📌 Key Facts at a Glance
2026-AFD-POD1
SEBI has issued Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026 dated June 16, 2026, addressed to all Alternative Investment Funds (AIFs) and all Venture Capital Funds (VCFs) registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996. The circular comes into force with immediate effect and operationalises provisions inserted into the SEBI (Alternative Investment Funds) Regulations, 2012 by the amendment notified on April 18, 2026.
The circular was signed by Anshul Jagdish Goyal, Deputy General Manager, and is available on the SEBI website at www.sebi.gov.in under "Legal → Circulars" and "Info for → Alternative Investment Funds." The SEBI Master Circular for AIFs dated June 03, 2026 has also been updated with these provisions.
📜 Background — The Problem This Circular Solves
AIFs have defined fund lives — a tenure, an extension, and a liquidation or dissolution period. At the end of this "permissible fund life," Regulation 29 of the AIF Regulations requires assets to be liquidated, proceeds distributed, and the certificate of registration surrendered. In practice, this clean sequence is often blocked by two messy realities:
Litigation notices, tax reassessments, or regulatory demands may arrive after the fund has wound down. An AIF cannot distribute all proceeds without risking being unable to satisfy a future adverse order. Previously there was no formal mechanism to hold back proceeds past the fund life.
An AIF that has wound down its portfolio but cannot surrender registration (because of pending litigation) had to remain in full regulatory compliance — CTRs, quarterly activity reports, NISM certifications, custodian requirements, benchmarking disclosures — even though no active investing was occurring. This was disproportionate and costly.
The April 18, 2026 amendment to the AIF Regulations addressed both problems in principle by inserting Regulation 29(7) (proceeds retention subject to SEBI conditions), Regulation 29(10A) (Inoperative Fund tagging), and Regulation 29(11) (surrender of registration after winding up). This circular now specifies all the conditions and modalities for exercising those powers.
🏗️ Regulatory Foundation
💰 Part 1 — Retention of Proceeds Beyond Permissible Fund Life (Paragraphs 3–7)
This is the core regulatory change. AIFs and their schemes may now retain liquidation proceeds beyond the liquidation period or dissolution period (i.e., beyond the "permissible fund life"), but only if they satisfy at least one of three specified conditions.
🏷️ Part 2 — 'Inoperative Fund' Status: Application & Framework (Paragraphs 8–14)
The 'Inoperative Fund' status is a new regulatory category for AIFs that have effectively ceased operations but cannot yet surrender their registration. It provides meaningful compliance relief while maintaining a minimal accountability structure.
An Inoperative Fund can apply to SEBI for surrender of its certificate of registration only after: (a) all liabilities are satisfied, and (b) the pending retained monies are distributed to investors in all schemes. The Inoperative status is therefore temporary — it bridges the gap between operational winding-down and formal registration surrender.
Conditions Applicable to Inoperative Funds (Paragraph 12)
✂️ Part 3 — Regulatory Requirements Waived for Inoperative Funds (Paragraph 13 + Annexure B)
Paragraph 13 states that the regulatory requirements listed in Annexure B shall not be applicable to AIFs tagged as Inoperative Funds. Annexure B lists 10 specific requirements, each with its own effective date of non-applicability.
Requirements 6, 7, 8 and 10 (NISM certification, custodian, periodic investor disclosure, detailed valuation) are waived immediately on the date of tagging. Requirements 1–5 and 9 (activity reports, CTR, PPM audit, PPM change intimation, benchmarking, investor reports) are waived only from the next financial year or quarter, so there is a brief transitional period of continued compliance even after tagging.
When does each compliance waiver actually start?
📊 Part 4 — Annual Retention Status Report (Paragraph 14 + Annexure C)
Although Inoperative Funds are relieved of the heavy periodic reporting burden, a single consolidated accountability mechanism remains: the Annual Retention Status Report.
What Annexure C Requires in the Annual Retention Status Report
🏛️ Part 5 — Applicability to Erstwhile Venture Capital Funds (Paragraph 15)
All of the above — the retention-of-proceeds facility and the Inoperative Fund status — are also available to Venture Capital Funds (VCFs) registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996. The VCF regulations were effectively subsumed into the AIF framework over time, but many VCFs continue to hold registered status under the old framework.
The regulatory framework applicable to VCFs tagged as Inoperative Funds is the same as applicable to AIFs — i.e., paragraphs 12 to 14 of the circular (three binding conditions, Annexure B exemptions, annual retention status report).
📋 Annexure A — Application Format for Inoperative Fund Status
The application to be emailed to [email protected] has four parts. Here is what each part requires:
Documents to Keep Ready Before Applying for Inoperative Fund Status
- Copy of litigation notice, tax notice, summons, show-cause notice, re-assessment notice, or other official communication, where reliance is placed on paragraph 3.1 or paragraph 24(a).
- Investor consent records showing approval by at least 75% of investors by value, along with disclosure of retained amount and proposed retention period, where reliance is placed on paragraph 3.2 and paragraph 4.
- Invoices, supporting documents, or comparable prior-year expense records, where monies are retained for residual winding-up operational expenses under paragraph 3.3.
- Manager undertaking in the format set out in Part C of Annexure A.
- Trustee / Board of Directors / Designated Partners undertaking, as applicable, in the format set out in Part D of Annexure A.
- Scheme-wise data on corpus, cumulative investments, liquidation dates, proceeds accrued, proceeds distributed, proceeds retained, expected resolution timeline, and pending enforcement actions, as required in Part B of Annexure A.
🔄 End-to-End Process: From Permissible Fund Life Expiry to Registration Surrender
FLOW — WHAT AN AIF DOES WHEN FUND LIFE EXPIRES WITH UNRESOLVED LIABILITIES
📅 Applicability & Implementation
- Effective date: Immediately upon issue — June 16, 2026. No transitional period.
- Addressees: All AIFs and all VCFs registered under erstwhile SEBI (VCF) Regulations, 1996.
- Master Circular update: SEBI Master Circular for AIFs dated June 03, 2026 has been updated to incorporate these provisions.
- Annual report due date: Within 30 calendar days from end of March each year — i.e., by April 30.
- SFA standards: Implementation standards for permitted operational expense categories will be issued by the Standard Setting Forum of AIFs (SFA) in consultation with SEBI — watch for this.
- Application channel: Email to [email protected] in Annexure A format.
📊 Impact Analysis — Who Benefits and What Changes
🏦 AIF Managers
No longer caught in a legal vacuum when a fund faces a tax reassessment or litigation post-wind-down. Clear framework enables proper fiduciary management of retained monies without regulatory ambiguity.
👥 AIF Investors
75% consent threshold and mandatory disclosure of retention amount + period provide meaningful protection. No management fees during Inoperative status. Annual report keeps investors informed of retained amounts and liability status.
💰 VCFs (1996 Regulations)
Erstwhile VCFs, many of which have long-tail portfolio cleanup issues and pending tax matters from historical investments, now have a formal mechanism to handle these without maintaining full compliance infrastructure.
📋 Compliance Teams
10 waived requirements significantly reduce compliance burden for dormant funds. NISM certification, custodian, and investment disclosure requirements drop immediately. CTR, PPM audit, and activity reports wind down from next FY. A single annual retention status report becomes the principal continuing reporting requirement under this circular, alongside the substantive conditions that continue to apply to Inoperative Funds.
🏛️ SEBI / Market Oversight
Inoperative Fund registry gives SEBI visibility into funds in limbo. Annual reports with retained amounts and expected timelines enable targeted supervision. Requirement to re-surrender registration ensures no permanent dormancy.
⚖️ Litigation Context
Show-cause notices and reassessment summons now qualify as "demonstrable litigation notices" — pre-crystallisation protection. An AIF awaiting a favourable judgment (Category B in Para 9) can retain registration without retained monies, covering a previously unaddressed scenario.
📋 Before vs. After Summary
✅ Compliance Action Points
- ✅ AIF Managers with overdue schemes: Review whether any scheme has exceeded its permissible fund life. Assess whether a pending litigation notice, tax demand, or anticipated liability qualifies under paragraphs 3.1 or 3.2. If retaining for operational expenses under 3.3, compile invoice documentation and ensure retention does not exceed 3 years.
- ✅ 75% consent campaigns: Where no crystallised demand exists but litigation is anticipated, initiate investor consent process. Remember: disclose retention amount and estimated retention period before seeking consent (Para 4).
- ✅ Inoperative Fund applications: Prepare the Annexure A application in full, including Part A and Part B details and the undertakings required in Part C and Part D, gather supporting documentation for the chosen retention ground (litigation notices / investor consent records / invoices), and email to [email protected].
- ✅ Immediate compliance relief on tagging: Once Inoperative Fund status is received, reassess compliance obligations that become non-applicable from the date of tagging, including NISM certification requirement, custodian requirement, periodic investment disclosure obligations, and valuation requirements, while ensuring any contractual or operational close-out steps are handled appropriately. Wind down CTR, PPM audit, activity reports, and investor reports from next FY/quarter.
- ✅ Investment management: Ensure retained monies are invested in accordance with Regulation 15(1)(f) of the AIF Regulations. Maintain clear internal records of the instruments used, since Annexure C requires scheme-wise disclosure of the instrument or investee company and related valuation details in the annual retention status report.
- • Annual Retention Status Report / April 30 timeline: Prepare the report in Annexure C format, submit it on the SEBI Intermediary Portal within 30 calendar days from the end of March of every financial year, and share it with investors of the relevant scheme(s). Where applicable, the updated NAV of AIF units must also be reported to depositories within the same timeline.
- ✅ VCF managers: If your fund is registered under the erstwhile 1996 VCF Regulations and has unresolved liabilities or pending litigation, the full AIF framework in this circular now applies — including Inoperative Fund status eligibility.
- ✅ Watch for SFA implementation standards: The Standard Setting Forum of AIFs (SFA) will publish standards for permitted operational expense categories under Para 3.3. Once published, these will define what expense heads qualify for the residual expenses retention ground.
Paragraph 20 of the circular states that the SEBI Master Circular for AIFs dated June 03, 2026 has been updated to incorporate these provisions. For compliance teams, this means the June 16, 2026 circular should be read not in isolation, but alongside the updated consolidated AIF Master Circular.
This article is for informational purposes only and does not constitute legal or investment advice. Verify all details against the official SEBI circular before relying on this content for compliance purposes.
