The document is not available to the general public. That private character is precisely why the disclosure burden placed on the PPM is so high: since the regulator cannot rely on public market price discovery to surface information gaps, every material fact must be in the document itself.

In a global fund context, a PPM functions similarly to a Limited Partnership Agreement and Offering Memorandum combined into a single document. In the Indian AIF framework, the PPM works alongside (not instead of) the Trust Deed, Investment Manager Agreement, and Contribution Agreement, each playing a distinct role that the PPM must be consistent with. Inconsistencies between these documents are one of the most common reasons SEBI delays taking a PPM on record.

What is the legal basis for filing a PPM?

The PPM obligation sits primarily in Regulation 11 of the SEBI (Alternative Investment Funds) Regulations, 2012, which requires every AIF to file a PPM with SEBI through a SEBI-registered merchant banker (except for Large Value Fund schemes and AI-only fund schemes, as discussed below). The regulation also requires that the PPM contain all necessary information that a prospective investor would reasonably require to make an informed decision.

Regulation 11(2) specifically mandates disclosure of disciplinary history: covering the AIF, its sponsor, manager, trustees, and the directors or partners of those entities, for a period of five years prior to the filing date. Tax disputes exceeding ₹5 lakh must also be disclosed under this provision. This is not a standard boilerplate section. SEBI reads it.

The SEBI Master Circular No. SEBI/HO/AFD-1/AFD-1-PoD/P/CIR/2024/39 dated 07/05/2024 (“Master Circular”) is the operative document that consolidates all PPM-related obligations as of 31/03/2024. It supersedes the 2023 Master Circular and is the current benchmark against which every PPM is assessed. The template mandated under Annexure 1 of the Master Circular applies to Category I and Category II AIFs. Category III AIFs have a separate template. The November 2025 and December 2025 amendments introduced modifications specifically for LVF schemes and AI-only funds, covered separately below.

Key legal instruments governing the PPM

Instrument	Relevance to PPM
SEBI (AIF) Regulations, 2012, Regulation 11	Core obligation to file PPM; disclosure of disciplinary history
SEBI (AIF) Regulations, 2012, Regulation 20(13)	Obligation to disclose material changes to SEBI and investors
SEBI (AIF) Regulations, 2012, Regulations 20(21) and 20(22)	Pro-rata and pari passu rights of investors; disclosure of differential rights
SEBI (AIF) Regulations, 2012, Regulation 29	Consequences for deviation from PPM terms
SEBI Master Circular, 07/05/2024	Operative template, filing process, audit requirements
SEBI Circular No. SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/175 dated 13/12/2024	Pro-rata and pari passu rights; side letter disclosure requirements; LVF pari passu exemption
SEBI (AIF) (Third Amendment) Regulations, 2025 (notified 18/11/2025)	LVF and AI-only fund framework; PPM template exemptions
SEBI Circular dated 08/12/2025	Operational guidelines for AI-only fund migration and LVF PPM exemptions
IFSCA (Fund Management) Regulations, 2025	PPM and scheme launch framework for GIFT City AIF-equivalent structures

What is the SEBI-mandated PPM template structure?

SEBI introduced the mandatory PPM template to address a genuine problem: in the absence of a standard format, the quality of disclosure across AIFs varied widely. Some PPMs ran to 150 pages of dense legal text that disclosed little of practical use. Others omitted entire sections on conflict of interest or risk factors. The template standardises the minimum floor of disclosure.

The template divides the PPM into two parts.

Part A (minimum disclosures) contains sections that every AIF must populate without exception. If a particular provision is not applicable, the fund must state that explicitly and explain why. Blank sections or omissions are not acceptable to SEBI.

Part B (supplementary information) contains additional sections that AIFs are encouraged (but not required) to include. Most well-run funds include Part B in full because it gives investors the context needed to make a genuine investment decision, and because it reduces the volume of due diligence questions during the fundraise.

The two-part structure applies to Category I and Category II AIFs. Category III AIFs have a separate template under Annexure 2 of the Master Circular, given the more complex leverage and derivatives strategies these funds employ.

Section-by-section breakdown: what every PPM must contain

Executive summary and fund overview

The executive summary is the first substantive section investors read. SEBI requires it to provide a clear, high-level overview that allows a sophisticated investor to understand the fund’s category, target corpus, investment focus, and proposed tenure in a single read. The summary must state:

• AIF category (I, II, or III) and sub-category where applicable
• Target corpus and the green-shoe option, if any
• Investment objective in two to three sentences
• Target sectors and geographies
• Proposed tenure and extension rights
• Minimum investment per investor

Do not use the executive summary to reproduce marketing language. SEBI reviewers flag boilerplate such as “seeking to generate superior risk-adjusted returns” without any specificity on what strategy or sector is being pursued.

Investment strategy and mandate

This section is the operational core of the PPM and, from Treelife’s experience, the one most often sent back for revision by SEBI. The strategy section must describe, with precision:

• Stage of investment (seed, growth, pre-IPO, distressed debt, structured credit)
• Sector focus and exclusions
• Geographic concentration (if investments outside India are contemplated, FEMA compliance obligations must be referenced)
• Investment size range per portfolio company
• Co-investment rights, if applicable
• Concentration limits: Regulation 15 of the AIF Regulations prescribes that Category I and II AIFs cannot invest more than 25% of investable funds in a single investee company
• Follow-on investment policy
• Hedging and derivatives use (primarily relevant for Category III AIFs)

Vague strategy descriptions create two risks. First, they slow SEBI approval because reviewers seek clarifications. Second, after launch, a broad mandate gives the Investment Committee maximum flexibility but gives investors minimum protection, and sophisticated LPs will push back on this during subscription negotiations.

Fund structure and key parties

Table: Key parties in an AIF structure

Party	Role	Minimum requirement
Sponsor	Promotes the AIF; provides skin-in-the-game commitment	2.5% of corpus or ₹5 crore, whichever is lower (Regulation 10)
Trustee	Holds assets in trust; fiduciary to investors	Must not be an associate of the manager in most structures
Investment Manager	Makes investment decisions; runs operations	Net worth of ₹5 crore (Category I/II); ₹10 crore (Category III); key investment team must hold NISM certification
Custodian	Safekeeps assets	Mandatory for AIFs with AUM above ₹500 crore; for dematerialised holdings from 01/10/2024
Administrator / RTA	Handles unit registry and investor records	Not mandatory but market practice for institutional funds

The PPM must identify each party by full legal name, registration number, and address. The Investment Manager’s profile (including the names, qualifications, and experience of every key investment professional) must be disclosed in detail. If a key person leaves after the fund is live and that departure constitutes a material change, the investor consent mechanics under Regulation 20(13) are triggered.

Sponsor commitment and skin-in-the-game

Regulation 10(d) of the AIF Regulations requires the sponsor or manager to hold a continuing interest in the fund of at least 2.5% of the corpus or ₹5 crore, whichever is lower, throughout the tenure of the scheme. The PPM must state the exact amount, the class of units through which the commitment is held, whether it is in cash or in kind, and whether any drawdown schedule applies. SEBI’s requirement is that this figure be recorded identically in both the Trust Deed and the PPM; mismatches between the two documents are a common filing error.

For Category III AIFs, the continuing interest requirement is higher: 5% of the corpus or ₹10 crore, whichever is lower.

Fee structure and distribution waterfall

The fee section is the most commercially negotiated part of any PPM, and SEBI requires a tabular illustration that shows investors exactly how fees are applied across multiple scenarios. The Master Circular explicitly requires a worked numerical example, not just a description of the fee structure in prose.

A typical Category II AIF fee structure includes:

• Management fee: Usually 1.5% to 2% per annum on committed capital or deployed capital. The PPM must specify the calculation base, the frequency of charging, and whether it steps down after the investment period.
• Setup and organisational costs: One-time fees that are typically charged to the fund (and therefore borne by investors pro rata). The PPM must cap these or state that they are uncapped.
• Transaction and monitoring fees: Charged by the manager for deal sourcing and portfolio company oversight. These may or may not be offset against the management fee. The PPM must state the offset policy clearly.
• Performance fee / carried interest: Typically 15% to 20% of profits above a hurdle rate. The PPM must disclose the hurdle rate (commonly 8% per annum for most Category II AIFs), the carry percentage, the catch-up provision (if any), the distribution waterfall model (deal-by-deal or whole-fund), and any clawback mechanism.

The distribution waterfall must be described in the PPM and illustrated with a worked numerical example. A standard whole-fund waterfall for a Category II AIF follows this sequence:

1. Return of contributed capital to all investors
2. Preferred return to investors at the hurdle rate (e.g., 8% per annum compounded)
3. Catch-up to the manager (where applicable), until the manager has received its carry percentage of total profits since inception
4. Carried interest to the manager on remaining profits (e.g., 20%)
5. Residual profits distributed pro rata to investors

Deal-by-deal waterfalls distribute carry after each realisation rather than at fund level. They are more favourable to managers but require robust clawback provisions to protect investors from overpayment of carry in early deals that may be offset by losses later. SEBI expects the PPM to disclose clearly which model is being used and what protections exist for investors.

The management fee is subject to Goods and Services Tax at 18% under the category of financial and management advisory services. Whether this GST is borne by the fund or charged additionally to investors must be stated explicitly.

Risk factors

Risk factors must be specific to the fund’s strategy, not generic boilerplate. SEBI reviewers are trained to spot copy-pasted risk sections. The PPM must cover:

• Strategy-specific risks (concentration risk, sector risk, liquidity risk, valuation risk for unlisted securities)
• Key person risk and succession plan
• Regulatory risk (SEBI, RBI, FEMA, sectoral regulators in target industries)
• Currency risk (if offshore investments are contemplated)
• Tax risk (pass-through tax treatment under Sections 10(23FBA) and 115UB of the Income Tax Act, 1961 applies to Category I and II AIFs, but the tax position on carried interest remains unsettled)
• Co-investor and syndication risk
• Force majeure and pandemic provisions (market practice since 2020)

The audit of the Risk Factors section under the annual PPM audit is optional under the Master Circular, but the section itself is mandatory in the PPM.

Offshore investments and FEMA limits: what the PPM strategy section must address

This is a drafting dimension that receives little coverage in Indian fund formation literature, yet it is one of the more common triggers for SEBI queries on Category I and II AIF PPMs that contemplate cross-border investing.

The regulatory framework

SEBI permits AIFs to invest in overseas securities and overseas funds, but subject to an aggregate industry-wide limit. As of the current SEBI notification, the combined overseas investment limit is USD 1,500 million for Category I and II AIFs and USD 500 million for Category III AIFs. These limits are periodically revised and are allocated on a first-come-first-served basis through SEBI’s overseas investment window. Individual funds may not invest more than 25% of their investable corpus in overseas securities, regardless of whether the industry-wide window is available.

PPM drafting obligations for funds with offshore mandates

If the PPM strategy section contemplates any form of overseas investment (including investments in offshore funds-of-funds, co-investments alongside global LPs in foreign portfolio companies, or investments in listed overseas securities), the PPM must:

• Explicitly state that overseas investments are subject to SEBI’s aggregate industry-wide limit and that the fund may not be able to make overseas investments if the window is exhausted
• Reference compliance with the Foreign Exchange Management Act, 1999 and applicable RBI Master Directions for overseas portfolio investments by AIFs
• Specify the maximum percentage of investable funds that may be deployed overseas (the regulatory cap is 25%, but the PPM may set a lower fund-specific limit)
• Disclose the currency risk arising from overseas investments and the fund’s hedging policy (or lack thereof)

The Foreign Investment Committee complication

Where the Investment Committee of the AIF includes external members who are not resident Indian citizens (which is common in funds with foreign LP bases or global advisory boards), SEBI has noted pending regulatory clarity on the applicability of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 to investment decisions made by such committees. Until SEBI issues final guidance, applications for registration and new scheme launches are being processed on a case-by-case basis. The PPM should flag this issue in the governance section and in the regulatory risk factors, and the manager should take specific legal advice before seating non-resident members on the Investment Committee.

Funds set up as Indian AIFs but investing entirely outside India

Some managers register an Indian AIF specifically to pool capital from resident Indian investors for deployment into global opportunities. The PPM for such a fund must be drafted with particular attention to the FEMA overseas direct investment framework, RBI approval requirements for remittances above certain thresholds, and the tax treatment of foreign income in the hands of the AIF under Section 115UB of the Income Tax Act, 1961. Pass-through tax treatment applies to Category I and II AIFs, but the characterisation of foreign income (whether as capital gains, dividends, or other income) may vary and must be addressed in the tax section of the PPM.

All AIFs must disclose their valuation methodology in the PPM. From 01/10/2024, AIFs must hold investments in dematerialised form where applicable, and the valuation policy must account for this. The Master Circular requires that:

• Unlisted equity investments be valued using a methodology consistent with SEBI-prescribed valuation norms (typically International Private Equity and Venture Capital Valuation Guidelines or equivalent)
• An independent registered valuer be appointed for annual valuations
• Any deviation from the stated valuation methodology be reported to the trustee and to investors

Managers who draft vague valuation policies (e.g., “as determined by the Investment Manager in good faith”) will face investor pushback during due diligence and SEBI queries during the filing review.

Governance: Investment Committee and LPAC

The PPM must disclose the composition, quorum requirements, and decision-making authority of the Investment Committee. Where an external member sits on the Investment Committee, that member’s identity, qualification, and independence criteria must be disclosed.

Most institutional-quality PPMs also establish a Limited Partner Advisory Committee (LPAC), sometimes called an Investor Advisory Committee. While not mandated by the AIF Regulations, an LPAC is now standard practice for funds raising from family offices, pension funds, and DFIs. The PPM must specify:

• LPAC composition and how members are elected
• Matters reserved for LPAC approval or consultation (conflicts of interest, related-party transactions, valuations in dispute, key person events)
• LPAC’s non-executive, advisory role (the LPAC does not manage the fund)

Key person clause and manager removal: what the PPM must actually say

Most published guides mention “key person risk” as a disclosure item but stop there. The PPM clause itself must be enforceable, which requires considerably more precision. This gap matters because a key person event is one of the most disruptive situations a fund can face mid-lifecycle, and how the PPM handles it determines whether investors have practical recourse or just a disclosure they cannot act on.

What constitutes a key person event

The PPM must name each key person (typically the founding partners or designated fund managers) and specify the exact events that trigger the key person clause. Standard trigger events include:

• Departure from the Investment Manager (whether voluntary or involuntary)
• Loss of capacity to perform investment management duties for a defined period (typically 90 to 180 days)
• Conviction for a criminal offence or regulatory disqualification
• Death or permanent incapacity

The PPM should also specify whether a key person event is triggered by the departure of one named individual or requires multiple departures. Some funds tie the key person clause to a minimum number of “eligible” key persons remaining. For example, at least two of three named individuals must be active. Investors in growth equity and VC funds consistently negotiate for tighter thresholds than managers prefer.

What happens when a key person event is triggered

The PPM must describe the consequences of a key person event with precision. Standard market practice in India provides for:

1. Immediate suspension of new investment activity: the fund may not make new investments or follow-on investments in companies where it has not yet committed capital
2. A defined remedy period (typically 90 to 180 days) during which the manager must either resolve the key person situation (by replacing the departed individual to the satisfaction of the LPAC or a supermajority of investors) or give investors a formal election right
3. Investor election: if the remedy period expires without resolution, investors with a defined vote threshold (commonly 66% or 75% by value) may elect to terminate the investment period or trigger manager removal proceedings

Importantly, a key person event is not automatically a material change requiring full investor consent under Regulation 20(13), unless the PPM specifically treats it as one. Managers who do not define the key person consequences precisely in the PPM have no clear contractual framework to invoke when the event occurs.

No-fault removal rights

The PPM should include a no-fault removal right for the Investment Manager: the ability for a supermajority of investors to remove the manager without having to prove cause. This is not required by the SEBI AIF Regulations but is now standard in institutional-quality Indian fund documentation and is expected by family offices, DFIs, and overseas institutional investors.

A typical no-fault removal provision requires:

• Approval by investors holding at least 75% (sometimes 80%) of the total commitments to the fund, excluding the manager and sponsor’s commitment
• A notice period (typically 90 to 180 days) during which the fund continues to be managed under the existing mandate
• Appointment of a replacement manager or winding-up of the fund upon expiry of the notice period
• Adjustment to the carried interest entitlement; most PPMs reduce or eliminate the carry for the removed manager on unrealised investments, though vested carry on realised investments is typically preserved

The PPM must specify whether the no-fault removal right extends to the trustee and whether SEBI notification is required before any removal takes effect. The Compliance Test Report must reflect any such removal event.

The PPM must describe the capital call process in detail: how much notice investors receive before a drawdown, how capital calls are proportioned across investors, and what happens if an investor fails to fund a capital call. Default provisions (including interest on defaulted amounts, dilution of defaulted investor’s interest, and the manager’s right to seek specific performance) must be stated clearly. Vague or absent default provisions create collection enforcement problems that are expensive to resolve without contractual clarity.

Pari passu, pro-rata rights, and side letter disclosures

This is one of the most consequential areas of PPM drafting, and one that most published resources in this space treat superficially. The SEBI (AIF) Regulations, 2012 were amended on 18/11/2024 to codify the pro-rata and pari passu principle at the statutory level. SEBI Circular No. SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/175 dated 13/12/2024 then issued detailed implementation guidelines. Every fund manager filing a PPM today must understand what this circular requires.

What pro-rata means for the PPM

Regulation 20(21) of the AIF Regulations now requires that every investor’s rights in an AIF (both in terms of participating in investments and receiving a share of proceeds) must be in proportion to their commitment to the scheme. An investor who has committed 10% of the fund’s total capital is entitled to 10% of each investment opportunity and 10% of every distribution. The PPM must state this principle explicitly and describe how the fund operationalises it across capital calls, investment participations, and distributions.

What pari passu means for the PPM

Regulation 20(22) codifies the pari passu principle: investors must have equal rights in all respects. Differential rights (whether embedded in separate unit classes or granted through side letters) are permitted only within the implementation standards formulated by the Standard Setting Forum for AIFs (SFA) in consultation with SEBI. The PPM must:

• State whether the fund intends to offer any differential rights to any investor class
• Disclose the eligibility criteria for differential rights
• Confirm that no differential right will result in any investor bearing liability accrued to another investor
• Confirm that no differential right will allow any investor to control scheme-level investment decisions beyond what the regulations permit

Side letters and the PPM

Since the SEBI circular of 05/02/2020, AIFs have been required to disclose in their PPM that any differential right offered through a side letter or a separate agreement shall not have an adverse impact on the economic rights or other rights of any other investor. The December 2024 circular and subsequent SFA implementation standards tightened this further. AIFs whose PPMs were filed on or after 01/03/2020 were required to report, by 28/02/2025, all differential rights offered to investors that did not comply with the new SFA standards. Rights found to adversely affect other investors must be terminated immediately.

For managers who draft PPMs today, the practical implication is:

• Any MFN (Most Favoured Nation) clause, fee reduction arrangement, co-investment right, or information right granted to a specific investor must be disclosed in the PPM
• The PPM must state that the fund does not maintain undisclosed side agreements that grant economic preferences to specific investors
• Side letters themselves are not required to be annexed to the PPM, but their existence and the category of rights they grant must be referenced

LVF exemption from pari passu

LVFs can avail an exemption from the pari passu requirement, but only if appropriate disclosure is made in the PPM of the LVF scheme and each investor provides a written waiver at the time of onboarding. The prescribed waiver text requires the investor to acknowledge that the fund may offer differential rights to selected investors, and that this may affect the interests of other investors. For existing LVFs converting from standard structures, each existing investor must individually provide this waiver. PPMs for LVF schemes filed after 13/12/2024 must incorporate these disclosures and the waiver mechanism.

Disciplinary history and litigation

Under Regulation 11(2) of the AIF Regulations, the PPM must disclose the five-year disciplinary history of the AIF, sponsor, manager, all directors and partners of those entities, and trustees. This includes:

• Regulatory actions by SEBI, RBI, MCA, or any other regulator
• Criminal convictions
• Pending litigation exceeding ₹5 lakh (tax disputes included)
• Insolvency or bankruptcy proceedings

This section cannot be populated with “nil” as a blanket statement without verification. SEBI cross-checks this disclosure against its own enforcement records. First-time managers who have clean records still need to state that explicitly, with appropriate certifications from each individual listed.

Investor grievance mechanism and complaint disclosure

The Master Circular requires a separate chapter in the PPM disclosing the investor grievance mechanism. The AIF must maintain data on investor complaints received against it and against each of its schemes, and must compile this data within seven days of the end of each quarter. Any complaints and their resolution status must be disclosed. For a first-close scheme with no prior complaint history, the section should state that the mechanism is in place and describe the process prospectively.

How is the PPM filed with SEBI?

Who files the PPM?

For most AIFs, the PPM must be filed through a SEBI-registered merchant banker. The merchant banker is not simply a conduit: it is required to perform independent due diligence on the disclosures in the PPM and certify its findings in a Due Diligence Certificate (Annexure 3 of the Master Circular).

The merchant banker’s certificate confirms that the disclosures are accurate to the best of the merchant banker’s knowledge, that the PPM complies with the AIF Regulations and the Master Circular, and that the merchant banker has independently verified key disclosures. The merchant banker cannot be an associate of the AIF, its sponsor, or its manager; this independence requirement is strictly enforced.

Fund managers who appoint a connected merchant banker, or who treat the merchant banker as a filing agent rather than an independent verifier, create a compliance weakness that SEBI typically surfaces during the registration or post-registration audit process.

What is the timeline?

Filing the PPM initiates a 30-day window during which SEBI reviews the document and either takes it on record or raises queries. SEBI’s communication taking the PPM on record starts the 12-month clock within which the AIF must declare its First Close. The First Close corpus must not be less than the minimum corpus specified in the AIF Regulations for the relevant category.

Minimum corpus requirements under the AIF Regulations:

• Category I AIF (excluding Angel Funds): ₹20 crore
• Angel Fund: ₹10 crore
• Category II AIF: ₹20 crore
• Category III AIF: ₹20 crore

If the First Close is not declared within 12 months of SEBI’s communication, the PPM lapses and a fresh filing is required.

Filing fees

The application fee for taking a PPM on record varies by AIF category and is paid online through the SEBI Intermediary Portal. As of January 2025, SEBI updated its FAQ guidance to require that the exact fee amount be tendered (including paisa, with no rounding), failing which the system may reject the payment. This is an operational detail that creates avoidable delays for fund managers who round off fee amounts.

GIFT City IFSCA: when the PPM framework changes entirely

SEBI’s SEBI AIF Regulations, 2012 are not the only framework. Fund managers who are considering whether to set up a SEBI-registered domestic AIF or an IFSCA-regulated scheme in GIFT City need to understand that the two regimes have meaningfully different PPM mechanics. Fund managers who are considering whether to set up a SEBI-registered domestic AIF or an IFSCA-regulated scheme in GIFT City need to understand that the two regimes have meaningfully different PPM mechanics. Choosing the wrong structure and then discovering the PPM implications mid-formation is expensive.

What the IFSCA framework is

The International Financial Services Centres Authority (IFSCA) is the unified regulator for all financial services in GIFT City, India’s only operational International Financial Services Centre (IFSC). AIF-equivalent structures in GIFT City are governed by the International Financial Services Centres Authority (Fund Management) Regulations, 2025 (“FM Regulations”), not by the SEBI AIF Regulations, 2012. IFSCA registers Fund Management Entities (FMEs) rather than the AIFs themselves. The FME then launches schemes, which are the GIFT City equivalent of AIF schemes.

Units and entities set up in GIFT City are treated as “persons resident outside India” for FEMA purposes, which means any GIFT City fund investing into Indian assets does so through the Foreign Direct Investment or Foreign Portfolio Investment route, not through the domestic AIF route.

Key PPM differences between SEBI AIF and GIFT City schemes

Table: SEBI AIF vs GIFT City IFSCA scheme: PPM and formation differences

Parameter	SEBI AIF (onshore)	GIFT City IFSCA scheme
Regulator	SEBI	IFSCA
PPM filing requirement	Filed through merchant banker; 30-day review period	Filed with IFSCA; scheme can launch within 21 days if IFSCA observations addressed
PPM template	Mandatory SEBI template (Annexure 1 of May 2024 Master Circular)	No prescribed SEBI template; IFSCA has its own minimum disclosure framework
Currency of fund operations	INR	USD or other foreign currency
Mandatory merchant banker	Yes (for most categories)	Not required under IFSCA FM Regulations
NISM certification	Required for key investment team	Not expressly required under IFSCA framework
Annual PPM audit	Mandatory (subject to LVF/AI-only exemptions)	IFSCA requires annual report and audit; specific PPM audit mechanics differ
Tax regime	Sections 10(23FBA) and 115UB of Income Tax Act, 1961 (pass-through)	GIFT City tax incentives under Special Economic Zones Act, 2005; no STT/CTT/DDT; capital gains exemption for IFSC exchange-traded securities
Investor base	Indian resident and foreign investors (subject to FEMA limits)	Primarily foreign investors and NRIs; resident Indians can invest subject to Liberalised Remittance Scheme limits
Investment into India	Direct, as a domestic AIF	Via FDI/FPI route; treated as foreign investment

When GIFT City makes sense and what the PPM must reflect

A GIFT City AIF structure is the more appropriate choice when the fund manager’s primary investor base is outside India (foreign LPs, NRI family offices, global institutions), when the deployment is primarily outside India or into India via FPI, or when the manager wants to operate in USD without the INR currency constraints of a domestic AIF.

The PPM (or offering document) for a GIFT City scheme must address:

• That the FME and scheme are regulated by IFSCA, not SEBI
• The foreign currency denomination of commitments and distributions
• FATCA, OECD Common Reporting Standard (CRS), and Anti-Money Laundering / Counter-Terrorism Financing compliance, since international investors expect these disclosures explicitly
• The capital gains tax exemption on securities traded on IFSC exchanges under the SEZ Act framework
• The route through which investments into Indian entities will be made (FDI route for controlling stakes, FPI route for portfolio investments)
• Repatriation rights: GIFT City funds have more seamless repatriation mechanics than domestic AIFs, and this must be disclosed as a structural feature

The hybrid model: onshore feeder into GIFT City master

Some managers run a parallel structure: a domestic AIF acting as a feeder that pools capital from Indian resident investors and deploys into a GIFT City master fund, while international investors come in directly at the master level. This structure requires two separate PPMs: one filed with SEBI for the domestic feeder (following the standard AIF template), and one filed with IFSCA for the master scheme. The two documents must be consistent in their description of the investment strategy, fee structure, and governance, but the regulatory disclosure requirements, currency, and investor eligibility criteria will differ. This is a structuring decision with significant PPM drafting implications that managers should take advice on before committing to either template.

What does the annual PPM audit require?

Once the AIF is operational, it must conduct an annual audit of its PPM to verify that the fund is operating in accordance with the terms disclosed to investors. The audit report must be submitted to SEBI and to the Trustee or Sponsor within six months of the end of the financial year.

The audit covers whether the fund’s actual operations (investment decisions, fee calculations, drawdown mechanics, governance procedures) match what the PPM says. Deviations detected during the audit must be reported. Material deviations can result in enforcement action under Regulation 29 of the AIF Regulations, including suspension of the fund’s registration, directions to cure the deviation, or in extreme cases, directions to refund investor contributions.

The following sections of the PPM are mandatory subjects of the annual audit:

• Investment strategy and concentration limits
• Fee structure and distribution waterfall calculations
• Governance procedures and Investment Committee functioning
• Drawdown and capital call mechanics
• Investor communication and reporting obligations
• Investor grievance data and resolution

The following sections are exempt from mandatory audit under the Master Circular:

• Risk Factors
• Legal, Regulatory and Tax Considerations
• Track Record of First Time Managers

These exemptions are on the annual audit, not on the disclosure itself. All three sections must still appear in the PPM in complete form.

What changed in 2025 and 2026: LVF exemptions and AI-only fund framework

The SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025, notified on 18/11/2025, introduced two significant changes that affect PPM obligations:

Large Value Fund (LVF) exemptions

LVFs (schemes of an AIF where every investor, other than the manager, sponsor, and their employees or directors, is an Accredited Investor with a minimum commitment of ₹25 crore, reduced from ₹70 crore by the November 2025 amendment) are now permanently exempt from:

1. Using the SEBI-prescribed standard PPM template
2. Conducting the mandatory annual audit of PPM terms

These exemptions apply automatically, without requiring individual investor waivers. The earlier framework required each investor to separately waive these protections in writing, a cumbersome requirement that the amendment removes.

For LVF managers, the removal of the template requirement does not mean the PPM can be abbreviated. Core provisions on valuation, conflicts of interest, liquidity, fees, investor rights, and side letter disclosures must be retained. SEBI’s broader principles on fairness and investor protection continue to apply even without the template mandate. The freedom from the standard template is an invitation to draft a more investor-specific, commercially nuanced document, not a licence to reduce disclosure.

LVF schemes must carry “LVF” in their scheme name (e.g., “Xyz Capital Growth LVF”).

AI-only fund framework

The November 2025 amendments also formally introduced the concept of “AI-only funds”: AIFs or schemes where every investor (other than the manager, sponsor, and their employees or directors) is an Accredited Investor. LVFs fall within this broader AI-only fund category.

A key distinction from LVFs: AI-only funds (other than LVFs) must still file the PPM through a merchant banker and are still subject to the standard PPM template and annual PPM audit. The merchant banker filing requirement is retained for AI-only funds that are not LVFs.

SEBI’s December 2025 circular clarifies that an investor who qualifies as an Accredited Investor at the time of onboarding retains that status for the full life of the scheme, even if their financial position changes and they would no longer meet accreditation criteria. This provides operational certainty for managers, who no longer need to track ongoing accreditation status of existing investors.

Co-investment vehicle shelf placement memorandum

For Category I and Category II AIFs (except Angel Funds registered on or after 08/09/2025) that wish to offer co-investment opportunities through a Co-Investment Vehicle (CIV) scheme, a separate Shelf Placement Memorandum must be filed with SEBI through a merchant banker, along with a filing fee of ₹1 lakh. The CIV framework allows only accredited investors to participate. The Shelf Placement Memorandum requirement is distinct from the scheme-level PPM.

What happens when material changes occur after the PPM is filed?

Under Regulation 20(13) of the AIF Regulations, AIFs must promptly disclose any material changes in fund structure, investment policy, or governance to both SEBI and existing investors. The Master Circular defines “material changes” as changes in the fundamental attributes of the fund or scheme.

The process for material changes is:

1. Notice to investors explaining the proposed change and its impact
2. Offer of an exit option (at NAV without exit load) to investors who do not consent to the change
3. Implementation of the change only after a defined consent period has elapsed

Material changes that significantly influence an investor’s decision to remain in the fund must follow this full consent process. Administrative changes (updated notice addresses, minor typographical corrections, addition of regulatory disclosures required by new SEBI circulars) can generally be effected through a PPM supplement filed with SEBI, without a full investor consent exercise.

The AIF must also intimate SEBI and investors of changes in PPM terms within one month of the end of the financial year in which the change was made, regardless of whether the change constitutes a material change requiring consent.

Common mistakes that cost fund managers time and money

Misalignment between the PPM and the Trust Deed

The Trust Deed and PPM must be internally consistent. The sponsor commitment figure, fee structure, governing law clause, and dispute resolution mechanism must be identical in both documents. SEBI’s review process surfaces mismatches quickly. Correcting them after SEBI raises a query adds two to four weeks to the filing timeline.

Strategy descriptions that are too broad

A PPM that describes the strategy as “investing in high-growth opportunities across sectors” gives SEBI nothing to assess for category compliance and gives investors nothing to evaluate. Strategy vagueness may also create liability if the fund’s actual investments deviate from investor expectations. SEBI expects sector-specific language, stage-specific language, and concentration limit disclosures that are operationally meaningful.

Missing or vague distribution waterfall examples

The Master Circular explicitly requires a numerical illustration of the fee structure and waterfall. Managers who describe the waterfall in prose without a worked example will receive a query from SEBI. The illustration must show fee application and distribution across multiple return scenarios, not just the best-case outcome.

Treating the merchant banker as a filing agent

The merchant banker is legally responsible for independent due diligence. Managers who hand the merchant banker a finished PPM without engaging in a genuine diligence process create a situation where the merchant banker’s certificate is not based on actual verification. If SEBI later finds material inaccuracies, both the manager and the merchant banker face regulatory exposure. Merchant banker engagement should begin early in the drafting process, not at the end.

Ignoring the annual audit obligation

Fund managers who are unaware that an annual PPM audit is mandatory, or who are aware but do not treat it as a substantive exercise, expose themselves to enforcement risk under Regulation 29. The audit is not a theoretical compliance step. SEBI has taken action against AIFs for operating outside their stated investment mandate, and the annual audit is the primary mechanism through which such deviations are surfaced.

Treelife practitioner note

In the AIF fund formation engagements we have run at Treelife, the PPM section that generates the most friction between the manager, the merchant banker, and SEBI is not the fee section or the risk section: it is the investment strategy. The AIF Regulations require that a fund’s registration category match its actual investment mandate. Category I and Category II AIFs cannot take leverage positions beyond what the regulations permit. Category II AIFs cannot deploy into listed securities in the way a Category III AIF can.

Where we see the most pressure is in the drafting of Category II debt fund PPMs, where managers want the flexibility to invest in both structured credit and equity-linked instruments (convertible notes, optionally convertible debentures, CCDs). The PPM strategy section must clearly articulate how those instruments fit within the Category II mandate under Regulation 2(1)(b) of the AIF Regulations, which covers funds that do not borrow for leverage but may invest in debt or equity of unlisted or listed entities.

We have also seen managers underestimate the disciplinary history section. Under Regulation 11(2), the five-year lookback applies to every director and partner of the manager entity and trustee company, not just the fund-level entities. When a manager has a large founding team with diverse prior professional histories, collecting and verifying this information from every individual takes time. Starting this process two weeks before the PPM is due to be filed consistently creates bottlenecks. Our standard advice is to begin the disciplinary history verification exercise the moment the legal entity formation is complete, well before the PPM drafting begins.

The annual audit, in our experience, is most valuable when it is treated as an internal controls exercise rather than a compliance output. Managers who use the audit process to review whether their capital call procedures, fee calculations, and valuation methodologies match what the PPM says tend to catch operational discrepancies before they become investor disputes. Those who file the audit report without substantive review are building up deferred risk.

Case study

Situation: Pre-Series A stage, first-time fund manager based in Mumbai, setting up a Category II AIF focused on venture debt for B2B SaaS companies. Target corpus ₹200 crore.

Challenge: The manager had drafted the strategy section broadly to preserve deal flexibility, which SEBI flagged in its first query round. The Trust Deed referenced a different hurdle rate than the PPM. The merchant banker had been engaged two weeks before filing and had not independently verified the disciplinary history of three overseas-based directors.

What Treelife did: Redrafted the strategy section with specific instrument types, ticket size ranges, and sectoral exclusions. Reconciled the Trust Deed and PPM. Ran a structured disciplinary history collection exercise across all disclosed individuals. Coordinated a substantive diligence session with the merchant banker covering all three areas of SEBI’s query.

Outcome: PPM taken on record by SEBI within 30 days of the revised filing. First Close declared in month 8 at ₹60 crore against a ₹20 crore minimum. Total time saved against the manager’s original timeline: approximately six weeks.

FAQ on PPM for Alternative Investment Funds in India

Q: Is the PPM a public document that any investor can access?
A: No. The PPM is a private document circulated only to prospective investors who meet SEBI’s eligibility criteria. It cannot be distributed publicly or used in general marketing. Any marketing material used for the fund must be consistent with the PPM and cannot make representations that go beyond what the PPM discloses.

Q: What is the filing fee for taking a PPM on record with SEBI?
A: Filing fees vary by AIF category and are paid through the SEBI Intermediary Portal. As of January 2025, SEBI requires the exact amount including paisa to be tendered online. Rounding the fee amount can result in system rejection. Fund managers should confirm the current fee schedule on the SEBI Intermediary Portal before filing, as these amounts are subject to revision.

Q: How long does SEBI take to take the PPM on record?
A: SEBI has 30 days from the date of filing to raise queries or take the PPM on record. In practice, the timeline varies depending on the completeness of the filing and the query resolution cycle. A clean first filing with no discrepancies can be taken on record within the 30-day window. Filings that require multiple rounds of query responses can take three to five months.

Q: Can a manager amend the PPM after it has been taken on record?
A: Yes. The PPM can be amended to reflect material or non-material changes. Material changes require investor notification, an exit option for non-consenting investors, and filing with SEBI. Non-material administrative changes can be effected through a supplement filed with SEBI. All changes in PPM terms must be intimated to SEBI and investors within one month of the financial year end in which the change occurred (SEBI Circular No. SEBI/HO/IMD/DF6/CIR/P/2021/549 dated 07/04/2021).

Q: Does a Category III AIF use the same PPM template as a Category I or II AIF?
A: No. Category III AIFs have a separate template under Annexure 2 of the SEBI Master Circular (May 2024). The Category III template addresses leverage limits (which cannot exceed 2 times NAV), derivatives and hedging strategies, and redemption norms applicable to open-ended schemes, which are not relevant for most Category I and II AIFs.

Q: Can an AIF raise money from foreign investors? Does that affect the PPM?
A: Yes, AIFs can accept contributions from foreign investors, provided the foreign investor’s home country regulator is a signatory to IOSCO’s Multilateral Memorandum of Understanding with SEBI. Foreign investment into an AIF is treated as foreign portfolio investment under FEMA and RBI regulations. The PPM must disclose whether foreign investors are being accepted, any FEMA-related restrictions on repatriation, and applicable withholding tax treatment for foreign investor distributions under Section 115UB of the Income Tax Act, 1961. If the AIF intends to invest outside India, separate FEMA compliance for overseas direct investments must also be addressed.

Q: What is the minimum corpus requirement for an AIF at First Close?
A: The minimum corpus at First Close is ₹20 crore for most AIFs (Category I, II, and III), except Angel Funds where the minimum is ₹10 crore (Regulation 10 of the SEBI AIF Regulations, 2012). The sponsor or manager’s continuing interest commitment (2.5% of corpus or ₹5 crore, whichever is lower) made to meet the First Close minimum corpus cannot be reduced or withdrawn after First Close.

Q: Are LVF managers exempt from all PPM obligations?
A: No. As of the November 2025 amendments, LVF managers are exempt from the standard SEBI PPM template and from the mandatory annual PPM audit. They are not exempt from all disclosure obligations. Core provisions covering valuation methodology, conflicts of interest, fee structure, investor rights, and side letter disclosures must still be included in the fund documents. SEBI’s general principles on fairness and investor protection apply to LVFs regardless of the template exemption.

Q: What happens if an AIF operates outside the terms of its PPM?
A: Operating outside PPM terms is a violation of Regulation 29 of the SEBI (AIF) Regulations, 2012. SEBI may impose penalties, suspend or cancel the AIF’s registration, direct the manager to refund investor contributions, or take other enforcement action. The annual PPM audit is designed to surface such deviations. Managers who detect their own deviations and proactively disclose them to SEBI and investors are generally in a stronger position than those who are found to have concealed deviations.

Q: Can the manager charge carry on deals before returning investor capital (deal-by-deal carry)?
A: Yes, subject to disclosure in the PPM. Deal-by-deal carry (where the manager takes carry after each portfolio realisation rather than after the fund has returned all invested capital) is permitted but requires a clawback provision protecting investors from overpayment of carry in early deals. The distribution waterfall model, whether deal-by-deal or whole-fund, must be clearly stated in the PPM with a numerical illustration. Both models are used in the Indian market; the whole-fund model is more common in larger PE funds, while deal-by-deal structures appear more frequently in VC and growth equity funds.

Q: What are the NISM certification requirements for the fund’s investment team?
A: The key investment team of the Investment Manager must include at least one person with the NISM-Series-XIX-C: Alternative Investment Fund Managers certification. This requirement continues for standard AIFs and for AI-only funds that are not LVF schemes. As of the November 2025 amendments, LVF schemes are exempt from the NISM certification requirement, on the basis that accredited investors are considered capable of independently assessing the manager’s credentials.

Q: What are pro-rata and pari passu rights, and does the PPM need to address them explicitly?
A: Yes, and this is no longer optional. Regulations 20(21) and 20(22) of the SEBI AIF Regulations, as amended on 18/11/2024, now codify these rights at the statutory level. Pro-rata means every investor participates in each investment and receives distributions in proportion to their commitment. Pari passu means investors have equal rights in all respects. The PPM must state whether differential rights (through unit classes or side letters) are being offered and disclose the eligibility criteria for such rights. Under the SEBI Circular dated 13/12/2024, AIFs whose PPMs were filed on or after 01/03/2020 were required to report any differential rights not covered by the Standard Setting Forum for AIFs’ implementation standards to SEBI by 28/02/2025. Rights that adversely affect other investors must be immediately terminated.

Q: What should a key person clause in the PPM actually specify?
A: A properly drafted key person clause must name the key persons, define the trigger events (departure, incapacity, regulatory disqualification, death), specify what happens immediately upon a trigger (typically, suspension of new investments), set a remedy period (commonly 90 to 180 days), and describe the investor election rights if the remedy period expires without resolution. Managers frequently draft key person clauses that describe the risk but do not create enforceable contractual consequences, which leaves investors with disclosure but no recourse. The PPM should also clarify whether a key person event constitutes a material change requiring full investor consent under Regulation 20(13).

Q: How is a GIFT City IFSCA scheme different from a SEBI-registered AIF, and does the PPM framework change?
A: Substantially, yes. A GIFT City scheme is regulated by the International Financial Services Centres Authority (IFSCA) under the FM Regulations, 2025, not by SEBI. The AIF equivalent scheme in GIFT City can be launched within 21 days of filing the offering document with IFSCA (compared to a 30-day minimum review for SEBI). There is no mandatory SEBI PPM template for IFSCA schemes, and a SEBI-registered merchant banker is not required for filing. IFSCA schemes operate in foreign currency and are treated as non-residents under FEMA, so any Indian investment is made via the FDI or FPI route. Managers considering GIFT City must draft the offering document with IFSCA’s disclosure requirements, FATCA/CRS compliance, and international investor AML standards: a meaningfully different exercise from a domestic SEBI PPM.

Q: If the fund contemplates overseas investments, what must the PPM disclose?
A: The PPM strategy section must explicitly state that overseas investments are subject to SEBI’s aggregate industry-wide limit (currently USD 1,500 million for Category I and II AIFs; USD 500 million for Category III AIFs) and that the fund may be unable to make such investments if the window is exhausted. The PPM must also state that the individual fund’s overseas exposure will not exceed 25% of investable funds, reference FEMA 1999 and RBI overseas investment directions, disclose currency risk and the fund’s hedging policy, and address the tax characterisation of foreign income under Section 115UB of the Income Tax Act, 1961. Where the Investment Committee includes non-resident members, the PPM’s governance section must flag the pending regulatory clarity from SEBI on the applicability of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

Q: Can a fund manager run both a domestic SEBI AIF and a GIFT City feeder-master structure simultaneously?
A: Yes, but this requires two separate PPMs: one filed with SEBI for the domestic feeder AIF under the standard template, and one filed with IFSCA for the GIFT City master scheme. The two documents must be consistent in their description of investment strategy, fees, and governance, but the regulatory disclosure requirements, currency denomination, investor eligibility, and tax disclosures differ substantially. This structure is often used to serve both Indian resident investors (through the domestic feeder) and foreign or NRI investors (through the GIFT City master). Legal and regulatory advice specific to the dual-PPM structure should be obtained before committing to this architecture.

Q: Does the PPM need to address the dematerialisation requirement for AIF investments?
A: Yes. As of 01/10/2024, AIFs must hold their investments in dematerialised form where applicable. The PPM’s valuation and operational sections should reflect this requirement, and any exemptions claimed for pre-October 2024 investments should be clearly documented in fund records.

Regulatory references:

• SEBI (Alternative Investment Funds) Regulations, 2012: Regulations 2(1)(b), 10, 11, 15, 20(13), 20(21), 20(22), 29
• SEBI Master Circular No. SEBI/HO/AFD-1/AFD-1-PoD/P/CIR/2024/39 dated 07/05/2024
• SEBI Circular No. SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/175 dated 13/12/2024: pro-rata and pari passu rights; side letter disclosure obligations
• SEBI (AIF) (Third Amendment) Regulations, 2025, notified 18/11/2025
• SEBI Circular dated 08/12/2025: operational guidelines for AI-only schemes and LVF PPM exemptions
• SEBI Circular No. SEBI/HO/IMD/DF6/CIR/P/2021/549 dated 07/04/2021: intimation of PPM changes
• SEBI Circular No. SEBI/HO/AFD-1/PoD/P/CIR/2022/155 dated 17/11/2022: First Close timelines
• IFSCA (Fund Management) Regulations, 2025: governing framework for GIFT City AIF-equivalent schemes
• Income Tax Act, 1961: Sections 10(23FBA) and 115UB, pass-through tax treatment for Category I and II AIFs
• Income Tax Act, 1961: Section 112A, long-term capital gains reference
• Companies Act 2013 (for private placement comparison)
• FEMA 1999 and RBI Master Directions on foreign investment in AIFs
• Foreign Exchange Management (Non-Debt Instruments) Rules, 2019: Schedule VIII, applicability to AIF Investment Committees with non-resident members

External sources:

• Securities and Exchange Board of India
• International Financial Services Centres Authority
• Ministry of Corporate Affairs
• Reserve Bank of India
• Income Tax India