India’s formal venture capital ecosystem crossed ₹15.74 lakh crore in total commitments as of December 2025, spread across 1,849 Securities and Exchange Board of India (SEBI) registered Alternative Investment Funds (AIFs), up from 732 five years earlier. For first-time fund managers and operator-investors who want a legitimate, investable vehicle with pass-through tax treatment, the SEBI AIF framework is the primary route. The process is well-defined, but it is not simple. Between entity structuring, Private Placement Memorandum (PPM) drafting, service provider appointments, NISM certification, SEBI queries, and scheme launch mechanics, a misstep at any stage creates delays that cost real money. This article maps the complete process, from the first structural decision through to first close, with specific timelines, costs, and regulatory references updated for FY 2026-27.
Why a VC fund in India must register as an AIF with SEBI
A venture capital fund that pools money from more than one investor to make equity or equity-linked investments in unlisted companies is a privately pooled investment vehicle under Indian law. Any such vehicle collecting capital above ₹20 crore must register with SEBI under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012. Operating without registration exposes the fund and its manager to enforcement action under Section 12 of the SEBI Act 1992.
The old SEBI (Venture Capital Funds) Regulations, 1996 were superseded by the AIF Regulations 2012. Funds that were registered under the 1996 regulations have been migrated to the AIF framework, and all new venture capital vehicles must register afresh under the 2012 regulations. There is no parallel track: if you are running a pooled vehicle for third-party capital investing in startups or early-stage companies, AIF registration is the law, not a choice.
The practical reason to register, beyond legal compliance, is investor access. Large limited partners including family offices, high-net-worth individuals, domestic institutional investors, and foreign portfolio investors will only commit capital to a registered, regulated vehicle. An unregistered vehicle cannot issue units, cannot open fund-level bank accounts with reputable custodians, and cannot provide the tax documentation (Form 64C and Form 64D) that investors need to file their own returns.
What is a Category I AIF (VCF) and is it right for your fund?
For a venture capital strategy, the relevant registration category is Category I AIF with a Venture Capital Fund (VCF) sub-category under Regulation 3(4)(a) of the AIF Regulations.
Category I AIFs are funds that invest in sectors considered socially and economically beneficial: startups, early-stage ventures, social ventures, SMEs, and infrastructure. SEBI and the government treat these positively, and the pass-through tax regime under Section 115UB of the Income-tax Act 1961 applies to them. The practical meaning is that the fund itself is not taxed on non-business income such as capital gains and interest. Tax flows through to investors and is assessed in their hands at their applicable rates, preserving the character of the income.
Category I is the correct choice if your investment strategy is:
- Equity or equity-linked investments in unlisted startups at seed, pre-Series A, or Series A stage
- Convertible instruments in early-stage companies across any sector not prohibited by SEBI
- Portfolio companies at the SME or growth stage that have not yet listed
Category II is a residual category covering private equity, debt, and distressed asset funds that do not receive government incentives and do not use leverage for investment purposes. If your strategy involves later-stage growth equity, debt instruments, or a sector-agnostic mandate that does not fit the VCF profile, Category II may be more appropriate. Both categories receive the same pass-through tax treatment under Section 115UB. The key differences are in investment restrictions: Category I VCFs cannot invest in listed securities except as permitted, while Category II funds have broader flexibility on asset class.
Table 1: Category I vs Category II AIF, key parameters for VC fund managers
| Parameter | Category I (VCF) | Category II |
|---|---|---|
| Primary use case | Seed to early growth VC | PE, growth equity, debt |
| Minimum corpus | ₹20 crore per scheme | ₹20 crore per scheme |
| Min investor commitment | ₹1 crore | ₹1 crore |
| Leverage for investment | Not permitted | Not permitted |
| Fund structure | Close-ended, min 3 years | Close-ended, min 3 years |
| Pass-through tax | Yes (Section 115UB) | Yes (Section 115UB) |
| SEBI registration fee | ₹5 lakh | ₹10 lakh |
| Sponsor continuing interest | 2.5% of corpus or ₹5 crore, lower | 2.5% of corpus or ₹5 crore, lower |
For most first-time fund managers launching a VC strategy, Category I (VCF) reduces registration costs and aligns better with SEBI’s own policy intent around startup investing.
How to structure the fund: trust, LLP, or company?
SEBI permits AIFs to be constituted as a trust, a Limited Liability Partnership (LLP), or a company. For a VC fund, the irrevocable trust is the right answer in almost every case. It provides clean legal separation between the Sponsor and Investment Manager, and investors; trust documentation is SEBI-familiar; and query turnaround is faster than for LLPs or companies. LLP structures add MCA filing obligations and create less familiarity among domestic institutional LPs. Companies impose distribution and governance constraints under the Companies Act 2013 that conflict with standard VC economics.
The trust structure requires the following entities in place before filing:
- The trust itself, registered under applicable state law (typically the Indian Trusts Act 1882)
- A corporate trustee, independent of the Sponsor and Investment Manager
- An Investment Manager, incorporated in India as a Private Limited Company or LLP
- The Sponsor, who can be the same entity as the Investment Manager
All entities must have PAN and TAN before Form A is filed. For a detailed comparison of tax treatment, GST on management fees, and annual compliance differences across all three structures, see AIF trust vs LLP vs company: which fits your fund.
What is the minimum net worth for the investment manager?
The Investment Manager must have a minimum net worth of ₹5 crore. This is verified by SEBI through the financial statements submitted with Form A. The net worth is computed as paid-up capital plus free reserves minus accumulated losses and deferred revenue expenditure, as per the most recent audited financials. SEBI may call for updated management accounts if the financials are more than 18 months old.
First-time fund managers who do not have a pre-existing company with ₹5 crore net worth typically incorporate a new Private Limited Company and infuse the required capital through equity or shareholder loans before filing the SEBI application.
Who can manage the fund: eligibility and the NISM certification requirement
SEBI does not prescribe a specific minimum years of experience for the Sponsor or Investment Manager in a rigid rule, but Regulation 4 of the AIF Regulations requires the applicant to have the necessary infrastructure and professional experience to manage the fund. In practice, SEBI scrutinises the key investment team profiles closely. Teams without at least one or two professionals who can demonstrate prior investment decision-making experience, deal execution, or portfolio management will face queries.
From May 2024 onwards, SEBI made NISM certification mandatory for at least one key personnel in the investment team before a new AIF can be registered or an existing AIF can launch a new scheme. SEBI updated this requirement in June 2025, clarifying that for Category I and II funds, the qualifying certification is either the NISM Series-XIX-C: Alternative Investment Fund Managers examination or the newer NISM Series-XIX-D: Category I and II Alternative Investment Fund Managers examination (available from May 2025). SEBI extended the compliance deadline for existing funds to 31 July 2025.
The NISM Series-XIX-D exam consists of 60 multiple-choice questions and 4 case-based questions. The passing score is 60 out of 100 with a 25% negative mark for wrong answers. The certificate is valid for 3 years, after which a Continuing Professional Education (CPE) renewal is available following successful industry advocacy with SEBI in 2025 to introduce this renewal option.
The investment team personnel who clear this exam is formally the “Key Investment Team” member for SEBI documentation purposes. This person’s name appears in the PPM and in SEBI filings. If that person leaves the organisation, the fund must replace the certified member and notify SEBI, which creates a governance dependency that fund managers should plan for early.
The full document list before you file Form A
SEBI’s application must be filed on the SEBI Intermediary (SI) Portal at siportal.sebi.gov.in. An application fee of ₹1,00,000 plus 18% GST (total ₹1,18,000) is paid online at the time of filing. The system requires payment to the exact paisa; a rounded amount will be rejected.
The following documents must be ready before filing:
- Form A (filled online on the SI Portal)
- Trust deed or LLP deed or Memorandum and Articles of Association of the AIF entity, registered and stamped
- Certificate of registration or incorporation of the AIF entity, Investment Manager, and Sponsor
- KYC documents for all entities: PAN, address proof, board resolution, list of directors/partners
- Audited financial statements of the Investment Manager for the last 3 years (or from inception if incorporated recently)
- Net worth certificate of the Investment Manager from a CA
- Fit-and-proper declarations for the Sponsor, Investment Manager, Trustee, and directors and key investment team members
- Business plan and investment strategy: sector focus, stage, ticket size, geographic scope, investment horizon
- Details of the key investment team, including CVs, qualifications, and investment track record
- NISM certification of at least one key investment team member
- Draft PPM, compliant with SEBI’s standardised 36-section template
- Merchant banker due diligence certificate on the PPM
- Trustee undertaking confirming independence and willingness to act
- Sponsor continuing interest confirmation
- Authorization letter designating the authorized signatory for SEBI correspondence
The PPM is the most important document in this list. SEBI’s queries on a Form A application are predominantly about the PPM, and a generic template from a non-specialist lawyer is the single largest source of registration delays. The PPM must cover investment thesis, sector restrictions, stage, ticket size, co-investment policy, fee structure, hurdle rate, distribution waterfall, LPAC composition, key man provisions, risk factors, and conflict of interest policies. For a full breakdown of the 36-section SEBI template and the mandatory audit requirements, see Private Placement Memorandum for an AIF: structure, requirements, and drafting.
Step-by-step SEBI registration process and realistic timeline
Table 2: AIF registration timeline from decision to first close
| Stage | Activities | Realistic duration |
|---|---|---|
| Pre-application preparation | Entity incorporation, net worth infusion, trust deed drafting, trustee identification, NISM certification | 6 to 8 weeks |
| PPM drafting and merchant banker diligence | PPM drafted to SEBI 36-section template, MB due diligence, final sign-off | 3 to 5 weeks |
| Form A filing | Documents assembled, application fee paid, Form A submitted on SI Portal | 1 week |
| SEBI initial review | SEBI processes application, raises first set of queries | 21 to 30 working days |
| Query responses | Fund manager and legal team respond to SEBI queries (1 to 3 rounds) | 4 to 8 weeks |
| SEBI in-principle approval | SEBI issues in-principle approval and registration fee demand note | 2 to 4 weeks after final query response |
| Registration certificate | Registration fee paid, SEBI issues Certificate of Registration | 1 to 2 weeks |
| Scheme filing and investor outreach | PPM filed for first scheme, capital calls begin | 2 to 4 weeks |
| First close | Minimum subscription reached, money drawn down | Variable; typically 60 to 120 days after registration |
The total time from starting entity setup to receiving the Certificate of Registration is typically 4 to 6 months for a well-prepared applicant. First close after registration adds another 2 to 4 months depending on the fund’s LP pipeline. End-to-end, from decision to first drawdown, budget 6 to 9 months.
Poorly prepared applications take materially longer. Three rounds of SEBI queries, each taking 4 weeks to respond and 3 weeks for SEBI review, adds 3 months to the timeline. The most common triggers for multiple query rounds are vague investment strategy descriptions, under-documented team experience, underdeveloped conflict-of-interest policies, and a trustee whose independence from the Sponsor is not clearly established. For a document-by-document breakdown of what SEBI scrutinises and the most common rejection patterns, see SEBI AIF registration: documents, timeline, and rejection patterns.
What happens after SEBI grants registration?
The Certificate of Registration is not the end of the process. It is the start of operational compliance. Before the fund makes its first investment, the following must be in place:
- A SEBI-registered custodian appointed for the scheme (mandatory for all new schemes from October 2024 regardless of corpus size, under the SEBI Master Circular dated 07/05/2024)
- Demat accounts for AIF units opened with NSDL or CDSL (physical unit certificates are prohibited since October 2023)
- An AIF data repository (ADR) registration for quarterly reporting
- Fund administrator and registrar and transfer agent (RTA) engaged
- Bank accounts for the scheme opened in the fund’s name
The first scheme PPM is filed with SEBI simultaneously with the Form A registration application. SEBI “takes the PPM on record” at the time of registration, which means it acknowledges receipt and checks for process compliance but does not guarantee the accuracy of disclosures. Subsequent schemes require a separate PPM filing at least 30 days before launch, with a scheme filing fee of ₹1 lakh per scheme. The first scheme is exempt from this separate fee.
As of April 2026, SEBI introduced a Fast-Track Mechanism (Phase 1) under the GARUDA (Green-Channel: AIF Rollout Upon Document Acknowledgement) proposal, which allows AIF schemes to begin soliciting investors 30 days after filing the PPM, without waiting for SEBI’s affirmative sign-off, subject to no regulatory objection being raised during the 30-day window.
What does it cost to set up a VC fund in India?
Table 3: All-in setup cost estimate for a Category I VCF
| Cost item | Amount (approximate) |
|---|---|
| SEBI application fee | ₹1.18 lakh (₹1 lakh + 18% GST) |
| SEBI registration fee (Category I) | ₹5 lakh |
| Trust deed drafting and registration | ₹1 to 2 lakh (including stamp duty, varies by state) |
| Investment Manager incorporation | ₹0.50 to 1 lakh |
| PPM drafting and legal advisory | ₹5 to 12 lakh (specialist firm; do not compromise here) |
| Merchant banker due diligence fee | ₹1 to 3 lakh |
| NISM exam fees and preparation | ₹5,000 to 10,000 per candidate |
| Trustee setup and initial year retainer | ₹2 to 5 lakh |
| Fund administrator and RTA first year | ₹3 to 6 lakh |
| Custodian onboarding | ₹1 to 3 lakh |
| Auditor fees (first year) | ₹1 to 2 lakh |
| Valuer fees (first year) | ₹1 to 2 lakh |
| Total estimated first-year setup | ₹22 to 45 lakh |
SEBI registration fees are fixed and non-refundable regardless of outcome. Legal and advisory fees are variable and directly correlated with the quality of the PPM and the speed of registration. A PPM drafted by a generalist firm at ₹2 lakh that triggers 3 rounds of SEBI queries over 4 months will cost far more in total than one drafted correctly the first time at ₹8 lakh.
Post-registration, annual compliance costs for a Category I AIF with a ₹50-crore corpus typically run ₹15 to 25 lakh per year, covering trustee retainer, auditor, valuer, custodian, compliance officer, SEBI reporting, and fund administration.
Post-registration compliance: what you must do every year
SEBI’s compliance obligations for registered AIFs are year-round and cover reporting, valuation, investor communications, and governance. Missing any of these can result in SEBI warnings, monetary penalties, or suspension of fresh investments.
Quarterly reporting: AIFs must submit quarterly reports to SEBI through the SI Portal within 7 calendar days of quarter end for Category I and II funds. The report covers fund performance, portfolio composition, investor details, and any borrowings. The AIF data repository (ADR) filing, introduced in 2024, is a mandatory additional quarterly obligation.
Valuation: Category I and II AIFs must compute NAV at least once every 6 months using an independent registered valuer. The valuation must follow the methodology disclosed in the PPM and comply with SEBI’s 2024 updated valuation guidelines. Valuations cannot be prepared by the Investment Manager or any related party.
PPM audit: SEBI introduced mandatory PPM audit requirements under the 2024 Master Circular. An independent audit must confirm that the fund’s actual investments, fee structures, and governance practices are consistent with what the PPM discloses to investors. Material deviations must be disclosed to SEBI and investors promptly.
Dematerialisation: All AIF investments made on or after 01/10/2024 must be held in dematerialised form. This means the portfolio companies in which the AIF invests must also issue securities in demat form, which has practical implications for very early-stage companies that may not yet have completed demat conversion.
Annual statutory audit: Each scheme must be audited annually by a SEBI-registered auditor. Audited accounts must be sent to investors and filed with SEBI within the prescribed timelines.
Form 64C and Form 64D: The fund must issue Form 64C to each investor every year, detailing their share of income, character of income (capital gains, interest, dividend, business income), and TDS deducted. Form 64D must be filed with the Income Tax Department. These forms are the basis on which investors file their own tax returns under Section 115UB.
Material change intimation: Any change in key personnel, investment manager, sponsor, trustee, or material fund terms must be reported to SEBI within the prescribed timeframe. The PPM must be updated and re-filed for any material change.
Tax treatment of a Category I VC fund and its investors
The pass-through regime under Section 115UB of the Income-tax Act 1961, introduced by the Finance Act 2015, is one of the most important features of the AIF framework for VC fund managers and their LPs.
The core principle: a Category I or II AIF is not taxed on non-business income (capital gains, interest, dividend) at the fund level. Income flows through to investors and retains its character. A capital gain earned by the fund is taxed as a capital gain in the investor’s hands at rates applicable to the investor. An interest income earned by the fund passes through as interest income to the investor.
The Finance Act 2025 made a critical clarifying amendment to Section 2(14) of the Income-tax Act, expressly including securities held by investment funds specified under Section 115UB within the definition of “capital asset” with effect from 01/04/2025. This resolved a long-standing ambiguity about whether AIF securities transactions give rise to capital gains or business income. From AY 2026-27 onwards, the characterisation is settled: gains from securities held by Category I and II AIFs are capital gains.
Current capital gains rates for investors (effective 23/07/2024, per the Finance (No. 2) Act 2024, unchanged in Budget 2025):
- Long-term capital gains on listed securities: 12.5% (Section 112A) on gains above ₹1.25 lakh
- Short-term capital gains on listed securities: 20% (Section 111A)
- Long-term capital gains on unlisted securities: 12.5% without indexation, or slab rates with indexation for residents; 12.5% for non-residents under Section 115AD (also harmonised in Budget 2025)
Business income is an exception. If the fund earns income characterised as business income (profits and gains from business or profession), that income is taxed at the fund level under Section 115UB(4) at the applicable rate for the fund’s legal structure. Investors are not taxed again on this income under Section 10(23FBB).
The Finance Act 2025 also clarified that carried interest earned by the Investment Manager will be treated as capital gains, not as salary or professional income. This was an important industry ask and has a material impact on the fund manager’s personal tax planning.
TDS under Section 194LBB applies when income is credited or paid to resident unit holders, at 10%. Under the Income Tax Act 2025 (effective 01/04/2026), this provision is renumbered as Section 393(1); the mechanics are unchanged. For non-resident investors, the applicable rate under Section 195 applies, subject to DTAA relief where valid Tax Residency Certificates and Form 10F are submitted.
What changed in 2025-26: regulatory updates that affect fund managers
1. Co-investment vehicles (CIVs) formalised under Regulation 17A
The SEBI (AIF) Second Amendment Regulations 2025, notified on 08/09/2025, introduced a formal framework for co-investment through Co-Investment Vehicles. Category I and II AIFs (excluding angel funds) can now offer co-investment opportunities to their accredited investors by launching separate CIV schemes. Each CIV scheme is restricted to a single portfolio company, requires a shelf placement memorandum filed through a merchant banker (fee: ₹1 lakh), and is limited to accredited investors. An investor’s contribution through a CIV scheme cannot exceed 3 times their contribution to the same company through the main fund. CIVs are exempt from the ₹20 crore minimum corpus, standard PPM filing requirements, and continuing interest requirements. Operationally, this route is new and implementation circulars are still being developed.
2. Angel fund overhaul: now a standalone Category I sub-category
Under the same September 2025 amendment, angel funds are no longer a sub-category of VCFs under Category I. They are now a distinct Category I AIF type. Capital raising is restricted to accredited investors only, with no minimum investment threshold. The minimum corpus requirement of ₹5 crore has been removed. An angel fund must onboard at least 5 accredited investors before declaring its first close, which must happen within 12 months of SEBI taking the PPM on record. Each investment must include participation from at least 2 accredited investors. The fund’s portfolio is restricted to startups not backed by corporate groups with group turnover exceeding ₹300 crore.
3. Accredited Investor-Only Fund (AIOF) scheme introduced November 2025
The SEBI (AIF) Third Amendment Regulations 2025, notified on 18/11/2025, introduced the AIOF scheme type, allowing AIFs to run schemes exclusively for accredited investors. AIOFs are exempt from pari-passu requirements and the NISM certification requirement does not apply to them. For fund managers serving an entirely accredited investor base, this opens a structurally lighter operating model.
4. Mandatory custodian for all schemes from October 2024
Under the SEBI Master Circular dated 07/05/2024, custodian appointment before the first investment is mandatory for all new AIF schemes regardless of corpus size. The prior threshold of ₹500 crore for Category I and II funds no longer applies. This adds a fixed cost to every new fund.
5. NISM certification updated and renewed in June 2025
SEBI’s circular dated 25/06/2025 updated the NISM certification requirements and introduced the category-specific exams (Series-XIX-D for Category I and II, Series-XIX-E for Category III). The NISM CPE renewal option was also introduced, so managers certified under the old exam can renew without retaking the full examination.
6. GARUDA fast-track mechanism proposed in May 2026
SEBI’s May 2026 consultation paper proposes the GARUDA mechanism, which would allow AIF schemes to begin soliciting investors 10 working days after filing the PPM for regular schemes, and immediately for accredited-investor-only schemes. This would significantly reduce scheme launch timelines from the current 30-day waiting period and is expected to be formalised in the second half of 2026.
Common mistakes that cost fund managers time and money
1. Starting entity setup before the PPM strategy is locked
The entity structure, sponsor arrangements, and trustee appointment must all reflect the investment strategy described in the PPM. If the strategy shifts after the trust deed is executed, amendments to the trust deed require fresh registration and restamping, adding 4 to 6 weeks. Lock the strategy on paper before any incorporation document is signed.
2. Using a generic PPM template from a non-specialist firm
Close to 90% of SEBI queries originate from PPM deficiencies. Common problems include a vague investment strategy that does not specify sectors, stages, or exclusions; underdeveloped conflict-of-interest policies that do not address situations where the manager has existing portfolio companies in the same sector; and fee disclosures that use percentage ranges rather than fixed structures. Each round of SEBI queries takes 4 to 8 weeks. At two rounds of queries, a poorly drafted PPM adds 3 months and effectively costs more than the fee difference between a good and a bad legal advisor.
3. Appointing a trustee who is not clearly independent
SEBI requires the trustee to be independent of the Sponsor and Investment Manager. If the trustee is an associate entity, a former employer of a director, or shares a registered address with the Sponsor, SEBI will raise a query. The trustee should be a professional corporate trustee with a track record of acting for AIFs, have no economic interest in the Investment Manager, and have no shared directors or key personnel.
4. Missing the NISM certification before filing Form A
SEBI will not process a Form A application if no member of the key investment team holds the applicable NISM certification. The NISM exams are computer-based and available at centres across India, but scheduling lead times can be 2 to 3 weeks. Factor this into the pre-application timeline and do not treat certification as a parallel activity to be sorted later.
5. Not planning for the custodian requirement before filing
Since October 2024, a custodian must be appointed before the fund makes its first investment. Custodians are SEBI-registered entities and their onboarding process involves KYC, account opening, and agreement execution, which takes 3 to 5 weeks. If the custodian is identified and onboarded only after registration, it delays the first investment and creates a regulatory gap. Identify and initiate the custodian agreement during the pre-application stage.
6. Treating the SEBI AIF Regulations as static
SEBI has amended the AIF Regulations consistently every year since 2012, with significant changes in 2021, 2022, 2023, 2024, and three rounds of amendments in 2025. Any PPM, trust deed, or compliance policy written more than 18 months ago will have gaps. Always verify current obligations against the most recently consolidated version of the regulations and the latest SEBI Master Circular before filing or launching a new scheme.
Treelife practitioner note
In the AIF registration engagements we have run at Treelife, the single most consequential decision is not the choice of category. It is the quality of the PPM and the clarity of the investment strategy document submitted with Form A. SEBI’s Investment Management Department has a checklist approach to reviewing applications: they want to see that every relevant question in Regulation 4 and the formal checklist has been addressed specifically, not generically. We have seen applications from experienced fund managers with strong track records take 8 months because the PPM described the strategy as “opportunistic investments in high-growth companies across sectors” without specifying sectors, exclusions, or typical ownership stakes.
The mandatory NISM certification requirement, now in its second year post the July 2025 deadline, has added another pre-filing dependency that some first-time fund managers discover only when they are 3 months into the process. Under Regulation 7A, if the certified key investment team member leaves before the fund’s tenure ends, the fund must replace that person and notify SEBI. We now include a succession clause in the Investment Management Agreement as standard practice.
One pattern we see in Category I VCF registrations is the underestimation of the continuing interest obligation. For Category I and II, the Sponsor must commit at least 2.5% of the corpus or ₹5 crore, whichever is lower (Regulation 10(d)). On a ₹50 crore fund, that is ₹1.25 crore. On a ₹150 crore fund, it is ₹3.75 crore. These amounts need to be liquid and verifiable at the time of SEBI filing, not at first close. Fund managers who plan to fund this commitment from management fees will receive a query from SEBI. The commitment must come from the Sponsor’s own balance sheet.
FAQs on Starting a Venture Capital Fund in India
Q: Can a first-time fund manager with no prior VC fund experience register an AIF?
A: Yes. SEBI’s Regulation 4 requires the Investment Manager to have the necessary infrastructure and professional experience, but does not mandate prior fund management experience as a bright-line rule. What SEBI examines is the collective professional background of the key investment team: prior deal execution, investment analysis, portfolio monitoring, or operating roles at investee companies. The NISM certification is now a hard requirement and cannot be substituted by experience alone.
Q: How long does the SEBI AIF registration process take?
A: For a well-prepared applicant, 4 to 6 months from entity setup to Certificate of Registration. For an applicant with documentation gaps, 7 to 9 months is common. The fastest registrations Treelife has seen took 14 weeks from Form A filing to certificate; the slowest stretched to 11 months due to multiple query rounds.
Q: What is the total cost to register a Category I VC fund?
A: SEBI fees are ₹1.18 lakh (application) plus ₹5 lakh (registration). All-in setup costs including entity incorporation, PPM drafting, merchant banker certification, trustee, custodian onboarding, and first-year compliance services range from ₹22 lakh to ₹45 lakh.
Q: Can foreign investors put money into an Indian AIF?
A: Yes. Category I and II AIFs can accept capital from foreign investors including Foreign Portfolio Investors, NRIs, OCIs, and foreign institutional investors, subject to FEMA 1999 and the AIF’s PPM provisions. Downstream investment by the AIF in Indian companies may be subject to FDI sector caps and pricing guidelines under the Foreign Exchange Management (Non-Debt Instruments) Rules 2019. Non-resident investors can access DTAA benefits on pass-through income if they submit valid Tax Residency Certificates and Form 10F before distribution.
Q: What is the minimum corpus a VC fund must raise?
A: Each scheme of a Category I AIF must have a minimum corpus of ₹20 crore (Regulation 10(b)). There is no minimum for the fund overall if it runs only one scheme; the ₹20 crore requirement is per scheme. Angel fund schemes are subject to separate and more flexible norms following the September 2025 amendment.
Q: What is the minimum investment a single LP can make?
A: ₹1 crore per investor per scheme (Regulation 15(1)(d)). Directors and employees of the AIF or the Investment Manager may invest a minimum of ₹25 lakh. This minimum is for the commitment, not necessarily for the first drawdown.
Q: Can the Sponsor and Investment Manager be the same entity?
A: Yes. SEBI permits the Sponsor and Investment Manager roles to be held by the same entity. In practice, most first-time fund managers do this to simplify the structure. The Trustee, however, must always be independent of both.
Q: What is carried interest and how is it taxed?
A: Carried interest is the Investment Manager’s share of fund profits above the hurdle rate, typically 20% of returns above an 8% preferred return to investors. The Finance Act 2025 clarified that carried interest is treated as capital gains in the hands of the Investment Manager, not as salary or professional income, providing more predictable tax outcomes for fund managers.
Q: Is GST applicable to management fees?
A: Yes. Management fees charged by the Investment Manager to the AIF are subject to 18% GST. The AIF itself is treated as a recipient of taxable services. Fund managers must factor the GST cost into the total expense ratio disclosed in the PPM.
Q: What happens if the fund cannot reach the minimum corpus within the permitted period?
A: If the AIF cannot achieve the minimum corpus of ₹20 crore within 12 months of SEBI taking the scheme PPM on record (or the period specified in the PPM), the AIF must wind up the scheme, return committed capital to investors after meeting liabilities, and notify SEBI. Winding up the scheme does not cancel the AIF registration; the registered entity can launch a new scheme subsequently.
Q: What is the GIFT City alternative to a domestic AIF for foreign LPs?
A: For funds that primarily target offshore investors, a Fund Management Entity (FME) registered with the International Financial Services Centres Authority (IFSCA) in GIFT City under the IFSCA (Fund Management) Regulations 2022 can be an attractive parallel or feeder structure. GIFT City FMEs can launch schemes with more flexibility on investor domicile and may access certain tax exemptions on business income for a specified period. A GIFT City structure feeding into a domestic Category I AIF can offer foreign LPs structural advantages while preserving the domestic fund’s eligibility for Indian deal flow.
Q: What is the priority distribution model that SEBI tightened in 2025?
A: The 2025 SEBI updates on priority distribution models relate to structuring the distribution waterfall in a way that does not give certain investors a return that is more favourable than the pro-rata entitlement implied by the PPM without proper disclosure and LPAC consent. SEBI’s tightened disclosure requirements mean that any differential return structure must be explicitly described in the PPM and cannot be managed informally through side letters that are not disclosed to all investors.
Q: Can an AIF invest in a company where the Sponsor is already a shareholder?
A: This is a related-party transaction and must be disclosed in the PPM under SEBI’s enhanced related-party transaction disclosure requirements introduced in 2025. The LPAC (if constituted) must typically provide consent. The terms of the AIF’s investment must not be less favourable than the Sponsor’s terms. Treelife recommends a standalone conflict-of-interest policy that defines the approval process for any investment where the Investment Manager, Sponsor, or their associates hold existing stakes.
Q: How often does SEBI inspect a registered AIF?
A: SEBI may conduct inspections at its discretion under Regulation 29 of the AIF Regulations. Inspections typically arise from investor complaints, anomalies in quarterly reports, or thematic supervisory focus areas. SEBI also introduced the concept of “inoperative fund” under an amendment in 2026 for AIFs that have not made investments or collected capital within a defined period, which can trigger enhanced scrutiny.
Regulatory references:
- SEBI (Alternative Investment Funds) Regulations, 2012, as last amended 19/11/2025 (Third Amendment Regulations 2025)
- SEBI (AIF) Second Amendment Regulations 2025, notified 08/09/2025 (Regulation 17A, co-investment vehicles; angel fund restructuring)
- SEBI (AIF) Third Amendment Regulations 2025, notified 18/11/2025 (Accredited Investor-Only Fund scheme)
- SEBI Master Circular for AIFs dated 07/05/2024 (consolidated compliance requirements, PPM audit, valuation guidelines, mandatory custodian, dematerialisation)
- SEBI circular dated 09/09/2025 on Co-Investment Vehicles (CIV framework)
- SEBI circular dated 10/09/2025 on revised Angel Fund norms
- SEBI circular dated 25/06/2025 on updated NISM certification requirements for AIF managers
- Income-tax Act 1961, Section 115UB (pass-through regime, Category I and II AIFs)
- Income-tax Act 1961, Section 10(23FBA) (income exempt at fund level)
- Income-tax Act 1961, Section 10(23FBB) (business income exempt in investor hands)
- Income-tax Act 1961, Section 194LBB (TDS on AIF income distributions; renumbered Section 393(1) under Income Tax Act 2025 effective 01/04/2026)
- Finance Act 2025: amendment to Section 2(14) classifying AIF securities as capital assets from AY 2026-27
- Finance (No. 2) Act 2024: LTCG rate revised to 12.5% (Section 112A), STCG revised to 20% (Section 111A), effective 23/07/2024
- FEMA 1999 and Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (downstream FDI obligations on AIF investments)
- IFSCA (Fund Management) Regulations 2022 (GIFT City FME alternative)
- NISM Series-XIX-D: Category I and II Alternative Investment Fund Managers Certification Examination (available from 01/05/2025, per NISM circular 29/04/2025)
