Summary: The SEBI, vide its Consultation Paper dated February 5, 2026, has proposed amendments to the existing AIF Regulations related to the winding up of AIF schemes and the surrender of AIF registrations. The proposal seeks to address challenges faced by AIFs that retain liquidated proceeds beyond the permissible fund life due to pending or anticipated litigation, tax contingencies, or residual operational expenses. The key proposals include (i) permitting AIFs to surrender their registration while retaining funds, with such AIF schemes being designated as inoperative funds, subject to rationalised compliance obligations; (ii) permitting retention of funds for anticipated liabilities, subject to the consent of a super-majority of investors; and (iii) permitting retention of funds for operational expenses for up to 3 (three) years. SEBI has invited public comments on the Consultation Paper until February 26, 2026.
Link to Draft Blog: Draft Blog:
The Securities and Exchange Board of India (“SEBI”) has, vide its consultation paper dated February 5, 2026 (“Consultation Paper”), proposed amendments and invited public comments to the regulatory framework governing the winding up of Alternative Investment Fund (“AIF”) schemes and the surrender of AIF registrations. These proposals seek to address the practical challenges faced by AIFs during the winding-up process under Regulation 29 of the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”), particularly in circumstances where pending or anticipated litigation, tax contingencies, or residual operational expenses prevent the timely distribution of liquidated proceeds to investors.
The proposals set forth in the Consultation Paper are premised on the principle that, while entry into the securities market is subject to specified eligibility criteria, the regulatory framework for exit should be clear, predictable, and operationally efficient. The proposed amendments seek to provide regulatory clarity and reduce the compliance burden for those funds in the winding-up phase that have unliquidated reserves pending litigation, tax contingencies, or residual operational expenses.
Link to Regulatory Context Regulatory Context
As per Regulation 29(7) of the AIF Regulations, an AIF within its liquidation period, being one year following the expiry of the tenure or extended tenure of the scheme, shall liquidate the assets of its scheme and distribute such proceeds to the investors upon satisfying all permissible liabilities. Moreover, Regulations 29(1)(a) and 29(2)(a) of the AIF Regulations provide that an AIF established as a trust or limited liability partnership shall be wound up upon the completion of its tenure or of all schemes launched under it. Upon winding up, the framework requires surrendering the certificate of registration to SEBI.
Operationally, as a prerequisite for the surrender of the certificate of registration, SEBI requires confirmation of the liquidation of all investments and complete distribution of proceeds held by the trust, including submission of the bank statement evidencing a nil balance in the trust/scheme’s account (as applicable). Based on industry feedback, SEBI has observed that certain AIFs or schemes continue to retain the proceeds of liquidated assets beyond the permissible fund life, because of the three principal reasons:
- amounts retained on account of pending litigation or tax demands;
- amounts retained in anticipation of potential litigation or tax demands; and
- amounts retained to meet residual operational liabilities.
SEBI has further observed that certain AIFs do not undertake any active fund management activities and continue to exist solely pending the favourable resolution of litigation/demand/liabilities. Consequently, AIFs that have completed their tenure but continue to retain reserves face constraints in surrendering their registration due to non-compliance with the “nil balance” requirement under Regulation 29(7) of the AIF Regulations.
Link to SEBI Proposal SEBI Proposal
SEBI, vide its Consultation Paper, has proposed amendments to the existing AIF Regulations permitting AIF schemes to retain liquidated proceeds/reserves beyond the permissible fund life, subject to the following:
- In case of amounts retained on account of pending litigation or tax demands: the AIF demonstrating receipt of a notice pertaining to litigation, or a demand notice from tax authorities, any other regulatory authority, or any law enforcement agency; or
- In case of amounts retained in anticipation of potential litigation or tax demands: the AIF obtaining consent from a super-majority of investors to retain funds due to anticipated litigation or tax demands; or
- In case of amounts retained to meet residual operational liabilities: the AIF demonstrates invoices, supporting documents, or demonstrated consistency with prior years’ expenses, provided the duration for such retention does not exceed 3 (three) years.
A detailed framework as proposed by SEBI is as follows:
Link to Retention on Account of Pending Litigation or Tax Demands Retention on Account of Pending Litigation or Tax Demands
For AIFs seeking to surrender their certificate of registration while one or more schemes continue to retain funds due to ongoing litigation/tax proceedings, SEBI has proposed to process these surrender applications and designate the relevant AIF as an “inoperative fund”.
Such “inoperative funds” shall be subject to the following relaxations/conditions:
Compliance relaxations: SEBI has proposed to rationalise the compliance obligations applicable to such inoperative funds, relieving such AIFs from the periodic requirement to file the following documents with it:
- private placement memorandum audit reports;
- compliance test reports; and
- quarterly reports.
However, such AIFs shall be required to submit an annual status report to SEBI and investors in respect of monies so retained.
Temporary investments: SEBI has proposed to permit AIF schemes to retain liquidation/reserve proceeds beyond the permissible fund life, subject to investment conditions specified under Regulation 15(f) of the AIF Regulations, which stipulates temporary investment of reserves or undistributed proceeds in temporary investments such as liquid mutual funds, bank deposits, treasury bills, tri-party repo dealing and settlement arrangements, commercial papers, certificates of deposit, and other liquid assets of higher quality.
Restriction on further launch of scheme: SEBI has proposedtoprohibitAIFs designated as “inoperative funds” from launching any new schemes and levying any management fee in respect of existing schemes. The AIF may apply to SEBI for the surrender of its certificate of registration only upon satisfaction of all liabilities and the attainment of a “nil” account balance.
Link to Retention on Account of Anticipated Litigation or Tax Demands: Super-Majority Consent Mechanism Retention on Account of Anticipated Litigation or Tax Demands: Super-Majority Consent Mechanism
Following industry feedback indicating practical challenges in the invocation of giveback provisions and acknowledging that the contribution agreement is finalised subject to negotiations with investors, SEBI has proposed to allow the retention of undistributed/reserve funds beyond the permissible fund life for anticipated litigation or tax liabilities, subject to the consent of a super-majority of investors. Upon receipt of such consent, the AIF would be accorded the same regulatory treatment as that proposed for “inoperative fund” status.
Link to Retention on Account of Residual Operational Expenses Retention on Account of Residual Operational Expenses
SEBI has also proposed to allow AIFs to retain monies for meeting residual operational expenses, including consultant fees, retainership costs, legal fees, registrar and transfer agent payments, and costs associated with filing PPM audit reports, only if they substantiate expected operational expenses though invoices, supporting documents, or demonstrated consistency with prior years’ expenses.
The regulatory intent underlying this proposal is to limit operational expenses to costs necessary to maintain the fund’s operations during the winding-up phase and to ensure that the duration for such retention does not exceed 3 (three) years.
AIFs opting to retain the funds for this purpose shall be accorded the same treatment as that proposed for “inoperative fund” status.
Link to Analysis Analysis
The Consultation Paper represents a significant development in the regulatory framework governing the winding up of AIF schemes, addressing practical challenges that have historically impeded the orderly winding up of AIF schemes. By rationalising compliance obligations for AIFs that no longer undertake active fund management activities, SEBI seeks to strike an appropriate balance between regulatory oversight and operational efficiency.
Moreover, certain aspects of the proposed framework may be reconsidered from a regulatory oversight perspective. Particularly, the retention of undistributed proceeds for anticipated operational expenses, as distinct from crystallised liabilities, could be made subject to the express consent of a two-thirds majority of investors. Furthermore, the framework’s reliance on the consent of a two-thirds majority of investors in respect of retention of funds attributable to anticipated litigation or tax proceedings could be supplemented with a recommendation or advisory opinion from a qualified chartered accountant.
Link to Public Comments: Public Comments:
SEBI has invited public comments to this Consultation Paper until February 26, 2026, through its public comments link:
https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublic Comments=yes 6.2
