Beyond Traditional AIFs: The Rise of SEBI's Co-Investment Framework

By Shreshtha Saha Ray & Nidhi Kapadia

Abstract

This article provides a critical, multi-dimensional analysis of SEBI's Co-investment Vehicle (“CIV”) framework introduced under the AIF (Second Amendment) Regulations. While the market has welcomed the shift away from the cumbersome Co-Investment Portfolio Management Services route, our article evaluates the operational frictions emerging from its implementation and proposes structural remedies.

Introduction

Imagine having to double down on your most promising investment, but the deal is threatened due to legal complexities. This was the case for co-investment through Portfolio Managers Services (“PMS”) route in India, until the Securities and Exchange Board of India (“SEBI”) introduced a new regulatory framework to resolve this problem in 2025. Co-investment refers to an arrangement in which an investor can directly invest alongside an Alternative Investment Fund (“AIF”) in the investee company in which the AIF has invested; its regulation is a more recent development in the AIF structure. As of 30th June 2025, the total investments made in listed securities by category I and II AIFs are 1,83,251 crores, which is nearly half of the total investments made in unlisted securities by category I and II AIFs, that is 3,51,670 crores. These statistics highlight the contemporary development of co-investment in India. This essay examines SEBI’s recent reforms in co-investment as applied to Category I & II AIFs, evaluates their effectiveness, situates them in a global context and offers recommendations for further reform.

The Traditional Co-Investment Structure

SEBI’s initial foray to regulate the co-investment traces back to the regulation namely, the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020, where the Board made a preliminary effort as to define a Co-investment Portfolio Manager (“CIPM”) and introduce related provisions governing co-investment activities. The initial regulations, prior to amendment reforms, for co-investment were the invention of a third type of portfolio managers known as the CIPMs. The framework allowed the CIPM, namely, the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020, where the Board made preliminary efforts to offer services to investors in category I or II AIFs, which are under common management and sponsorship with the parent AIF, and the framework also provided for the CIPM to invest in unlisted securities.

With the advent of the PMS route, challenges such as increased regulatory compliance, operational inefficiencies and investor disparity arose. Under the PMS route, a separate license and additional regulatory compliance were required, and the number of investors was limited due to private placement compliance, and the documentation of these investors delayed the process of co-investment. Operational inefficiency, like the execution of a Power of Attorney (“PoA”) that empowered the portfolio managers to decide on matters such as voting on behalf of their co-investors, that empowered the portfolio managers to decide on matters such as voting on behalf of their co-investors undermined the flexibility of the process. These challenges are now resolved by the new CIV route, as the CIV scheme is added to the AIF structure, and the regulatory compliance and other inefficiencies are reduced.

SEBI's 2025 Co-Investment Reforms 

In May, 2025, SEBI released a consultation paper to enhance flexibility in the AIF structure and offered co-investment opportunities in the existing system. This paper introduced two reforms-

First reform was to launch a separate scheme where investors of AIFs have the opportunity to co-invest in unlisted securities under the CIV Route by virtue of SEBI AIF Regulations,2012. And second, to ease the restriction on AIF’s Investment Managers from advising on listed securities.

The paper also outlines the implementation of the CIV model, indicating how it should work within the Alternative Investment Fund structure. According to this framework, the CIV can be registered as Category I and II AIF. Processes related to registration or termination will be identical to those governing the existing system. It is further proposed that CIV(s) will also be exempted from some AIF Regulations to enhance flexibility, namely Regulation 15, 16 and 17. It is also recommended to launch a distinct CIV scheme for each co-investment, with every such scheme maintaining its own bank account, demat account, and PAN. One of the major recommendations is that only ‘Accredited Investors’ shall be offered the CIV scheme.

The above proposal was accepted by the board in its 210th meeting of the board of SEBI on 18th June, 2025. On 9th September, 2025, SEBI issued a circular, which made it clear that for the ease of doing business, the SEBI (AIF) Regulations, 2012 had been amended and notified on 9th September, which enabled AIFs to offer co-investment opportunities, alongside the already existing route under the SEBI (Portfolio Managers) Regulations, 2020 (PMS route).

Key features of the SEBI (Alternate Investment Fund) (Second Amendment), 2025:

• Amended definition of Co–investment, Section 2(fa) states “Co-investment” means investment made by a manager, sponsor or investor of a Category I or II AIF in unlisted securities of investee companies where such a Category I or Category II Alternative Investment Fund makes an investment.

• A CIV scheme shall be constituted of Category I and II AIFs, which will allow the co-investors to invest in unlisted securities of an investee company along with the main AIF. A shelf private placement memorandum (“PPM”) of the CIV requires submission to the Board, via a merchant banker, accompanied by a fee as prescribed by this regulation, prior to making a co-investment being offered to co-investors under the co-investment scheme.

• For every co-investment made in an investee company, an independent CIV scheme

  shall be launched in line with the shelf PPM filed with SEBI.

• Further, a restriction is placed on an angel fund from creating a co-investment scheme.

• A CIV shall be offered only to accredited investors of AIF(s) (Category I or II). Each co-investment will only invest in one investee company.

• The governing of the co-investment terms should be concurrent with that of the main AIF, and the exit timelines of both investments need to be co-terminus.

• Certain regulations like Regulation 13, Regulation 16 and Regulation 17, along with certain sub-regulations and clauses under Regulations 10, 11, 12, 14 and 15, will not be applicable to the CIV model of AIF.

Analysing the Effectiveness of the Reforms

Co-investments allow investors to venture beyond the traditional fund structures, thereby providing a pathway towards enhanced investments and high-value opportunities. It cuts down on the due diligence and deal sourcing expenses, along with capped management and incentive fees that are lower than traditional private equity funds, ensuring higher returns to investors.  According to Preqin, 80% of limited partners reported that equity co-investments outperformed conventional fund investments. On the other hand, while managing large projects, investee companies secure swift financing and structured capital support.  

The new model brought into effect by SEBI has resolved certain inefficiencies persistent in the old route. It mitigates the dual regulatory compliance burden, resolves asynchronous exit timelines, enhances flexibility on investing in unlisted securities, mitigates restrictions on advisory for investment in listed securities and enhances managerial control by reducing dependence on uncoordinated investor decisions.

However, there are certain downsides to it. The CIV scheme is limited only to Accredited Investors, which is defined under Regulation 2(ab) of the AIF Regulations by the Board. It contains defined thresholds for net worth and income, further limiting investments to the investors of the main AIF. This discriminates against investors who do not fall within the specified standards. Additionally, it restricts the true nature of co-investment by limiting divergent exit timelines, specifying quantum and terms of co-investment.

Further, mandatory shelf PPM filings via merchant bankers and the requirement of distinct CIV schemes, each necessitating distinct accounts and documents, add multiple compliance layers. This results in significant cost and logistical burdens for smaller deals, while also prolonging deal timelines, potentially making this route commercially unviable.

Lastly, practical ambiguities arise regarding how transfers, transmissions, or mandatory exits in the parent AIF scheme affect the linked CIV scheme, leading to potential operational uncertainties. A regulatory ambiguity arises as Category III AIFs, though primarily investing in listed securities, may also invest in unlisted ones. If an investor independently makes an investment in unlisted securities of an investee company of the parent AIF without any involvement or fee to the AIF or its manager, it is arguable that no SEBI regulation is breached, since such a transaction falls outside the scope and intent of the CIV framework. Despite regulatory safeguards, the bespoke structure could weaken oversight mechanisms, posing challenges to effective governance and regulatory monitoring.

Comparative Insights and Recommendations

Around the world, co-investment structures like those in the US, UK, and Europe are well- established and investor-friendly. Common models include Sidecar funds, Direct LP Co-investment, etc. These models allow selected limited partners to invest alongside the main private equity or venture capital fund in specific portfolio companies. Based on the global practices, certain changes can be brought out to the current framework:

• Globally, co-investment entails investments in twenty-five to thirty companies encompassing across various General Partners (“GPs”), countries and industries, while maintaining necessary diversification. The current framework in India requires one CIV per investee. Adopting a scheme that allows co-investments to be made for multiple investee companies under one CIV, subject to investee companies having homogeneous terms and conditions, would significantly reduce administrative and documentation overload and enhance scalability.

• Generally, co-investments are rendered by GPs without management or performance fees, increasing investor returns in a typically high-fee asset class. However, co-investors may still face indirect fees where the AIF, its affiliates, or portfolio companies bear management or service-related expenses. Hence, India’s CIV framework should mandate full fee transparency, pre-disclosure of indirect charges, investor consent for new fees, and contractual caps to ensure fairness, protect investor interests, and align with global best practices. 

Conclusion

The recent SEBI amendments mark a decisive step in enhancing the flexibility of AIFs in India by institutionalising co-investment within the regulated AIF structure. By eliminating the dual compliance burden of the PMS route, ensuring enhanced operational efficiencies, and offering structured access for high-value unlisted opportunities to investors, the framework has worked well. Moreover, it brings about alignment in exit timelines, reduction in managerial fragmentation, and integration of co-investments directly under the AIF regime, thereby bringing in much-needed regulatory clarity and market confidence driven by SEBI. Nevertheless, this framework is restrictive because it is limited exclusively to 'Accredited Investors' and, considering the demand for each investee company to have separate CIVs, evinces high levels of administrative and cost barriers, which can be seen as a disincentive to participate in smaller deals. Looking ahead, the adoption of global best practices, such as multiple co-investments under a single CIV, full fee transparency, and uniform investor treatment, would indeed render the Indian co-investment landscape more inclusive, scalable, and globally competitive, thus assuring greater participation of capital and long-term sustainability within the AIF domain.

Disclaimer

The views expressed in this article are solely those of the author(s). This article is intended for educational/information purposes only. The source of this article is publicly available information, and under no circumstances should the contents of the article be construed to be professional advice by the authors.