SEBI issued a Press Release on June 18, 2025 wherein it disclosed that it has approved co-investment opportunities for Category I and II Alternative Investment Funds (“AIFs”) within the AIF structure during its 210^th Board Meeting (“Board minutes”). This decision by the securities regulator is expected to enhance ease of doing business for AIFs in India. The Board’s approval also seeks to facilitate AIFs and investors to co-invest and support capital formation in unlisted companies through AIFs.

SEBI’s nod to co-investment within the AIF regime follows a Consultation Paper on May 09, 2025, wherein it invited public comments on allowing co-investment through Co-Investment Vehicle (“CIV”) as a scheme of AIF under SEBI (AIF) Regulations, 2012 (“AIF Regulations”). SEBI decided to allow the CIV scheme only after carefully reviewing public comments and suggestions, and finally incorporating the recommendations of the Alternative Investment Policy Advisory Committee (“AIPAC”).

This move by the Board exemplifies the Board’s collaborative approach towards regulatory issues, its efforts towards aiding capital formation and ultimately providing convenience to AIFs. This blog discusses the recently approved CIV model, its expected role in enhancing the ease of doing business for AIFs, positive and negative implications that the new regime may bring and what it could mean for the broader AIF infrastructure of India.

Existing Legal Framework

‘Co-investment’ is an additional investment opportunity in unlisted securities of an investee company, offered to the manager, the sponsor or the investors of a Category I or Category II AIF, where the AIF is also making or has made investment.

During FY 2020-21, the AIF industry solicited to SEBI to permit co-investments within the AIF structure. The request highlighted various constraints faced by the Category I and Category II AIFs, which can be overcome by allowing co-investments by issuing separate class of units to the co-investors. These constraints included:

1. Restriction on investment managers (advisory, discretionary and non-discretionary) to invest in unlisted securities;
2. Clients’ liberty to opt out of the portfolio management agreement and early withdrawal of funds and securities; and
3. Managers inability to maintain alignment of interests, in the case of advising co-investment through advisory route;

In response, SEBI amended the AIF Regulations and the SEBI (Portfolio Managers) Regulations, 2020 (“PMS Regulations”) in December 2021 with the intent to regulate offering of co-investment opportunities to investors of AIFs (referred to as the “Amendment Regulations”). These regulations facilitated the managers to manage the co-investment of their investors in unlisted securities through portfolio management route, which is applicable presently.

The Amendment Regulations were contrary to what was requested by the AIF industry as it provided a stricter framework to allow co-investments. The framework, which was supposed to be a response to the industry stakeholders’ representations, turned out to be increasingly compliance intensive in nature, leading to disappointment within the AIF industry.

Issues soon began to surface in the framework brought through the Amendment Regulations. In response to these issues, SEBI decided to set up an Ease of Doing Business Working Group (EoDB WG) to review compliance requirements under AIF regulations and suggest measures that could enhance ease of doing business and optimize costs for the AIF industry. The EoDB WG highlighted multiple issues in the framework including:

1. Increased compliances, added costs and diminished global competitiveness to a manager seeking an additional SEBI registration as a Portfolio Manager;
2. Cumbersome documentation for portfolio companies because of multiple co-investors, causing transactional delays and loss of opportunities;
3. Restriction on providing advice on listed securities in the co-investment context or on advising other funds that operate alongside the AIF using a parallel investment model;
4. Requirement that the terms and timing of co-investment exits must be identical to those of the main fund;
5. The expansive definition of co-investment potentially capturing situations where:
   1. a portfolio company directly approaches an investor of an AIF; or
   2. an Investment Manager is not charging any consideration for its specific services;
6. Restriction on Investment Manager’s ability to connect with investors by allowing co-investment services only for investors in funds that share the same Sponsor and are managed by the Co-investment Portfolio Manager.

Regulatory Update

The extant co-investment framework is facilitated through Co-investment Portfolio Managers under PMS Regulations (“PMS route”). SEBI issued a consultation paper on May 09, 2025, inviting public comments on allowing co-investment through CIV model. This proposal received strong support from stakeholders, along with a few suggestions and recommendations. The Board considered these inputs and approved the revised CIV model during its 210^th meeting on June 18, 2025.

The following are the features of the CIV Model as approved by the Board:

1. CIV model will only form a scheme under Category I or II AIF.
2. Only accredited investors will be allowed to co-invest in unlisted securities of companies the AIF invests in.
3. For each co-investment transaction, a separate CIV scheme will be launched.
4. Each separate CIV scheme will be accompanied by safeguards to ensure bona fide purposes of the scheme’s end use.
5. CIV schemes will be given relaxation against certain regulatory requirements applicable to other AIF schemes. While the Press Release disclosing the approval is silent on these relaxations, the CIV model is expected to get relaxations under the following norms as per the consultation paper previously issued by SEBI in the same context:
   1. Diversification norms per investee company;
   2. Separate sponsor commitment; and
   3. A minimum tenure of 3 years.
6. The CIV model is a policy initiative to facilitate co-investments within the AIF regulations in addition to the existing PMS route for co-investments.

The Good and The Bad

While the consultation paper issued by SEBI discussed various recommendations of the EoDB WG, the Board minutes fail to deliver a comparable length while approving the CIV model. This leaves a considerable gray area that may lead to ambiguity in the absence of a formal amendment to operationalize the Board’s decision. For instance, the paper recommended mandating the annexure of a shelf PPM of the CIV to the memorandum of the main AIF at the time of seeking registration of the latter, while the Board minutes are entirely silent on this requirement. Other aspects discussed by the consultation paper, like minimum tenure, quarterly filings, deemed approval, specific relaxations, etc. with respect to the CIV model, also failed to make space in the Board minutes.

The co-investment model approved by the SEBI on June 18, 2025 marks the fulfillment of a long-standing demand of the AIF industry. The actual amendment followed by its implementation is primarily expected to:

1. Offer regulatory simplification and operational efficiency by removing the dual registration burden upon the managers;
2. Enhance alignment with AIF strategy, thus ensuring consistent deal timelines;
3. Facilitate bringing in supplementary capital without altering the main fund’s size or structure; and
4. Bring operational ease to the investee companies by avoiding multiple direct investors on record.

While the actual amendments are awaited, there is only one major concern that revolves around this framework. The restricted access of this model to only include Accredited Investors appears to have been misplaced. While it can be speculated that the regulator’s intent may have been to ensure that only the most sophisticated of the investors undertake direct exposure to unlisted securities, the blanket restriction fails to consider a class of investors that is well-informed and experienced in these investments but lack the accreditation threshold for participating in the CIV scheme. A better approach would be to either remove the restriction completely or to introduce a more nuanced suitability assessment based on the awaited amendment and then tailor such assessment as per the terms of each CIV scheme.

Conclusion

The approval of the CIV model for co-investments within the AIF framework has ignited a spark of excitement in the AIF industry. While the PMS route is not yet closed, the industry has long opined that driving a sidecar, under the AIF Regulations (CIV model), is a simpler and more efficient means of making and managing co-investments.

Following the enforcement of the awaited amendment, the CIV sidecar revolution is expected to promote co-investments by offering ease of investments, capital formation and operational efficiency. As the securities regulator, it will be SEBI’s responsibility to clarify ambiguities in the structure as they arise. Additionally, the CIV model unlocks potential for greater global participation through smoother syndication of offshore Limited Partners into Indian deals. This will further aid cross-border capital flows and place India in a better spot in the global investment ecosystem. In summation, the CIV scheme brings in opportunities and responsibilities on the shoulders of SEBI from domestic as well as cross-border markets. The intersection of the evolving investment ecosystem and the adapting regulatory measures will determine the potential and scalability that rests with the CIV model.