Introduction
On 15 July 2025, the Securities and Exchange Board of India (SEBI) notified the Venture Capital Fund (VCF) Settlement Scheme, 2025. This circular is an update and a considerable regulatory intervention to ease the long-standing compliance issues persistent within legacy venture capital funds. More specifically, SEBI issued a form of structured opportunity to VCFs that have transitioned into the Alternative Investment Fund (AIF) regime and that are presumably complying with regulations by removing the unwanted regulatory breaches surrounding the delays of schemes winding up outside of their respective liquidation timeline.
Under the scheme, which is effective from 21 July 2025, until 19 January 2026, eligible funds can make an official application for settlement with the continuous payment of a non-refundable fee. This application does not include the charges for settlement, and the fees will be based on the period of delay and the amount of unliquidated investments that remain with the fund. SEBI has prescribed a minimum penalty, which is set at ₹1 lakh for delays of up to one year, with an incremental amount of ₹50,000 for each additional year or part thereof. SEBI may also impose a separate settlement amount in the range of ₹1 lakh to ₹6 lakh, which will depend on the value of the remaining investment. The fees are to be exclusively incurred by the fund managers or sponsors and may not be charged to investors or schemes.
The circular is rooted in SEBI’s broader effort to resolve issues relating to the now-repealed VCF regulatory framework. SEBI repealed the VCF Regulations in 2012, following the AIF Regulations coming into force; however, a large number of funds that were active in the former regime were somehow allowed to continue past their intended lifecycle due to challenges with liquidating assets. Despite the availability of a migration route to the AIF framework for VCF funds, an additional year for winding up was granted, though many of the long-standing VCFs did not comply. The terms of this settlement scheme provide them a last chance to regularize their activities free from enforcement action, as confirmed by SEBI that enforcement is expected upon expiration of compliance after 19 July 2025.
Outcome of the Settlement Scheme
Expected outcomes from this soft settlement scheme are diverse. In the short term, the scheme is likely to elicit a large response from a number of legacy funds to conclude winding-up and formalize closure. Otherwise, it allows for some regulatory verification, and hopefully a reduction of inactive or non-compliant entities from the SEBI registry. From a larger lens, the scheme is an effort to apply greater discipline in fund lifecycle management in the alternative investment landscape. It indicates an evolution towards further strident closure methods, which is a welcome contrast to the caution represented in the earlier transition phases. There are also consequences for investor protection and trust. By prohibiting funds from passing on the costs of settlement, SEBI is putting accountability on fund managers for any non-compliance while attempting not to penalize the fund’s investors, which may serve to restore trust in regulatory measures that are often slow to materialize in such an illiquid and long-term sector.
While the scheme is supportive in principle, it is certainly open to criticism. Some people may see this one-time settlement phase as a regulatory concession, and this may set a dangerous precedent for future non-compliance. It could be argued that the continued use of extensions, and now a settlement window, would potentially dilute the tenet of time-bound fund governance. Certainly, questions may arise on how much enforcement could be activated if funds do not use the scheme, especially given SEBI’s track record of delays in formal engagement.
Conclusion
With these apprehensions in mind, the scheme is a practical means to get started on a complicated legacy issue. It adopts a fair and pragmatic balance between regulatory enforcement and the reality that long-standing funds will face in distressed market conditions. If the scheme is successfully implemented as envisioned, it might also herald further regulation aimed at enabling and managing responsible exits for investment funds, especially those operating under transitional and/or developing engagements. In short, the VCF Settlement Scheme 2025 is a narrow initiative designed to conclude an important regulatory transition in India’s private capital markets. Its adoption should enhance the regulatory continuity for the protection of investors and the private equity and venture capital industry. Its expected outcome will strengthen good practice and guide the winding up of funds in a more efficient manner, together with the ongoing development of the Indian alternative investment sector.
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