The Securities and Exchange Board of India has issued guidelines setting out when Alternative Investment Funds and legacy Venture Capital Funds may retain liquidation proceeds beyond the end of their permissible fund life and when they may be classified as an "Inoperative Fund" while moving toward winding up. The circular operationalizes April 2026 amendments to the AIF regime and allows retained monies only where there is a demonstrable litigation, tax or regulatory notice or demand, where at least 75 percent of investors by value consent to retention for anticipated liabilities, or where residual winding-up operating expenses are supported by invoices or comparable records. The framework requires managers to disclose the amount to be retained and the expected retention period when seeking investor consent for anticipated liabilities. Retention for residual winding-up expenses is capped at three years from the end of permissible fund life, and all retained monies must be invested in line with Regulation 15(1)(f) of the AIF Regulations. An AIF may seek inoperative status if it has schemes with retained monies and wants to surrender registration, or if it has no retained monies but is keeping registration solely in anticipation of a favorable outcome in pending litigation. Once tagged as inoperative, the AIF cannot launch new schemes and cannot charge management fees, while a range of ongoing regulatory requirements cease to apply. In exchange, AIFs with retained monies and inoperative funds must file an annual status report to SEBI and relevant investors covering retained amounts, outstanding liabilities and related investments. The circular takes immediate effect and applies the same retention and inoperative-fund facility to Venture Capital Funds registered under the former 1996 regulations.
Securities & Exchange Board of India2026-06-16
Securities and Exchange Board of India sets conditions for AIFs to retain winding-up proceeds and obtain inoperative fund status
The Securities and Exchange Board of India has set rules allowing AIFs to retain winding-up proceeds beyond fund life only for documented litigation or tax exposures, investor-approved anticipated liabilities, or substantiated residual winding-up expenses. It also created an inoperative fund status for AIFs seeking to surrender registration while liabilities remain unresolved or litigation is pending. The regime takes immediate effect and also applies to legacy Venture Capital Funds.