Co-Investment in AIFs- SEBI's Latest Changes and Its Impact

On September 9, 2025, the Securities and Exchange Board of India (SEBI) issued a circular introducing a framework that allows certain Alternative Investment Funds (AIFs) to offer co-investment opportunities within the AIF structure itself. In today's article, we will look at:

Meaning of co-investment
Latest Updates
Limits & Exemptions

What is co-investment in AIF?

Co-investment in Alternative Investment Funds (AIFs) means an investor puts money directly into a portfolio company (an investee company) alongside the AIF, instead of only investing through the pooled AIF structure. Here is how it will work:

Typically, an AIF collects money from investors and then invests that pooled money into different companies.
In co-investment, some investors get the option to invest alongside the AIF in a particular company that the fund is investing in.
It gives those investors a chance to increase their exposure to selected companies without going through the pooled AIF route for that portion.

Let us understand this with an example. Suppose there is an AIF fund called the Growth Capital Fund. This AIF raises Rs 100 crore from investors and plans to invest in 10 different startups.

One of those startups is TechX Pvt Ltd, an early-stage fintech company. There could be a scenario where AIF decides to invest Rs 100 crore in TechX, or TechX is only taking a minimum investment of Rs 100 crore.

Investor Mr Sharma has already invested Rs 10 crore in the Growth Capital Fund. He really likes TechX and wants to increase his exposure beyond what his share in the fund allows. The AIF manager offers a co-investment opportunity. Mr Sharma puts in an additional Rs 5 crore directly into TechX alongside the AIF’s Rs 100 crore investment.

Without the co-investment option, Mr Sharma could have invested in TechX through Portfolio Management Services (PMS). Additionally, for the fund house, it meant registering both as an AIF and PMS.

Changes Brought by SEBI: Co-investment in AIF

Below are some changes from the latest SEBI circular around co-investment in AIF:

New Route via Co-Investment Vehicle (CIV) Schemes: Category I and Category II AIFs can now form separate Co-Investment Vehicles (CIV schemes) to facilitate co-investment by accredited investors, in addition to the existing option of using the Portfolio Management Services (PMS) route under SEBI’s PMS Regulations (2020).
Mandatory Documentation and Disclosures: AIF managers must file a Shelf Private Placement Memorandum for each CIV scheme. This document must include the main investment terms, governance framework, regulatory structure, risk disclosures, and other key features.
Separation and Ring-Fencing: Each CIV scheme will have its own bank account and demat account. Assets must be clearly ring-fenced from other schemes of the same AIF.

Limits and Exemptions of Co-Investment in AIFs

Below are some limits and exemptions on co-investment in AIFs:

Eligibility of Investors: Investors who are excused, excluded, or have defaulted in contributing to the main AIF scheme cannot co-invest in that same investee company via a CIV scheme.
No Leverage / Borrowing: CIV schemes are not permitted to borrow funds (directly or indirectly) nor to use leverage.
Investment Cap for Individual Investors: An investor’s co-investment in an investee company through CIVs must not exceed three times their contribution via the main AIF scheme into that company.

The cap does not apply to certain institutional investors, such as:

Multilateral or bilateral Development Financial Institutions (DFIs)
State Industrial Development Corporations
Entities owned or controlled by government (Central / State) or foreign governments, including central banks and sovereign wealth funds

How Does This Change Impact Stakeholders?

Below are the implications of the proposed changes:

More Flexibility for Accredited Investors: Accredited investors now have a clearer, regulated pathway to co-invest directly in unlisted companies alongside AIFs. It may help them tailor exposure more precisely, rather than only participating via a pooled AIF investment.

Stronger Governance and Transparency Requirements: With ring-fenced schemes, separate accounts, required disclosures, limitations on leverage, and standard-setting oversight, the framework aims to balance the new flexibility with investor protection.

Operational Adjustments for AIF Managers: Managers will need to establish new CIV schemes if they opt for this route, maintain separate accounts, ensure eligibility checks, prepare the shelf placement memorandum, and comply with reporting obligations.

Potential to Attract Institutional Capital: The exemptions for DFIs, sovereign wealth funds, state-controlled entities, etc., show SEBI’s recognition of large investors’ role. This change could encourage more institutional participation, especially from global or government-related entities.

Summary

Co-investment in AIFs offers investors the opportunity to participate more directly in specific portfolio companies alongside the fund, while maintaining alignment with the fund’s overall investment strategy. The framework set by SEBI ensures that such participation is conducted transparently, on fair terms, and within clear regulatory boundaries.

For investors, it offers flexibility to enhance exposure to select opportunities, while for fund managers, it adds a structured avenue to attract greater participation without compromising governance standards.