Introduction
Alternative Investment Funds (AIFs), governed by the SEBI (Alternative Investment Funds) Regulations, 2012, are pooled investment vehicles designed for accredited and high net-worth investors. They cater to investors such as institutions, sovereign wealth funds, development financial institutions, and other sophisticated participants who seek opportunities beyond traditional listed securities. AIFs raise commitments through schemes and channel these into portfolio companies, largely in the unlisted space, offering diversification and professional management. Broadly, they are classified into Category I, Category II, and Category III, with Category I and II AIFs often focusing on long-term investments in unlisted companies, infrastructure, and private equity-style opportunities.
What is Co Investment Scheme and why do people invest
A co-investment refers to an investment made by the manager, sponsor, or investors of a Category I or Category II AIF directly into the unlisted securities of a company in which the AIF itself is investing. Earlier, the only governing framework for such participation was through the Co-investment Portfolio Manager (CPMS) route, as specified under the SEBI (Portfolio Managers) Regulations, 2020. This required a separate registration and created additional costs and operational challenges.
With the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025 and the circular issued on September 9, 2025, a new mechanism has been introduced. Now, AIFs can launch Co-Investment Vehicle Schemes (CIVs) within the AIF framework itself. These CIVs are regulated under Regulation 17A of the AIF Regulations, 2012, read together with the SEBI circular, which lays down the operational modalities.
For investors, co-investments offer the advantage of participating in specific opportunities alongside the main AIF without bearing additional layers of management or performance fees. It allows them to selectively increase exposure to portfolio companies of interest while maintaining the same terms and exit timeline as the AIF scheme. From the perspective of fund managers, co-investment structures help in deepening relationships with investors and in mobilizing larger pools of capital for individual deals.
What was the previous regulatory framework
Co-investment alongside an AIF’s investment flowed through the Co-investment Portfolio Manager (CPMS) route under the SEBI (Portfolio Managers) Regulations, 2020. In practice, this meant the AIF’s investors participated via a Portfolio Manager specifically registered for co-investment, rather than within the AIF structure itself. Managers facilitated investor participation deal-by-deal through a CPMS, with each co-investment arranged outside the AIF scheme.
Such a framework led to:
1. Additional registration and cost — obtaining a separate SEBI registration as a Co-investment Portfolio Manager added regulatory and fee overheads. The new framework explicitly seeks to address that cost by permitting a CIV within the AIF.
2. Cap-table and documentation burden — direct participation by multiple co-investors could make investee company documentation heavy and slow closings, given sensitivities around investor numbers and profiles in private placements.
3. Process complexity and timelines — because each investor followed their own documentation process with the CPMS, transactions could face delays.
What is the current framework
SEBI overhauled the co-investment regime through the SEBI (AIF) (Second Amendment) Regulations, 2025, anchoring co-investment inside the AIF Regulations via Regulation 17A, and followed it with an operational circular dated September 9, 2025. In short, Category I and II AIFs can now offer co-investment within the AIF umbrella by launching a Co-Investment Vehicle (CIV) scheme; the circular sets the day-to-day rules and is effective immediately.
Scope & eligibility- The facility is available to Category I and II AIFs, and participation is restricted to accredited investors. Managers must choose one route per investor—either the traditional PMS (CPMS) route or the CIV scheme route. The fee for launching a CIV Scheme is stipulated at INR 0.10 million.
Offer document & launch mechanics- Before offering co-investment, the manager files a shelf placement memorandum capturing the principal terms, governance and regulatory framework for co-investment (the circular provides a template). Industry notes add that this filing is through a merchant banker.
Scheme structure & segregation- Each co-investment is housed in a separate CIV scheme. Every CIV scheme maintains separate bank and demat accounts, with assets ring-fenced from other schemes. A CIV does not invest in units of other AIFs.
Quantum caps & carve-outs- An investor’s co-investment in a given investee company (across CIV schemes) is capped at three times that investor’s contribution routed through the main AIF scheme; the cap does not apply to multilateral/bilateral DFIs, SIDCs, and entities owned/controlled by central/state/foreign governments (including central banks and sovereign wealth funds). Excused/excluded or defaulting investors for that AIF deal cannot co-invest.
What a CIV cannot do- A CIV may not make an investment that (i) gives investors an indirect exposure they cannot legally hold directly, (ii) would have triggered additional disclosures had they invested directly, or (iii) is into a company that cannot receive such investors’ money directly.
Terms, exit & winding-up- The co-investment terms (for the sponsor/manager/co-investors/CIV) cannot be more favourable than those of the main AIF scheme, and the exit timing must mirror the AIF scheme’s exit from that company. A CIV winds up upon exit from the co-investment.
Economics & costs- Investor rights and distributions are pro-rata to contributions (aside from carried-interest style allocations to sponsor/manager/team). Deal expenses are shared proportionately between the AIF scheme and the CIV scheme, in line with their investment split.
Light-touch exemptions for CIVs- Recognising their narrow purpose, CIV schemes are exempt from several routine AIF requirements (e.g., minimum corpus, continuing-interest, tenure and certain Reg. 15 conditions), offering operational flexibility. Angel funds are not permitted to launch CIV schemes.
Oversight & implementation standards- SEBI has tasked the Standard Setting Forum for AIFs (SFA)—with IVCA and other associations—to frame implementation standards to ensure bona fide use; managers must also reflect compliance in the Compliance Test Report under the AIF master circular.
Compliance summary based on the amended framework
- Route (pick one): For each investor, use either PMS (CPMS) or CIV—never both.
- Who’s eligible: Only Category I/II AIFs; investors must be accredited.
- Before offering: File shelf placement memorandum (SEBI template; industry notes: via merchant banker).
- One deal = one CIV: Launch a separate CIV scheme per co-investment.
- Ring-fence: Separate bank & demat accounts; assets ring-fenced.
- Quantum cap: Investor’s co-investment (across CIVs) ≤ 3× their AIF contribution; exempt: DFIs, SIDCs, govt/sovereign entities (incl. SWFs, central banks).
- Who cannot join: Investors excused/excluded or in default for that deal cannot co-invest.
- Negative list: No investments that give indirect exposures investors can’t hold directly, trigger extra disclosures if direct, or where the company can’t receive such investors.
- No leverage: CIV cannot borrow or lever.
- Economics: Investor rights/distributions pro-rata (carried-interest style allocations to sponsor/manager/team allowed).
- Expenses: Deal costs split proportionately between AIF scheme and CIV by investment ratio.
- Terms & exit: CIV/co-investors no better terms than AIF; exit mirrors the AIF; CIV winds up on exit.
- Other guardrails: CIV can’t invest in AIF units; angel funds can’t launch CIVs.
- Oversight: Follow SFA implementation standards and reflect in Compliance Test Report.
Conclusion
CIV scheme as an in-house alternative to the earlier CPMS route, addressing added registration costs and cap-table/documentation frictions for co-investments.
Its guardrails—accredited-investors only, a 3× cap linked to AIF contribution, ring-fencing, and parity on terms/exit—strengthen investor protection but narrow flexibility.
That said, the shelf placement memorandum (via merchant banker), separate CIV per deal, and accounting segregation add compliance layers that can stretch timelines and deter smaller transactions.
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