SEBI has issued new guidelines providing greater flexibility to Alternative Investment Funds (AIFs) and erstwhile Venture Capital Funds (VCFs) during the winding-up process. The circular permits funds to retain liquidation proceeds beyond their permissible fund life in specific circumstances, including pending or anticipated litigation, potential tax liabilities, or residual operational expenses linked to winding up. Where retention is based on anticipated liabilities, approval from at least 75% of investors by value is required, along with clear disclosure of the amount and proposed retention period. Operational expense-related retention is capped at three years. SEBI has also introduced the concept of an “Inoperative Fund,” allowing eligible AIFs to surrender active registration while resolving outstanding liabilities. Such funds cannot launch new schemes or charge management fees and must provide annual reports to SEBI and investors until all liabilities are settled and retained monies are distributed.
Securities and Exchange Board of India
Circular No. H0/19/34/11(2)2026-AFD-POD1/1/13764/2026 | Dated: June 16, 2026
To,
All Alternative Investment Funds (AlFs)
All Venture Capital Funds (VCFs) registered under erstwhile SEBI (Venture
Capital Funds) Regulations, 1996
Sir/Madam,
Sub: Guidelines for winding up of AlFs with respect to retention of proceeds and `Inoperative Fund’ status
1. SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) have been amended and notified on April 18, 2026 to provide certain flexibility to AlFs with respect to winding up of their schemes and surrender of registration.
2. Regulation 29 of AIF Regulations states, inter-alia, the following with respect to winding up —
2.1. Regulation 29(7) – Within the liquidation period, the assets shall be liquidated, and the proceeds accruing to investors in the AIF or the scheme of the AIF shall be distributed to them after satisfying all liabilities, subject to conditions as may be specified by SEBI from time to time.
2.2. Regulation 29(10A) – An AIF may be tagged as an inoperative fund, in such manner and subject to conditions as may be specified by SEBI from time to time.
2.3. Regulation 29(11) – Upon winding up of the AIF, the certificate of registration shall be surrendered to SEBI.
The conditions and modalities with respect to retention of proceeds beyond permissible fund life, tagging as ‘Inoperative Fund’ and surrender of registration are being specified in this circular.
Retention of proceeds beyond permissible fund life
3. AIFs/schemes of AlFs may retain liquidation proceeds beyond the liquidation period or dissolution period (beyond “permissible fund life”), as applicable, subject to satisfying at least one of the following conditions —
3.1. Demonstrable receipt of a litigation notice or demand by the AIF/scheme of AIF, which includes any official written communication from a tax authority, regulatory authority, law enforcement agency, court of law, or from an investor or counterparty in relation to litigation, which indicates a potential tax, regulatory or legal liability. This shall include show-cause notices, reassessment notices, investigation summons, or similar communications and shall not be restricted to crystallised demand notices;
3.2. Consent obtained from at least seventy-five percent of the investors by value of their investment in the scheme, in cases where proceeds are proposed to be retained on account of anticipated liabilities arising due to a possible/probable litigation or tax demand;
3.3. Substantiation of amounts retained for meeting residual winding up related operational expenses, through invoices, supporting documents or records of comparable expenses incurred in previous years.
4. In cases where monies are being retained on account of anticipated liabilities as specified in paragraph above, the manager of AIF shall disclose the amount being retained and estimated time period for which it is proposed to be retained to the investors of the fund while seeking their consent for retention.
5. In cases where monies are being retained for meeting residual winding up related operational expenses as specified in paragraph3 above, the time period for such retention shall not exceed three years from the end of permissible fund life of the AIF/scheme of AIF. Further, the implementation standards for standardising the operational heads under which monies may be retained, shall be formulated by Standard Setting Forum of AIFs (‘SFA’), in consultation with SEBI.
6. All monies retained in line with conditions at paragraph above shall be invested in accordance with Regulation 15(1)(f) of the AIF Regulations.
7. Once the liabilities are satisfied and the pending retained monies are distributed to the investors of the fund, the scheme shall be wound up in terms of Regulation 29 of AIF Regulations.
Application for ‘Inoperative Fund’ status
8. An AIF having one or more schemes with retained monies as specified in paragraph 3 above and intending to surrender its registration, may apply for obtaining the `Inoperative Fund’ status. The application shall be submitted to SEBI in the format as specified in Annexure A, by emailing to inoperativeaif@sebi.gov.in.
9. An AIF whose scheme(s) have not retained any monies beyond the permissible fund life, but intending to continue with the registration solely in anticipation of a favourable outcome of a pending litigation, may also apply for obtaining the `Inoperative Fund’ status.
10. Upon approval of the aforesaid application, the applicant AIF will be tagged as `Inoperative Fund’.
11. Such Inoperative Fund shall apply to SEBI for surrender of its certificate of registration only after the liabilities are satisfied and the pending retained monies are distributed to the investors in all its schemes.
Regulatory framework applicable to ‘Inoperative funds’
12. An AIF tagged as ‘Inoperative Fund’ shall be subject to the following conditions, with effect from the date of obtaining the tag —
12.1. The monies retained by scheme(s) of such AIF in terms of paragraph above, shall be invested in accordance with Regulation 15(1)(f) of the AIF Regulations;
12.2. No new scheme shall be launched under the AIF; and,
12.3. No management fees shall be charged in respect of any of its scheme(s).
13. The regulatory requirements as specified in Annexure B shall not be applicable to AIFs tagged as ‘Inoperative Funds’.
14. AIFs having schemes which have retained monies in terms of paragraph 3 above and AIFs tagged as ‘Inoperative Funds’ shall submit an annual status report on retained monies and outstanding liabilities to SEBI and to investors of the relevant scheme(s), in the format as given at Annexure C of this circular. The report shall be submitted on SEBI Intermediary portal within 30 calendar days from the end of March of every financial year.
Applicability to erstwhile Venture Capital Funds
15. The aforesaid facility of retention of proceeds beyond permissible fund life and availing Inoperative Fund status shall also be applicable to Venture Capital Funds registered under erstwhile SEBI (Venture Capital Funds) Regulations, 1996. The regulatory framework applicable to such VCFs tagged as ‘Inoperative Funds’ shall be the same as applicable to AlFs, stated in para 12 to 14 above.
16. This circular shall come into force with immediate effect.
17. This circular is issued with the approval of the competent authority.
18. This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with Regulation 29 and Regulation 36 of SEBI (Alternative Investment Funds) Regulations, 2012, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
19. The circular is available on SEBI website at sebi.gov.in under the categories “Legal 4 Circulars” and “Info for 4 Alternative Investment Funds”.
20. The SEBI Master Circular for AlFs dated June 03, 2026 has also been updated with the provisions of this circular. The updated Master Circular for AIFs is available on SEBI website at www.sebi.gov.in in the path “Legal – Master Circulars” and “Info for – Alternative Investment Funds”.
Yours faithfully,
Anshul Jagdish Goyal
Deputy General Manager
Tel no.: +91-22-26449389
anshulg@sebi.gov.in
Enclosures: As above
