Unlocking Flexibility: SEBI’s CIV Model Could Redefine Co-Investments in India

On May 9, 2025, the Securities and Exchange Board of India (SEBI) issued a consultation paper proposing significant reforms to the co-investment framework within the Alternative Investment Fund (AIF) structure. Aimed at enhancing flexibility and fostering increased investor participation, the proposed changes focus on two key areas: the introduction of Co-Investment Vehicles (CIVs) and the easing of regulations governing advisory services offered by AIF managers.

Currently, co-investments are usually made outside the AIF structure, often through Portfolio Management Services (PMS). The proposed changes aim to integrate co-investment activities within the AIF framework, responding to earlier demands from private equity and venture capital funds. In February 2025, the SEBI mandated that AIF investments must be held in dematerialised form starting in July. Additionally, in September 2023, the SEBI revised the rules for valuing investment portfolios, aligning them more closely with mutual fund standards for listed securities.

Co-Investment

In December 2021, the SEBI amended the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“SEBI AIF Regulations”) and the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020 (“SEBI PMS Regulations”) to enable co-investments.

According to the SEBI AIF Regulations, a “co-investment” is defined as an investment made by the investment manager, sponsor, or an investor of a Category I or II Alternative Investment Fund (AIF) into the same investee companies in which that Category I or II AIF has invested. Simply put, SEBI’s definition of “co-investment” does not cover investments made by individuals or entities who have not invested in the relevant AIF.

Under the SEBI PMS Regulations, discretionary Portfolio Managers are prohibited from investing their clients’ funds in unlisted securities. Portfolio Managers providing non-discretionary or advisory services may invest in or advise investments in unlisted securities, but only up to 25% of the client’s assets under management. Since co-investments typically involve unlisted securities, the portfolio management route previously used by investment managers became restrictive for such co-investments. Additionally, the SEBI PMS Regulations grant clients the right to terminate their portfolio management contracts early and to withdraw funds and securities before the contract’s tenure ends, allowing investors to exit investments prematurely.

For co-investments, the investment manager is expected to align the interests of co-investors with those of the AIF to ensure the AIF investors’ interests are protected. However, if a co-investor exits or divests early, this may cause misalignment with the AIF investors’ interests, potentially harming their interests.

Apart from managing investments through the portfolio management route, an investment manager can also facilitate co-investments via the investment advisory route. However, this approach does not allow the investment manager of an AIF to ensure alignment of interests between the AIF investors and the co-investor. This is because the co-investor retains full discretion over investment decisions, including the timing of exits, while the investment manager merely provides advisory services to the co-investor.

A SEBI working group observed that obtaining an additional SEBI registration as a Portfolio Manager not only increases costs for the investment manager but also creates obstacles in granting co-investment rights to investors due to the restrictions under the PMS Regulations. This situation undermines the competitiveness of domestic investment managers, as their global counterparts face no such limitations and can easily acquire significant stakes in Indian companies or participate in large-scale deals.

Furthermore, when co-investments are made directly into a portfolio company, it expands the cap table—something portfolio companies typically prefer to avoid. Additionally, such arrangements complicate investment transactions because portfolio companies must manage relationships with multiple investors.

Category I or Category II Alternative Investment Funds (AIFs) will be permitted to establish a separate Co-Investment Vehicle (“CIV”) linked to the main AIF to facilitate co-investments. The CIV must be registered under the same category as the primary AIF. At the time of registration of the main AIF with SEBI, a shelf Private Placement Memorandum (PPM) for the CIV must be annexed. Existing AIFs intending to offer co-investment opportunities may also submit the shelf PPM of the CIV to SEBI.

The shelf PPM for the CIV must outline the principles and criteria based on which co-investment rights will be offered to investors of the main AIF. This could include parameters such as the amount of the investor’s capital commitment to the main AIF. The investment manager’s co-investment policy must be disclosed to prospective investors before they are onboarded into the main AIF. Only Accredited Investors will be eligible to receive co-investment opportunities through the CIV. The investment manager is required to register the CIV by filing the shelf PPM with SEBI at the time of the first co-investment transaction. If SEBI does not raise any queries within 30 days of filing, the registration application will be deemed approved.

The CIV will receive a distinct registration number, enabling it to obtain a separate PAN for tax purposes. The tenure of the CIV will be aligned with the tenure of the main AIF, and the minimum three-year tenure requirement will not apply to the CIV. Several provisions under the AIF Regulations will not apply to CIVs, including the restriction on investing more than 25% of the fund in a single investee company. Additionally, CIVs will not be required to have any sponsor commitment.

The Consultation Paper recommends that the investment manager establish a single CIV for all co-investments related to the main AIF. However, if SEBI determines that this approach significantly hampers the pro rata mechanism introduced in the SEBI AIF Regulations (Fifth Amendment), effective November 18, 2024, SEBI may permit the creation of multiple CIVs — potentially one CIV per co-investment — without limits on the number of CIVs that may co-invest alongside the main AIF.

AIF managers’ advisory on listed securities

Regulation 20(15) of the AIF Regulations provides that “the manager shall not provide advisory services to any investor other than the clients of the co-investment portfolio manager as specified in the PMS Regulations, for investment in securities of investee companies where the AIF managed by it invests.” Notably, the phrase “for investment in securities of investee companies” does not differentiate between listed and unlisted securities. Consequently, AIF managers are currently prohibited from offering advisory services on listed securities, where the AIF has invested, to any investor other than eligible co-investors under the PMS framework.

The Consultation Paper proposes that “in respect of investment in listed securities of investee companies, the manager of AIF may provide advice to any investors, irrespective of whether the AIFs managed by it have invested in such listed securities or not.” This appears to suggest that an AIF manager may offer advisory services to investors on any listed securities, regardless of whether the AIF itself has invested in those securities.

Closing Thoughts

The replacement of the Co-Investment PMS Licence with a Collective Investment Vehicle (CIV) model is a welcome move. However, the CIV model introduces certain limitations—most notably, it does not allow co-investors to remain invested in a portfolio company beyond the tenure of the AIF. Given that many AIFs already face challenges in liquidating their investments at the end of their term, the implementation of the Consultation Paper’s proposals may create similar exit challenges for co-investments.

Moreover, SEBI has not considered the possibility of permitting entities that are not investors in the AIF to co-invest in its portfolio companies alongside AIF investors. This restricts flexibility and may limit broader participation in co-investment opportunities. The Consultation Paper also lacks clarity regarding the alignment of the CIV’s tenure with an AIF’s dissolution period. Specifically, it does not specify whether the tenure of a CIV can be extended to match the AIF’s dissolution period if such a period is invoked.

Another point of concern is SEBI’s requirement for the investment manager to register the CIV and file a shelf Private Placement Memorandum (PPM) at the time of the first co-investment. In practice, the need for co-investment often arises only after the AIF has made a few portfolio investments. If this proposal is enforced, it could lead to a situation where all AIFs are compelled to file a shelf PPM at the time of their initial registration, regardless of whether co-investments are anticipated.

SEBI’s preference for each AIF to operate a single CIV for all its co-investments is also puzzling, given that each co-investment typically involves different investors and varying levels of participation. Pooling such investments into a single CIV could complicate fund management. It remains to be seen whether SEBI will allow CIVs to establish sub-pools for individual co-investment deals. Lastly, the Consultation Paper does not clarify whether a separate registration fee will be payable when the investment manager registers the CIV by filing the shelf PPM at the time of the first co-investment transaction.