Winding up an AIF: SEBI Process, Timelines and Payouts

The winding-up of an Alternative Investment Fund (AIF) is not a single event. It is a staged regulatory process, governed by Regulation 29 of the Securities and Exchange Board of India (SEBI) (Alternative Investment Funds) Regulations, 2012, that plays out over months or years after a scheme reaches the end of its permissible life. Between 2023 and 2026, SEBI has substantially rebuilt this process: the liquidation scheme concept was dropped, the dissolution period was introduced, and a June 2026 circular created a formal Inoperative Fund status for schemes carrying residual liabilities. Understanding where your fund sits in this sequence, and what each stage demands of you, is the difference between an orderly exit and a compliance default that puts your registration at risk.

What is the SEBI-mandated timeline to wind up an AIF scheme?

Under Regulation 29(7) of the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF scheme must liquidate all assets and distribute proceeds to investors within one year of the scheme’s tenure (or extended tenure) expiring. This one-year window is the Liquidation Period. If assets cannot be sold in that window, the scheme may seek a Dissolution Period with 75% investor approval by value, or distribute assets in-specie. The SEBI Amendment Regulations dated 18 April 2026 and Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026 dated 16 June 2026 have since added a further Inoperative Fund pathway for schemes with residual liabilities.

When does winding up begin?

Winding up starts earlier than most fund managers expect. Regulation 29(1) of the AIF Regulations provides that an AIF established as a trust or a limited liability partnership (LLP) shall be wound up when the tenure of the fund or all its schemes, as mentioned in the Private Placement Memorandum (PPM), expires. It also winds up if 75% of investors by value resolve that it should, or if SEBI directs it to. For a fund set up as a trust, there is an additional ground: if the trustees are satisfied that winding up is in investors’ interests, they can do so unilaterally.

In practice, winding up is not a legal event triggered by a single vote. It is the operational reality that sets in as the scheme enters its final year. The manager is expected to have substantially realised the portfolio by this point. What actually happens is that the trustee or board of directors or designated partners, as applicable, must intimate SEBI and investors of the circumstances leading to winding up. From that intimation date, no further investments can be made on behalf of the scheme.

The clause on tenure extensions is worth noting separately. Regulation 13(4) of the AIF Regulations permits a close-ended scheme’s tenure to be extended by up to two years, subject to the approval of two-thirds of unitholders by value. Extensions can be taken in one-year increments. If the required consent is not obtained, the scheme must fully liquidate within one year of its original tenure expiry. An extension is not a right; it requires active investor engagement, and any manager relying on the assumption that investors will approve extensions without preparation is exposed.

The four-stage regulatory timeline

Stage 1: Active fund period and tenure extension

The scheme operates under its original PPM tenure, typically five to ten years depending on the strategy. If the portfolio requires more time, the manager has two bites at a one-year extension each, subject to a two-thirds investor approval threshold. Once the extended (or original) tenure ends, the Liquidation Period begins automatically.

Stage 2: Liquidation Period (12 months)

This is the core operational phase. From the intimation date under Regulation 29(1), the scheme has one year to:

• Stop making new investments
• Liquidate all remaining portfolio positions
• Satisfy all permissible liabilities of the scheme
• Distribute net proceeds to investors

If the scheme successfully liquidates all assets and distributes all proceeds within this 12-month window, the manager then files for surrender of the registration certificate. SEBI’s operational requirement before accepting the surrender application is a confirmed nil balance in the trust or scheme account, evidenced by a bank statement.

The difficulty is that many schemes reach the end of the Liquidation Period with positions they cannot sell. A venture-backed startup may still be unlisted and illiquid. A real estate debt position may be in dispute. Tax demands may be pending. This is where the next stage becomes relevant.

Stage 3: Dissolution Period (duration not exceeding original scheme tenure)

The Dissolution Period was introduced by the SEBI (AIF) (Amendment) Regulations, 2024, notified on 25 April 2024, and operationalised by SEBI Circular No. SEBI/HO/AFD/PoD1/CIR/2024/026 dated 26 April 2024. It replaced the earlier Liquidation Scheme framework, which was formally dropped at the same time because of the tax, exchange control and structural complications it created.

The Dissolution Period can be commenced during the Liquidation Period with the consent of at least 75% of investors by value. To enter this period, the manager must:

• Disclose the tenure of the proposed dissolution period and the quantum of unliquidated investments to investors before seeking their consent
• Arrange for bids for at least 25% of the total value of unliquidated investments (note: if no bids can be obtained from the market, the 75% consent threshold still applies, but the manager must report the unliquidated assets to benchmarking agencies at a value of ₹1, regardless of actual realised value)
• File an information memorandum with SEBI through a merchant banker, along with a due diligence certificate from the merchant banker (format prescribed in the July 2024 circular)
• Dissenting investors must be offered an exit option funded from the bid proceeds

The Dissolution Period cannot exceed the original tenure of the scheme (including any extensions). If the scheme had a seven-year tenure, the Dissolution Period cannot be more than seven years. No further extensions are available beyond this.

At the end of the Dissolution Period, if investments remain unsold, they must be mandatorily distributed in-specie to investors. No further time is granted.

Important table: Key timelines in the AIF winding-up sequence

Stage	Trigger	Regulatory basis	Duration limit
Tenure extension	Board / investor vote before expiry	Regulation 13(4)	Up to 2 years (in 1-year tranches)
Liquidation Period	Automatic on tenure expiry	Regulation 29(7)	12 months
Dissolution Period	75% investor consent during Liquidation Period	Regulation 29B (inserted April 2024)	Max = original scheme tenure
Inoperative Fund	Application to SEBI; scheme retains proceeds or awaits litigation	SEBI Circular, 16 June 2026	Until liabilities resolved

Stage 4: Registration surrender or Inoperative Fund status

Once all investments are liquidated and proceeds distributed, the manager applies to SEBI to surrender the registration certificate. The prerequisite is a nil balance in the account, confirmed by a bank statement, along with confirmation that all investments are liquidated.

The problem SEBI has now addressed is what happens when a scheme has distributed the bulk of its proceeds but retains a residual amount due to pending tax demands, ongoing litigation, or unresolved regulatory claims. Under the pre-2026 framework, such schemes could not surrender their registration because the nil-balance requirement was not met, yet they had no active fund management to do. They remained trapped in the full regulatory compliance regime indefinitely.

The Inoperative Fund framework: what changed in June 2026

SEBI issued its June 2026 circular (Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026, dated 16 June 2026) following amendments to the AIF Regulations on 18 April 2026. The circular formalised a framework that many in the industry had been waiting for since the dissolution period was introduced two years earlier.

What triggers eligibility for Inoperative Fund status?

A scheme may apply for Inoperative Fund status if:

• It has retained liquidation proceeds beyond the permissible fund life because of one or more of these conditions:
  • Demonstrable receipt of a litigation notice, tax demand, show-cause notice, reassessment notice, summons, investigation communication, or similar official written communication indicating a potential tax, regulatory or legal liability
  • Consent from at least 75% of investors by value for retaining funds to address anticipated litigation or tax liabilities (the manager must disclose the amount proposed to be retained and the expected retention period)
  • Amounts required to meet residual winding-up related operational expenses, backed by invoices, supporting documents, or records of comparable expenses from prior years; retention for this purpose cannot exceed three years from the end of the permissible fund life
• Alternatively, a scheme may apply for Inoperative Fund status even without retained proceeds, if it needs to remain registered solely because of ongoing litigation where a favourable outcome is awaited

The key distinction: the three-year cap applies only to funds retaining money for operational expenses. Funds retaining money because of active litigation notices or actual demands are not subject to the three-year cap; they can retain until the matter resolves.

What restrictions apply to an Inoperative Fund?

Once designated as an Inoperative Fund, the AIF:

• Cannot launch any new schemes
• Cannot make any new investments
• Cannot charge management fees on any of its schemes
• Must invest retained monies only in instruments permitted under Regulation 15(1)(f) of the AIF Regulations (essentially, liquid and safe instruments)
• Must file an Annual Retention Status Report with SEBI and share it with investors within 30 days of the end of each financial year (i.e., by 30 April each year)
• Remains registered until all liabilities are settled and retained monies are distributed

What compliance relief do Inoperative Funds receive?

SEBI’s circular exempts Inoperative Funds from several standard obligations:

• Quarterly activity reports
• Annual activity reports
• Compliance test reports
• Performance benchmarking disclosures
• Audits of PPM terms
• Certain key investment personnel certification requirements
• The obligation to appoint a custodian and maintain a full compliance infrastructure

The exemptions are significant. For a scheme that has effectively completed its investment lifecycle and is merely waiting for a tax tribunal order, these obligations served no investor-protective purpose and cost fund managers substantial time and money.

For the full policy narrative behind Chapter 25, including how SEBI built the framework from the February 2026 consultation paper through the April 2026 amendment and the June 2026 circular, see Treelife’s breakdown of the SEBI AIF Master Circular June 2026.

How do LP payouts work during winding up AIF?

The distribution mechanics at winding up are governed by the Limited Partnership Agreement (LPA) or trust deed and the PPM, within the bounds that SEBI and the Income Tax Act permit. The standard waterfall for a Category I or II AIF in India follows this sequence:

Return of contributed capital: Investors receive back their invested capital contributions in full, pro-rata across all LPs, before any other distribution.

Preferred return (hurdle): Most Indian AIFs include a preferred return, typically 8% per annum, compounded annually on the unreturned capital. Until LPs have received their capital plus accrued preferred return, the carry has not vested.

Catch-up (if provided in the LPA): Some LPAs provide the investment manager a catch-up tranche, where 100% of distributions go to the manager until the manager has received its agreed share (typically 20%) of the total returns above the preferred return.

Carried interest: Once the hurdle and any catch-up are cleared, distributions flow 80% to LPs and 20% to the manager (or per the agreed carry percentage) on remaining profits.

In a European-style waterfall (whole-fund waterfall), carry is only paid after all capital is returned and the hurdle is cleared on the whole portfolio. In an American-style waterfall (deal-by-deal), carry is paid on each exit separately. Most Indian AIFs use the European model; investors generally prefer it for its LP-protective structure.

Distribution triggers during winding up: During the Liquidation Period, distributions to investors must happen after satisfying all permissible liabilities of the scheme. This means pending management fees, audit fees, legal fees, and any tax withholding obligations must be addressed first. What flows to investors is the net.

In-specie distributions: mechanics and complications

If the manager cannot sell assets during the Liquidation Period and does not enter a Dissolution Period, assets must be distributed in-specie to investors. SEBI permits this with the approval of at least 75% of investors by value under Regulation 29(9) of the AIF Regulations. If a scheme is in the Dissolution Period and the assets remain unsold at expiry, in-specie distribution is mandatory without any consent requirement.

In-specie distributions are straightforward in principle: each LP receives a proportionate interest in the underlying portfolio company. In practice, there are several complications.

Companies Act constraint: A private limited company in India cannot have more than 200 shareholders. If an AIF with 100 LPs distributes shares in-specie across its portfolio, some investee companies may breach this cap and be required to convert to a public company, which is not viable for most early-stage or mid-market companies.

FEMA complications for foreign LPs: In-specie transfer of unlisted Indian securities to a non-resident investor triggers Foreign Exchange Management Act (FEMA) 1999 compliance. The pricing norms under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 require that the transfer price not be lower than the fair market value certified by a chartered accountant or merchant banker. If the asset is distressed and the FMV is substantially lower than cost, the process still proceeds, but the documentation burden is significant. Some FMV determinations in a forced-sale context can also be contested by the tax department.

Investor refusal: If an investor refuses to accept in-specie distribution, the AIF Regulations provide that such investments shall be written off from the perspective of that investor’s allocation. This is a consequential outcome that managers must communicate clearly to LPs before entering the dissolution or mandatory distribution process.

Tax treatment of distributions: what changes from FY 2025-26

The Finance Act 2025 amended Section 2(14) of the Income-tax Act, 1961 to expressly classify securities held by Category I and II AIFs as capital assets, effective AY 2026-27. This removes the longstanding ambiguity over whether AIF gains should be characterised as business income or capital gains, and it flows through to LP-level distributions under the Section 115UB pass-through regime. Category I and II AIFs do not pay tax at the fund level on non-business income; the gain passes through to investors retaining its character, and the applicable rates post the Finance (No. 2) Act 2024 are LTCG at 12.5% (Section 112A for listed; unlisted held over 24 months) and STCG at 20% (Section 111A for listed; slab rate for unlisted held under 24 months). Category III AIFs are taxed at the fund level at the maximum marginal rate on business income.

Two winding-up-specific obligations every manager must track: TDS under Section 194LBB (Section 393(1) under the Income Tax Act 2025) must be deducted before each distribution, at 10% for resident LPs and at Section 195 rates for non-residents subject to DTAA relief. Form 64C must be issued to every LP after each distribution event. During winding up, when distributions occur across multiple exit events over an 18-24 month period, keeping Form 64C records clean for every tranche is operationally important because LPs need it for their individual or corporate ITR.

For category-wise rates, the pass-through loss treatment under Section 115UB(2), TDS mechanics, and the full DTAA relief framework, see Treelife’s AIF Taxation guide, which covers AY 2026-27 rates in detail.

Carried interest: what Budget 2025 actually changed

Carried interest is the manager’s share of the fund’s profit, typically 20% of returns above the hurdle. Before the Finance Act 2025, there was ambiguity about whether carry received by a fund manager was capital gains or professional income.

The Finance Act 2025 amended the definition of “capital asset” in Section 2(14) of the Income-tax Act to expressly include securities held by Category I and II AIFs. Since the nature of income at the fund level determines the nature of income in the hands of the unit holder, and since the manager receives carry as a unit holder (through a disproportionate distribution on its units), the carry is now treated as capital gains. The character of the distribution follows the underlying income at the fund level.

This is a significant clarification. The tax department had previously argued in service tax proceedings that carry is performance-based compensation for investment management services and therefore taxable as professional income or fees. The Finance Act 2025 amendment, read with the industry practice of treating carry as capital gains, now has statutory backing.

The rate applicable to carry depends on the holding period of the underlying investments from which the gain arises, not the holding period of the manager’s units in the fund. In practice, most PE and VC exits in India involve LTCG on unlisted securities, which means carry is typically taxed at 12.5% for AY 2026-27 onwards. This should be factored into the fund’s waterfall modelling, since the after-tax carry in the manager’s hands is now more certain.
For the full carry structuring analysis, including the GP entity versus unit-holder distinction and its tax consequences, see Treelife’s AIF Taxation guide.

Common mistakes that cost fund managers time and money

1. Not intimating SEBI before the tenure expiry date

Regulation 29(1) requires the trustee or board of directors or designated partners to intimate SEBI of the circumstances leading to winding up. This intimation starts the clock for the Liquidation Period. Fund managers who leave the intimation for months after the tenure expiry are creating a gap in their regulatory record and potentially accruing compliance obligations they are not aware of. File the intimation as close to the tenure expiry as operationally possible.

2. Assuming investor consent is a formality

The 75% threshold for approval of tenure extensions, the Dissolution Period, or in-specie distributions requires active engagement. Funds with a large number of LPs, or with LP-level restrictions on certain asset types, frequently discover that obtaining the threshold is harder than expected. One LP holding a significant stake who has investment mandate restrictions on unlisted securities can block an in-specie distribution path. Build investor governance into the winding-up plan 18 months before tenure expiry.

3. Not arranging bids before seeking dissolution consent

The 2024 Dissolution Period framework requires that bids be arranged for at least 25% of the value of unliquidated investments before seeking investor consent. Managers who go to LPs for consent before arranging bids are out of sequence with the regulatory requirements. If bids cannot be obtained, the consequence is that unliquidated assets are reported at ₹1 for benchmarking purposes, which affects the manager’s track record, irrespective of what the assets eventually realise.

4. Distributing before clearing withholding tax obligations

TDS under Section 194LBB (Section 393(1) under the Income Tax Act 2025) must be deducted before distributions are made. Fund managers who distribute gross proceeds and then try to recover the TDS from LPs after the fact create avoidable disputes. Confirm TDS computation with the fund’s tax advisor before every distribution event. This is especially critical for funds with NRI or foreign LPs, where the TDS rates and DTAA relief applications require lead time.

5. Retaining proceeds without documenting the basis

Under the June 2026 circular, retention of proceeds beyond the permissible fund life is permitted only if specific conditions are met and documented. Retaining a reserve for “anticipated tax demands” without a received notice or 75% investor consent is not permitted. SEBI’s annual reporting requirement for Inoperative Funds means the basis for retention will be reviewed each year. Inadequate documentation risks a compliance action.

FEMA considerations for funds with foreign LPs

AIFs that have accepted foreign capital face additional regulatory layers at the distribution stage.

All repatriation of proceeds to foreign LP investors constitutes outward remittance and must comply with the FEMA 1999 framework and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. Remittances of capital proceeds and gains to foreign investors require:

• TDS clearance certificate or confirmation that TDS has been deducted and deposited
• Form 15CA and Form 15CB from a Chartered Accountant (CA), confirming the nature of remittance and applicable tax treatment, filed before the remittance is made
• The Authorised Dealer (AD) bank will require documentation before processing the outward remittance

For in-specie distributions of unlisted equity to foreign LPs, the transfer of securities from the AIF or its trust to a foreign person is a transfer of Indian securities to a non-resident, which triggers the pricing norm under the Foreign Exchange Management (Non-Debt Instruments) Rules. The transfer cannot be at less than the FMV determined by a SEBI-registered Category I Merchant Banker or a practising CA using a recognised valuation methodology (Discounted Cash Flow or Net Asset Value). Where the FMV at the time of distribution is below cost, the foreign LP recognises a loss, but the regulatory documentation requirement exists regardless.

Funds with foreign LPs who are from FATF grey-listed jurisdictions must also navigate additional SEBI due diligence requirements. This is a live regulatory issue for AIFs that raised capital from certain Southeast Asian and Middle Eastern jurisdictions before the enhanced due diligence circular.

One obligation that frequently catches managers by surprise during a multi-year winding-up is the Annual FLA (Foreign Liabilities and Assets) Return. Any AIF that has received foreign investment must file the FLA Return with RBI by 15 July each year, regardless of whether the fund is in active management, in the Liquidation Period, in the Dissolution Period, or under Inoperative Fund status. The obligation continues until the foreign LP’s capital is fully repatriated and no foreign liability remains on the fund’s books. Missing an FLA Return filing during a prolonged wind-down is a FEMA violation that SEBI and RBI can take up during the registration surrender review.

Treelife practitioner note

In the AIF closure engagements we have worked on at Treelife, the most consistently underestimated part of winding up is the gap between the last investment exit and the actual surrender of the registration certificate. On paper, once all portfolio companies are exited, the fund should close in a matter of months. In reality, that gap stretches to 18-24 months in the typical case, and longer where tax demands are pending.

The most common driver of delay is Section 148 reassessment notices arriving after the fund has completed its final distribution. Where a scheme has passed through short-term gains to LPs in an earlier year and the Assessing Officer subsequently issues a reassessment notice, the fund needs to either retain funds (now formally permitted under the June 2026 framework) or chase LPs for their pro-rata share of any eventual demand, which is operationally messy and legally uncertain under the LPA.

The practical lesson from the June 2026 circular is that the Inoperative Fund status is worth applying for early, as soon as the scheme has a credible documented basis for retention. The compliance relief it provides, particularly the exemption from quarterly reports, custodian obligations and benchmarking, reduces ongoing costs materially while the fund waits for a tax tribunal decision or a pending regulatory matter to resolve.

On carry: the Budget 2025 amendment resolving the capital gains versus business income question for Category I and II AIF managers is significant, but it does not resolve every carry structure. Managers who receive carry through a separate management vehicle or through a GP entity that is distinct from the AIF trust need to check whether their specific structure benefits from the amendment. The amendment addresses carry received by a unit holder in the fund; carry paid as a fee to a separately registered manager entity is a different question.

Case study

Situation: Category II PE fund manager based in Mumbai, seven-year scheme tenure, four portfolio companies remaining at tenure expiry, two of which were operationally healthy but unlisted with no near-term IPO prospect.

Challenge: The Liquidation Period of 12 months was insufficient to exit the two healthy but illiquid positions at fair value. One company had a pending income tax reassessment under Section 148. The fund had three foreign LPs, one of whom had internal restrictions on accepting in-specie distributions.

What Treelife did: Structured the Dissolution Period application, including bidding process for the two illiquid assets to meet the 25% bid requirement, LP consent process managed over eight weeks, and information memorandum filed with SEBI through a SEBI-registered merchant banker. Filed Form 15CA / 15CB for two interim cash distributions to foreign LPs. Applied for Inoperative Fund status post the June 2026 framework, citing the Section 148 notice as documented basis for retention. The one foreign LP with in-specie restrictions had their allocation written off per the AIF Regulations with full documentation.

Outcome: Dissolution Period approved. Two positions sold within 14 months at 0.9x and 1.4x invested cost. Inoperative Fund status obtained, eliminating quarterly compliance obligations. Section 148 matter remains pending; retained funds of ₹3.2 crore are held in liquid instruments as permitted under Regulation 15(1)(f). Management fees ceased on Inoperative Fund designation, saving the GP approximately ₹18 lakh per year in fee leakage during the pendency period.

Frequently asked questions on Closing an AIF

Q: Can a Category III AIF use the Dissolution Period?
A: Yes. The Dissolution Period is available to all categories of SEBI-registered AIFs. The June 2026 circular also extends the Inoperative Fund framework to all three categories, as well as to Venture Capital Funds registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996.

Q: What happens if the fund cannot get 75% investor consent for the Dissolution Period?
A: If the fund cannot get 75% consent and cannot make in-specie distributions with consent either, then unliquidated investments must be mandatorily distributed in-specie to investors without the 75% consent requirement. Investors who refuse to accept the in-specie distribution have their allocation written off.

Q: Does the 12-month Liquidation Period run from the date of the intimation to SEBI or from the date the tenure formally expires?
A: Under Regulation 29(7), the Liquidation Period runs from the end of the permissible tenure (or extended tenure) of the scheme, not from the date of intimation to SEBI. The intimation to SEBI is a separate obligation that must be made once the decision to wind up has been taken.

Q: Is there a fee for applying for Inoperative Fund status?
A: The June 2026 circular specifies that applications must be made in the prescribed format in Annexure A. The circular does not specify a fee. Check the current SEBI fee schedule on sebi.gov.in and confirm with your merchant banker before filing, as this may be updated by the time of your application.

Q: Can the fund charge management fees during the Liquidation Period?
A: Whether management fees can be charged during the Liquidation Period depends on the LPA. The AIF Regulations do not prohibit it during the Liquidation Period; they prohibit it only once Inoperative Fund status is obtained or during the Dissolution Period. Review your LPA’s fee termination clause. Many LPA templates in Indian funds provide that management fees cease at the end of the investment period, not the fund term, which means fees may already be zero before the Liquidation Period begins.

Q: What is the difference between the Liquidation Period and the Dissolution Period?
A: The Liquidation Period is the mandatory 12-month window after tenure expiry during which the fund must liquidate all assets and distribute proceeds. The Dissolution Period is an optional extension beyond the Liquidation Period, available with 75% investor consent, for a duration not exceeding the original scheme tenure, to deal with assets that cannot be sold in the Liquidation Period.

Q: How is the 75% investor consent threshold calculated?
A: The 75% threshold is by value of investment in the scheme, not by headcount. A single LP holding more than 25% of the scheme’s net assets can block a resolution requiring this threshold. This is a meaningful governance consideration for funds with anchor investors.

Q: Do foreign LPs pay TDS on distributions?
A: Yes. TDS is deducted on distributions to non-resident LPs at rates under Section 195 of the Income-tax Act, 1961 (or under the Income Tax Act 2025 effective 1 April 2026). The actual rate depends on the type of income and whether the LP has submitted a valid TRC and Form 10F to claim DTAA relief. The fund must deduct TDS before remitting proceeds abroad, regardless of whether the LP’s jurisdiction has a DTAA with India.

Q: Can the fund make interim distributions during the Liquidation Period?
A: Yes, there is no regulatory prohibition on interim distributions during the Liquidation Period. Many funds distribute proceeds from each exit as it occurs, rather than waiting for the full portfolio to be liquidated. The requirement is that all distributions happen after satisfying permissible liabilities. TDS must be deducted and deposited before each distribution, and Form 64C must be issued to LPs.

Q: What happens to the management entity when the fund winds up?
A: The investment manager’s SEBI registration as an AIF manager continues independently of any specific scheme winding up. Once all schemes under the AIF are wound up and the AIF registration certificate is surrendered, the manager’s registration in connection with that specific AIF ceases. Managers running multiple AIFs are unaffected for their remaining active schemes.

Q: Is there a penalty for not winding up within the Liquidation Period?
A: There is no prescribed monetary penalty specifically for breach of the Liquidation Period under the AIF Regulations. However, continued operation outside the permissible period without proper regulatory approval (Dissolution Period or Inoperative Fund status) constitutes a violation of the AIF Regulations, which can attract enforcement action by SEBI under Section 15HB of the SEBI Act, 1992, which provides for penalties up to ₹1 crore per violation.

Q: For FEMA purposes, when does the clock start on the permissible timeline for repatriation of sale proceeds?
A: There is no specific FEMA timeline for repatriation of AIF distribution proceeds. However, RBI’s general expectation is that sale proceeds of investments by non-residents are repatriated promptly. Extended retention of proceeds in an Indian account without documentary basis can attract scrutiny. Use the permitted documentation basis under the June 2026 circular (pending litigation, tax notice, or operational expense substantiation) to justify any extended retention in the fund’s accounts before remitting to foreign LPs.

Regulatory references:

• SEBI (Alternative Investment Funds) Regulations, 2012: Regulations 13(4), 29(1), 29(7), 29(8), 29(9), 29(9A), 29B
• SEBI (Alternative Investment Funds) (Amendment) Regulations, 2026, notified 18 April 2026
• SEBI Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026 dated 16 June 2026 (Inoperative Fund status and retention of proceeds)
• SEBI Circular No. SEBI/HO/AFD/PoD1/CIR/2024/026 dated 26 April 2024 (Dissolution Period modalities)
• SEBI Circular No. SEBI/HO/AFD-1/AFD-1-PoD/P/CIR/2024/39 dated 7 May 2024 (in-specie distribution and information memorandum format)
• Finance Act 2025: Amendment to Section 2(14) of the Income-tax Act, 1961 (capital asset definition for Category I and II AIF securities), effective AY 2026-27
• Finance (No. 2) Act 2024: Section 112A (LTCG rate 12.5%), Section 111A (STCG rate 20%), effective 23 July 2024
• Income-tax Act, 1961: Section 115UB (pass-through regime), Section 194LBB (TDS), Section 195 (TDS for non-residents)
• Income Tax Act 2025 (effective 1 April 2026): Section 393(1) (renumbering of Section 194LBB)
• FEMA 1999 and Foreign Exchange Management (Non-Debt Instruments) Rules, 2019: pricing norms for transfer of Indian securities to non-residents
• Income-tax Rules, 1962: Form 15CA, Form 15CB (pre-remittance compliance for foreign LPs)
• Equity Intelligence AIF Trust v. CBDT and Anr. (2025: DHC: 6170-DB) (determinacy of Category III AIF trust)