The Securities and Exchange Board of India (“SEBI”) has recently introduced a significant reform in the co-investment space by issuing the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025 (“Amendment Regulations”) on September 8, 2025,1 along with a Circular dated September 9, 2025 (“CIV Circular”).2 These measures permit Category I and Category II Alternative Investment Funds (“AIFs”) to create co- investment vehicles known as Co-Investment Schemes (“CIV schemes”), thereby providing a structured alternative to the existing Co-Investment Portfolio Manager (“CPM”) model under the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020 (“PMS Regulations”). The reform is designed to reduce compliance hurdles, streamline fundraising, and enhance operational flexibility for AIFs and their investors.
I. From CPMS to CIV Schemes:
Addressing Practical Limitations Until now, co-investments alongside AIFs could be undertaken only through CPMs registered under the PMS Regulations. This route, however, was criticised for its duplication of regulatory obligations and for raising practical concerns at the deal-making level. Obtaining a separate registration increased the cost of operations for fund managers, and the need to accommodate multiple investors directly on the investee company’s cap table often complicated private placement requirements under Section 42 of the Companies Act, 2013. 3 These factors collectively slowed down transactions and reduced the attractiveness of co-investment opportunities. The Amendment Regulations respond to these challenges by allowing AIFs to launch CIV schemes within their existing structure.
*The author is a final-year student at Maharashtra National Law University, Mumbai.
1 SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025, Notification No. SEBI/LAD-NRO/GN/2025/265, September 8, 2025.
2 SEBI Circular No. SEBI/HO/AFD/AFD-POD-1/P/CIR/2025/126, September 9, 2025.
3 Section 42, Companies Act, 2013; Rule 14, Companies (Prospectus and Allotment of Securities)
Rules, 2014.This mechanism effectively removes the need for additional CPM registration, while still
preserving regulatory oversight and investor protection standards.
II. Defining the CIV Scheme and Its Scope
A CIV scheme is defined as a scheme of a Category I or Category II AIF that facilitates co-investment by investors of that fund in unlisted securities of companies in which the AIF has made or is making an investment.
4 Except for Angel Funds registered on or after September 8, 2025,5 all Category I and II AIFs are now eligible to utilise this structure.
Participation in CIV schemes is restricted to accredited investors,6 ensuring that only financially sophisticated participants can access this opportunity. Managers must file a shelf placement memorandum with SEBI through a merchant banker, accompanied by a regulatory fee, before offering such schemes. 7 Each co-investment is required to be channelled through a separate CIV scheme, and its assets must remain ring-fenced from those of other schemes.8
III. Operational Rules and Investor Safeguards
The CIV framework prescribes a range of operational and investment conditions. CIV schemes cannot invest in units of other AIFs, nor can they borrow or employ leverage.
The quantum of co-investment by an investor is capped at three times its commitment to the main AIF scheme in respect of the same investee company, though exemptions apply to sovereign wealth funds, multilateral agencies, and certain government entities.10 The terms of co-investment cannot be more favourable than those applicable to the main AIF scheme, and the timing of exit must be synchronised with that of the AIF’s investment.11 Investors’ rights are proportionate to their capital contribution, subject only to specified carried interest arrangements.12 Further, investors who are excused, excluded, or in default
4 Regulation 3(I)(ii), Amendment Regulations, 2025.
5 Regulation VI, Amendment Regulations, 2025.
6 Regulation 2(1)(ab), SEBI (Alternative Investment Funds) Regulations, 2012.
7 Paragraph 2.2, CIV Circular.
8 Paragraph 2.3, CIV Circular.
9 Paragraph 2.7, CIV Circular.
10 Paragraph 2.7, CIV Circular.
11 Paragraph 2.6, CIV Circular.
12 Paragraph 2.8, CIV Circular.under the main AIF scheme cannot participate in co-investments for the relevant investee company.
13 The CIV Circular also provides that expenses associated with a co-investment must be shared between the AIF and the CIV in proportion to their investment contributions.
14 However, the drafting leaves some ambiguity, raising the possibility of divergent interpretations on how deal-level expenses are to be allocated. SEBI has granted CIV schemes targeted exemptions from certain provisions of the AIF Regulations, including requirements relating to minimum corpus, continuing sponsor interest, prescribed private placement memorandum formats, tenure restrictions, and investment concentration norms.
IV. Challenges and Practical Considerations
While the CIV framework enhances operational ease for AIFs, it also introduces new layers of compliance that managers will need to navigate. The exclusive eligibility of accredited investors narrows the investor pool and could limit participation. Each co-investment requires the preparation and filing of a fresh PPM, involving costs for merchant banker certification and separate administrative arrangements such as dedicated bank and demat accounts. For smaller transactions, these requirements could diminish commercial feasibility. Moreover, by mandating separate CIV schemes for each co-investment, the framework risks elongating deal timelines and complicating execution. Questions also remain over how transfers or redemptions of units in the main AIF scheme might affect associated CIV schemes, and whether SEBI will adopt a deemed-approval model for PPM filings or require explicit clearance in each case.
V. Conclusion
The creation of CIV schemes marks a forward-looking reform that addresses long-standing inefficiencies of the CPM route. By embedding co-investment opportunities within the AIF framework, SEBI has reduced regulatory duplication while ensuring investor protection.
13 Paragraph 2.5, CIV Circular
14 Paragraph 2.9, CIV Circular.
15 Regulation 15 and related exemptions, Amendment Regulations, 2025.Yet, the effectiveness of this innovation will depend on how the industry balances the benefits of operational integration against the added compliance obligations and costs. Further clarifications by SEBI and the Standard Setting Forum for AIFs will be crucial in determining whether CIV schemes become a widely adopted mechanism or remain confined to larger, well-resourced funds.
Author Bio
