Introduction

Imagine having to double down on your most promising investment, but the deal is threatened due to legal complexities. This was the case for co-investment through Portfolio Managers Services (“PMS”) route in India, until the Securities and Exchange Board of India (“SEBI”) introduced a new regulatory framework to resolve this problem in 2025. Co-investment, which refers to an arrangement where an investor can directly invest, alongside an Alternative Investment Fund (“AIF”) into the investee company in which the “AIF” has invested, or rather its regulation is a more recent development in the “AIF” structure. As of 30th June 2025, the total investments made in listed securities by category I and II AIFs is 1,83,251 crores which is nearly half of total investments made in unlisted securities by category I and II AIFs that is 3,51,670 crores¹. These statistics highlight the contemporary development of co-investment in India. This essay examines SEBI’s recent reforms in co-investment as applied to Category I & II AIFs, evaluates their effectiveness, situates them in a global context and offers recommendations for further reform.

The Traditional Co-Investment Structure

SEBI’s initial foray to regulate the co-investment traces back to the regulation namely, the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020, where the Board made a preliminary effort as to define a Co-investment Portfolio Manager (“CIPM”) and introduce related provisions governing co-investment activities. The initial regulations, prior to amendment reforms, for co investment were the invention of a third type of portfolio managers known as the Co-Investment Portfolio Managers. The framework allowed the “CIPM(s)” to offer services to investors in category I or II AIFs which are under common management and sponsor with the parent AIF and the framework also provided for the “CIPM” to invest in unlisted securities².

With the advent of the “PMS” route, challenges such as increased regulatory compliance, operational inefficiencies and investor disparity arose³. Under the “PMS” route, a separate license and additional regulatory compliance was required, and the number of investors were limited due to private placement compliance and the documentation of these investors delayed the process of co-investment⁴. Operational inefficiency like execution of a Power of attorney (“PoA”) that empowered the portfolio managers to decide on matters such as voting on behalf of their co-investors undermined the flexibility of the process. These challenges are now resolved by the new Co-investment Vehicle (“CIV”) route as the “CIV” scheme is added to the “AIF” structure and the regulatory compliance and other inefficiencies are reduced.

SEBI’s 2025 Co-Investment Reforms

In May, 2025, SEBI released a consultation paper to enhance flexibility in the AIF structure and offered co-investment opportunities in the existing system. This paper introduced two reforms-First reform was to launch a separate scheme where investors of AIFs have the opportunity to co-invest in unlisted securities under the Co-Investment Vehicle (“CIV”) Route by the virtue of SEBI AIF Regulations,2012. And second, to ease the restriction on AIF’s Investment Managers from advising on listed securities.

The paper also outlines the implementation of the “CIV” model, indicating how it should work within the Alternative Investment Fund structure. According to this framework, the “CIV” can be registered as Category I and II AIF, processes related to registration or termination will be identical to those governing the existing system. It is further proposed, “CIV(s)” will also be exempted from some AIF Regulations to enhance flexibility, namely Regulation 15, 16 and 17. It is also recommended to launch a distinct “CIV” scheme for each co-investment, with every such scheme maintaining its own bank account, demat account, and PAN. One of the major recommendations is that only ‘Accredited Investors’ shall be offered the “CIV” scheme.⁵

Key features of the “SEBI (Alternate Investment Fund) (Second Amendment), 2025”:

• Amended definition of Co – Investment, Section 2(fa) states “Co-investment” means investment made by a Manager or Sponsor or investor of a Category I or II Alternative Investment Fund unlisted securities of investee companies where such a Category I or Category II Alternative Investment Fund makes investment.”⁸
• A “CIV” scheme shall be constituted of Category I and II AIFs which will allow the co-investors to invest in unlisted securities of an investee company along with the main AIF.A shelf private placement memorandum (“PPM”) of the “CIV” requires submission to the Board, via a merchant banker accompanied with a fee as prescribed by this regulation, prior to making a co investment being offered to co investors under the co investment scheme.
• For every co-investment made in an investee company an independent “CIV” scheme shall be launched in line with the shelf “PPM” filed with SEBI.
• Further, a restriction is placed on an angel fund from creating a co-investment scheme.
• A “CIV” shall be offered only to accredited investors of “AIF(s)” (Category I or II). Each, co-investment will only invest in one investee company.
• The governing of the co-investment terms should be concurrent to that of main “AIF” and exit timelines of both investments need to be co-terminus.
• Certain regulations like Regulation 13, Regulation 16 and Regulation 17 along with certain sub regulations and clauses under Regulations 10, 11, 12, 14 and 15 will not be applicable to “CIV” model of “AIF”.

Analysing the Effectiveness of the Reforms

Co- investments allow investors to venture beyond the traditional fund structures thereby, providing a pathway towards enhanced investments and high-valued opportunities. It cuts down on the due diligence and deal sourcing expenses along with capped management and incentive fees that is lower than traditional private equity funds, ensuring higher returns to investors. According to Preqin, 80% of limited partners reported that equity co-investments outperformed conventional fund investments.⁹ On the other hand, while managing large projects, investee companies secure swift financing and structured capital support¹⁰.

The new model brought into effect by SEBI, has resolved certain inefficacies persistent in the old route It mitigates the dual regulatory compliance burden, resolves asynchronous exit timelines, enhances flexibility on investing in unlisted securities, mitigates restriction on advisory for investment in listed securities and enhances managerial control by reducing dependence on uncoordinated investor decisions.

However, there are certain downsides to it The CIV scheme is limited only to Accredited Investors, which is defined under Regulation 2(ab) of the AIF Regulations by the Board. It contains defined thresholds for net worth and income, further limiting investments to the investors of the main AIF. This creates a discrimination towards investors who do not fall within the specified standards. Secondly, it restricts the true nature of co-investment by limiting divergent exit timelines, specifying quantum and terms of co-investment¹¹.

Further, mandatory shelf private placement memorandum (“PPM”) filings via merchant bankers and requirement of distinct “CIV” schemes, each necessitating distinct accounts and documents add multiple compliance layers. This results in significant cost and logistical burdens for smaller deals, while also prolonging deal timelines, potentially making this route commercially unviable.

Lastly, practical ambiguities arise regarding how transfers, transmissions, or mandatory exits in the parent AIF scheme affect the linked CIV scheme, leading to potential operational uncertainties. A regulatory ambiguity arises as Category III AIFs, though primarily investing in listed securities, may also invest in unlisted ones. If an investor independently makes an investment in unlisted securities of an investee company of the parent AIF without any involvement or fee to the AIF or its manager, it is arguable that no SEBI regulation is breached, since such a transaction falls outside the scope and intent of the CIV framework¹².Despite regulatory safeguards, the bespoke structure could weaken oversight mechanisms, posing challenges to effective governance and regulatory monitoring.

Comparative Insights and Recommendations

Around the world, co-investment structures like in the US, UK, and Europe are well-established and investor-friendly. Common models include Side-car funds, Direct LP Co-investment etc. These models allow selected limited partners to invest alongside the main private equity or venture capital fund in specific portfolio companies. Based on the global practices, certain changes can be brought out to the current framework:

• Globally, co-investment entails investments in twenty-five to thirty companies encompassing across various General Partners (“GPs”), countries and industries, while maintaining necessary diversification¹³. The current framework in India, requires one CIV per investee. Adopting a scheme that allows co-investments to be made for multiple investee companies under one CIV, subject to investee companies having homogeneous terms and conditions would significantly reduce administrative and documentation overload and enhance scalability.
• Generally, co-investments are rendered by General Partners without management or performance fees, increasing investor returns in a typically high-fee asset class¹⁴.

However, co-investors may still face indirect fees where the AIF, its affiliates, or portfolio companies bear management or service-related expenses.¹⁵ Hence, India’s CIV framework should mandate full fee transparency, pre-disclosure of indirect charges, investor consent for new fees, and contractual caps to ensure fairness, protect investor interests, and align with global best practices.

Conclusion

The recent SEBI amendments, mark a decisive step in enhancing the flexibility of AIFs in India by institutionalizing co-investment within the regulated AIF structure. By eliminating the dual compliance burden of the PMS route, ensuring enhanced operational efficiencies, and offering structured access for high-value unlisted opportunities to investors, the framework has worked well. Moreover, it brings about alignment in exit timelines, reduction in managerial fragmentation, and integration of co-investments directly under the AIF regime, thereby bringing in much-needed regulatory clarity and market confidence driven by SEBI.

Nevertheless, this framework is restrictive because it is limited exclusively to ‘Accredited Investors’ and, considering the demand for each investee company to have separate CIVs, evinces high levels of administrative and cost barriers, which can be seen as a disincentive to participate in smaller deals. Looking ahead, the adoption of global best practices, such as multiple co-investments under a single CIV, full fee transparency, and uniform investor treatment, would indeed render the Indian co-investment landscape more inclusive, scalable, and globally competitive, thus assuring greater participation of capital and long-term sustainability within the AIF domain.