SEBI Tightens Rules: AIFs Must Fulfill Conditions Before Retaining Proceeds Beyond Permissible Fund Life

SEBI Tightens Rules: AIFs Must Fulfill Conditions Before Retaining Proceeds Beyond Permissible Fund Life​

SEBI has released comprehensive new guidelines governing the winding up of Alternative Investment Funds (AIFs). These regulations address crucial aspects related to retaining liquidation proceeds beyond the permissible fund life period and provide a formal process for obtaining 'Inoperative Fund' status. The circular, effective immediately, introduces structured compliance requirements designed to protect investor interests during complex dissolution scenarios.

Guidelines on Retention of Proceeds Beyond Permissible Life​

The updated AIF Regulations (Amended on April 18, 2026) detail conditions under which AIFs or their schemes can retain accrued liquidation proceeds after the designated liquidation or dissolution period has ended. Standard practice dictates that assets must be liquidated and proceeds distributed after satisfying all liabilities during the winding up phase.

To permit the retention of these monies beyond the permissible fund life, an AIF must satisfy at least one stringent condition. This includes demonstrating receipt of a litigation notice or demand from any regulatory authority, tax agency, court, or counterparty indicating potential legal or tax liability.

Another requirement is securing consent from a minimum of seventy-five percent of investors by investment value in cases where retention is based on anticipated liabilities arising from possible litigation. AIF managers must disclose the retained amount and the estimated retention period while seeking investor approval for such proceeds.

For schemes retaining funds to cover residual winding up operational expenses, a maximum retention period of three years from the end of the permissible fund life has been established. The implementation standards for these operational heads will be formulated by the Standard Setting Forum of AIFs (SFA) in consultation with SEBI.

Applying for 'Inoperative Fund' Status​

The regulations provide a clear path for an AIF to apply for 'Inoperative Fund' status if certain conditions are met regarding their remaining proceeds or ongoing litigation. This applies even if the scheme has not retained any monies beyond the fund life but wishes to continue its registration solely in anticipation of a favorable outcome from pending litigation.

The application process requires submission to SEBI via email to inoperativeaif@sebi.gov.in, utilizing the specified Annexure A format. Upon approval by SEBI, the applicant AIF will be formally tagged as 'Inoperative Fund.'

It is important to note that the surrender of registration for an AIF can only take place after all outstanding liabilities are satisfied and any pending retained monies have been duly distributed to the investors across all schemes.

Regulatory Framework for Inoperative Funds​

An AIF that achieves 'Inoperative Fund' status faces specific operational constraints, effective immediately upon receiving the tag. These include restrictions on launching any new scheme under the entity. Furthermore, management fees are strictly prohibited for any of its existing schemes while in this status.

All monies retained must be invested strictly in accordance with Regulation 15(1)(f) of the AIF Regulations. This mandates a heightened level of accountability and transparency from the fund manager.

Compliance Reporting and Requirements​

A critical obligation lies with both AIFs that retain proceeds and those tagged as 'Inoperative Funds.' They must submit an annual status report to SEBI and all relevant investors. This report details retained monies and any outstanding liabilities, following the prescribed format (Annexure C). The submission deadline is set within 30 calendar days from the end of March every financial year.

The guidelines also extend applicability to Venture Capital Funds (VCFs) registered under erstwhile regulations. These VCFs are subject to the same 'Inoperative Fund' status and related regulatory framework as AIFs outlined in this circular. The SEBI Master Circular for AIFs dated June 03, 2026, has been updated to incorporate these new provisions.