The AIF industry has grown from a niche investment segment into a ₹15.74 lakh crore ecosystem comprising more than 1,700 registered funds. As of December 2025, AIFs had raised nearly ₹6.79 lakh crore and deployed over ₹6.45 lakh crore into the economy.
Yet, as the industry grows, so does regulatory scrutiny.
SEBI’s recent enforcement actions send a clear message: obtaining an AIF registration may be difficult, but remaining compliant after registration is often far more challenging.
A few days ago, we were speaking with a client who had just received SEBI approval for their AIF Category III.
The excitement was understandable.
After months of preparing the application, responding to regulatory queries, finalising documents and obtaining approvals, the team felt they had crossed the most difficult hurdle.
The conversation went something like this.
“We finally got our AIF Cat III registration. Honestly, I feel like the hard part is behind us now.”
Congratulations Minal ! Getting registered is a real achievement, and the effort that goes into it shouldn’t be understated. But I’d gently push back on one thing: you haven’t crossed the finish line. You’ve just arrived at the starting line.
“The starting line? We’ve cleared SEBI registration, the PPM is in place, investors are ready. What more is there?”
Quite a lot, actually. Registration tells SEBI you are eligible to operate an AIF. What comes after: every investment decision, every investor communication, every quarterly report, every governance call; that is what tells SEBI whether you should continue operating one. Look at SEBI’s recent enforcement actions. All of them are about what happened or what went wrong after registration.
“That’s sobering. We assumed that once the structure and documents were in order, compliance would largely take care of itself.”
That assumption, right there, is exactly what we need to talk about. It’s the same one that has quietly landed several well-structured, well-intentioned AIFs in regulatory trouble.
Let me walk you through some of the most common gaps, drawn directly from recent SEBI orders.
1. Non-Registration with FIU-IND – An Overlooked but Critical Requirement
Let’s start with the compliance requirement of registration with FIU – IND.
“Kruti, isn’t FIU registration just an administrative formality?”
That is what most managers think. But that’s not the case. Registration with the Financial Intelligence Unit (FIU-IND) is a key compliance requirement under anti-money laundering (AML) regulations.
Despite its importance, some funds, like India Asset Growth Fund (Cat II AIF), fail to complete this registration or delay it significantly. Given the increasing focus on AML compliance, such lapses are likely to invite stricter scrutiny going forward.
What to do: Treat FIU-IND registration as a day-one post-registration obligation, not an afterthought.
2. Minimum Contribution Requirements – Not Just a One-Time Check
“At least contribution requirements are easier to monitor, aren’t they?”
Not really!
Compliance with minimum contribution norms i.e. ₹1 crore for investors and specified requirements for employees/directors of the Manager is often treated as a formality at onboarding. However, the obligation does not end there.
As seen in the case of India Asset Growth Fund II (Cat II AIF), investors (including the Manager) have contributed below the prescribed threshold, despite drawdown notices being issued. The absence of follow-up action against defaulters, especially when clearly outlined in the PPM, will be viewed as a regulatory lapse.
What to do: Ensuring full drawdown and enforcing contribution commitments. It is not just a contractual matter—it is a regulatory expectation.
3. Non-Adherence to PPM
“Talking about PPM, our PPM is quite comprehensive”
Be careful with that statement.
The Private Placement Memorandum (PPM) is not merely a disclosure document—it is the operating blueprint of the fund. Deviations from the PPM, whether in investment policy, format, or governance processes, are closely scrutinised.
As seen in the case of KellyGamma Fund, common gaps include:
- Investment decisions not aligned with the stated strategy
- Failure to follow prescribed formats and disclosures
- Delays in audit filings
Such inconsistencies create a disconnect between what is promised to investors and what is implemented in practice—something regulators take seriously.
What to do: Any change to investment strategy, fees, or governance must go through a formal PPM amendment with investor consent where required. Internal convenience cannot override documented commitment.
4. Breach of Concentration Limits
Carrying on..
Another common yet critical lapses observed is the breach of concentration limits prescribed under Regulation 15(1)(c) of the SEBI AIF Regulations. The issue often stems not from aggressive investment strategies, but from incorrect computation. This was seen in the case of Abans Investment Trust.
A frequent mistake is including unrealised gains or profits while calculating the concentration threshold. Regulatory expectations are clear—such limits must be computed strictly on the basis of funds committed (or invested), and not on mark-to-market gains.
Even a technical miscalculation can lead to a regulatory breach, making it essential for fund managers to have clear internal methodologies and periodic checks in place.
What to do: Establish a documented computation methodology, exclude mark-to-market gains, and subject it to periodic independent review — not just at the point of investment.
5. Improper Parking of Uninvested Funds
“Talking of concentration limits, how does SEBI treat parking of uninvested funds? We’re not making an investment decision, just parking funds temporarily ”
SEBI doesn’t make that distinction.
As seen in the case of Unicorn India Venture Fund III, the uninvested funds and pending distribution proceeds were parked in a savings mutual fund scheme instead of permitted liquid instruments under Regulation 15(1)(f) of the AIF Regulations such as liquid mutual funds, bank deposits, or other high-quality liquid assets.
What to do: Review how uninvested and surplus funds are deployed at all times — not just at the point of investment or distribution. Even short-term or transitional parking of funds must comply strictly with the Regulations.
6. Non-Filing of Quarterly Activity Reports (QARs)
Kruti, since you mentioned, reporting to SEBI about deviation, how serious does SEBI treat missing a filing?.”
Periodic reporting obligations are often deprioritized in the day-to-day operations of a fund, but the consequences of ignoring them can be irreversible. Sometimes it costs a fund, its registration.
As seen in recent orders against Victory Investment Fund, Rudrabhishek Infrastructure Trust, Florintree India Flexi Advantage Trust, SEBI cancelled the fund’s registration after it failed to file QARs for four consecutive quarters and also did not respond to a Show Cause Notice.
This is perhaps the starkest illustration that regulatory reporting is not an administrative checkbox. Non-compliance here goes directly to the question of whether a fund should remain registered at all.
What to do: Maintain a regulatory calendar with clear filing deadlines, assign named ownership for each filing, build internal review deadlines ahead of regulatory ones, and never leave a SEBI notice unresponded to.
7. Not following the code of conduct by the investment managers
“Governance issues usually surface only when investors raise concerns. If investors aren’t complaining, then governance must be fine, right?“
Not necessarily.
The AIF Code of Conduct requires that funds be operated in the interest of all investors, and not merely for the benefit of the sponsor, manager, or a select class of investors.
As seen in the case of Motilal Oswal Alternative Investment Trust (Cat III AIF), the investment manager appropriated amounts recovered from defaulting investors under the label of “exit load” instead of crediting those amounts to the fund for the benefit of existing investors. SEBI viewed this as inconsistent with the fiduciary obligations imposed on investment managers.
What to do: Review fee structures, recovery mechanisms, and distribution waterfalls to ensure they are not only contractually sound but also consistent with equal treatment of all investors
8. Delayed Winding Up of Schemes
“Lastly, if exits are delayed, I believe we can always extend the scheme.”
That’s where several funds have faced challenges.
In many recent orders issued by SEBI, a fund continued beyond the allowed extensions, delaying closure by over two – three years without sufficient justification. Winding up timelines are clearly defined under the AIF Regulations, with limited extensions permitted.
While external factors (such as market disruptions) may impact exits, extensions beyond the regulatory framework require strong and well-documented rationale. Absence of the same can result in adverse regulatory observations as seen in the case of Multiples Private Equity Fund I (Cat I AIF) and Cinema Capital Venture Fund.
What to do: Identify wind-down risks early, communicate proactively with investors, maintain documented rationale, and engage with SEBI formally where extensions beyond the regulatory framework are being sought.
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“It’s interesting. These funds had lawyers, auditors, compliance officers and investment committees. Yet they still faced regulatory action.”
“Yes. The common thread across these lapses is not lack of awareness, but lack of continuous oversight and structured compliance processes.”
“Then what separates the funds that receive observations from the funds that don’t?”
I smiled.
Its is usually one thing.
“What?” asked Minal.
Someone in the organisation owns compliance.
Not just as a quarterly exercise. Not just as a filing requirement. Not just as a checklist.
But as a responsibility.
In an environment of increasing regulatory focus, compliance is no longer a periodic exercise, it is an ongoing function. Having the right systems, checks, and advisory support in place can make the difference between a well-run fund and one exposed to avoidable regulatory risks.
Because regulations do not get violated all at once. They get violated one missed review, one delayed action, one overlooked requirement at a time.
And by the time the regulator notices, the issue is rarely new.
In a landscape where regulatory scrutiny is only increasing, a well-supported compliance function is not just about avoiding penalties — it is about building a fund that inspires confidence with both regulators and investors.
Understood Kruti, we will need your assistance for reviewing our AIF compliance. One of my team members will send you an email.
Sure, Minal, please send an email to kruti@cskruti.com.
List of orders discussed above:
- India Asset Growth Fund (Cat II AIF)
- India Asset Growth Fund II
- KellyGamma Fund (Cat III AIF)
- Abans Investment Trust (Cat I AIF)
- Unicorn India Venture Fund III (CAT II AIF)
- Victory Investment Fund (Cat II AIF),
- Rudrabhishek Infrastructure Trust (Cat I AIF),
- Florintree India Flexi Advantage Trust (Cat III AIF),
- Motilal Oswal Alternative Investment Trust (Cat III AIF)
- Multiples Private Equity Fund I (Cat I AIF)
- Cinema Capital Venture Fund.