Alternative Funds 2026 Comparisons

India has developed into a substantial and increasingly diversified market for alternative investment funds. The alternative investment fund (AIF) ecosystem within mainland India is regulated by the Securities and Exchange Board of India (SEBI), while the AIF ecosystem in India’s first International Financial Services Centre in Gujarat International Finance Tec-City (GIFT ISFC) is regulated by the International Financial Services Centre Authority (IFSCA).

The regulatory approach towards AIFs, however, differs in mainland India with SEBI as compared to that of the IFSCA. SEBI primarily registers and regulates the AIF itself under the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”), and extends its regulatory purview to the manager of such AIF through the AIF. In the GIFT IFSC, the registration and regulation is focused primarily on the fund management entity (FME) under the IFSCA (Fund Management) Regulations, 2025 (“FM Regulations”) and extends to AIFs through such FMEs. The latter is better aligned with global standards on fund regulation.

As of 30 June 2026, SEBI reported aggregate commitments of INR17.53 lakh crore (1 lakh crore is 1 trillion; approximately USD185.2 billion) across registered AIFs, with net contributions of INR7.59 lakh crore and net investments of INR7.11 lakh crore. Foreign capital is a meaningful component on a gross basis. SEBI recorded approximately INR2.86 lakh crore (approximately USD30.2 billion) raised from FPIs (foreign portfolio investors), FVCIs (foreign venture capital investors), NRIs (non-resident Indians) and other foreign investors.

The range of strategies being pursued in the GIFT IFSC is similarly broad, including private equity, venture capital, private credit and debt, real estate, infrastructure, hedge funds and other alternative investment strategies. Restricted Schemes are the more commonly used vehicle for these strategies, while Venture Capital Schemes provide a dedicated framework for venture capital investments. The GIFT IFSC provides a regulatory leverage to certain India-based investors for their overseas allocations, allows for blended-finance structures, single-asset schemes, multi-class-based co-investments structures, and is also now exploring the introduction of variable capital companies (VCCs) for funds established thereunder, and some of these features are missing in SEBI-regulated AIFs, indicating a regulatory intent to avoid overlap or competition between the two avenues.

As of 30 June 2025, IFSCA reported that 177 FMEs had registered with it and had launched 272 schemes. Those schemes had cumulative commitments of USD22.11 billion, cumulative funds raised of USD10.5 billion and cumulative investments of USD11.27 billion; approximately 85% of reported investments had been directed towards India.

Taken together, the mainland SEBI-regulated AIF market and the GIFT IFSC framework offer fund sponsors and managers distinct structuring pathways for Indian, offshore and cross-border capital.

India’s alternative funds regulatory landscape is increasingly focused on greater structural flexibility and ease of doing business, particularly for sophisticated investors. A significant recent development is the Corporate Laws (Amendment) Bill, 2026, which proposes amendments to the Limited Liability Partnership Act, 2008 to facilitate ease of operating AIFs set up as limited liability partnerships (LLPs) in mainland India and the GIFT IFSC, including the conversion of existing trust-AIFs into LLPs. This development, in addition to the VCC framework specified above for GIFT IFSC, is expected to broaden the choice of legal structures available to fund managers, although certain aspects of the proposed framework, including its application to multi-scheme AIF structures, remain subject to further legislative development.

There has also been a clear regulatory push towards simplifying the regime for accredited investors. SEBI has introduced an Accredited Investor-only AIF (AIOF) framework and reduced the minimum investment threshold for accredited investors in Large Value Funds for Accredited Investors (LVF) from INR70 crore (1 crore is 10 million) to INR25 crore per investor, alongside a number of compliance flexibilities. These measures reflect a broader shift towards a differentiated regulatory framework for investors with greater financial sophistication and risk-bearing capacity.

The regulatory taxonomy of AIFs in India hosts a broad range of strategies including private equity, venture capital, private credit and debt, real estate, infrastructure, special situations, long-only, long-short and other public-markets-focused strategies within three categories, namely Category I, II and III.

Category I AIFs include angel funds, venture capital, infrastructure, SME, social impact and special situations funds with the legislative idea of introducing more sub-categories which are likely to have a positive spillover effect on the economy and may require special concessions from time to time. Category II AIFs include the broadest range of strategies, and constitute the largest segment of the market. They are commonly used for private equity, private credit, real estate and other residuary strategies which do not fall within Category I or Category III. Category III AIFs are typically used for public-market-focused funds but may also host hybrid strategies.

As mentioned earlier, the funds regulatory framework in the GIFT IFSC is structured differently. IFSCA primarily registers and regulates the FME, which establishes and manages individual schemes. An FME may be registered as an Authorised FME, Registered FME (Non-Retail) or Registered FME (Retail), with the category determining the types of schemes and other fund management activities that it may undertake.

The principal scheme types relevant to alternative investment fund strategies are Venture Capital Schemes and Restricted Schemes in the GIFT IFSC.

Venture Capital Schemes are principally directed towards investments in start-ups and early-stage ventures. Restricted Schemes are commonly used for private equity, private credit/debt, hedge fund and other alternative investment strategies.

Both AIFs under SEBI’s regulatory framework and the GIFT IFSC schemes under IFSCA’s regulatory framework may be constituted as trusts, companies or limited liability partnerships, and SEBI also allows for bodies corporate to be registered as AIFs. In practice, the trust structure is predominant, given the greater flexibility generally available in the governance and operation of a trust structure as compared with a company or LLP.

Evergreen and hybrid structures are used in India as Category III AIFs, although the traditional private equity and venture capital market remains predominantly based on closed-ended, fixed-tenure funds. Under the SEBI framework, Category I and Category II AIFs are required to be closed-ended, whereas Category III AIFs may be either open-ended or closed-ended.

The GIFT IFSC framework provides greater flexibility in this regard. In particular, Restricted Schemes can be structured to pursue a broad range of alternative strategies and may be designed with open-ended or closed-ended features, though there are portfolio limitations for unlisted investments on open-ended schemes even in the GIFT IFSC.

Under the AIF Regulations, each AIF is registered with SEBI as a separate regulated entity, following which multiple schemes may be launched under a single AIF. In the GIFT IFSC, an FME is registered with IFSCA, and the FME may thereafter launch individual schemes.

Both regimes establish a framework intended to protect investors while permitting professional management of AIF strategies. They prescribe codes of conduct and governance requirements for fund managers, valuation standards, disclosure and reporting obligations to investors, conflict-of-interest requirements, and requirements relating to custody, audit and maintenance of scheme assets.

Under the AIF Regulations, AIFs are generally subject to prescribed diversification requirements, with certain Category I and Category II AIFs permitted to invest up to 25% of their investable funds in a single investee company and Category III AIFs permitted to invest up to 10%, which is allowed to be calculated on the basis of net asset value instead of investable funds for listed equity, with other concessions available to Large Value Funds for Accredited Investors and Co-investment Schemes (which are intended to be single-asset funds). The AIF Regulations also impose restrictions and investor approval requirements for specified related-party transactions, as well as restrictions on leverage. Most AIFs are generally subject to a minimum corpus of INR20 crore and a minimum investment of INR1 crore per investor; however, these thresholds are reduced or done away with for certain specific types of AIFs.

The FM Regulations provide greater flexibility for funds established in the GIFT IFSC. Unlike AIFs regulated by SEBI, GIFT IFSC funds are not subject to the same prescriptive diversification and leverage restrictions. In particular, a GIFT IFSC fund may determine its leverage, subject to disclosure in the placement memorandum, compliance with its risk-management framework and applicable investor consent requirements. Moreover, GIFT IFSC funds are also permitted to invest up to 20% of their corpus in specified physical assets. The FM Regulations also impose restrictions and investor approval requirements for specified related-party transactions, and prescribe minimum corpus requirements.

Both the AIF Regulations and FM Regulations also prescribe investment limits based on the type of securities in which a fund may invest, depending on the applicable fund category and strategy.

In practice, registration of a new AIF typically takes approximately one to two months. SEBI has also recently introduced the “Green-Channel: AIF Rollout Upon Document Acknowledgement” (GARUDA) mechanism for quicker processing of new schemes under existing AIFs upon acknowledgement of their placement memorandums, subject to prescribed conditions and post-facto scrutiny.

For GIFT IFSC funds, FME registration currently takes approximately 1.5 to 2.5 months in practice but it could take a longer time to prepare for the application itself due to the infrastructure and other ancillary prerequisites for the application to be established within the GIFT IFSC. Once the FME is registered, a GIFT IFSC scheme may be launched through the green-channel filing of its private placement memorandum and may be opened for subscription immediately upon IFSCA communicating that the private placement memorandum has been recorded.

An investment opportunity to potential investors (or LPs) in an AIF established in India or a similar non-retail scheme established in the GIFT IFSC is required to be offered on a private placement basis. The offering document is referred to as a Private Placement Memorandum (PPM) in both the regulatory regimes.

Under the AIF Regulations, an AIF PPM’s template format is prescribed by SEBI across categories with exemptions to certain types of AIFs from having to adhere to such format, and consists of detailed disclosure requirements including the following:

• material information of the AIF including its terms, tenure, timelines, etc;
• material information relating to the manager including its track record;
• background of key investment team;
• target investors;
• fees and expenses to be charged;
• conditions or limits on redemption of units;
• investment strategy;
• risk management tools;
• parameters employed;
• key service providers;
• terms of reference for committee constituted for approving investment decisions;
• conflict of interest scenarios and procedures to identify and mitigate conflicts;
• disciplinary history of AIF, trust, trustee, sponsor, manager and their directors/partners/promoters and associates;
• the terms and conditions on which the manager offers investment services;
• affiliations with other intermediaries; and
• manner of winding up of the AIF.

While IFSCA has not prescribed a template PPM for GIFT IFSC funds, the FME Regulations have similar disclosure requirements as set out above.

Category I and Category II AIFs are granted pass-through (or tax transparent) status under Section 224 of the Income-tax Act, 2025, meaning their income (other than income in the nature of profits and gains from business or profession) is taxed in the hands of investors as if the investors have directly made the investment in the underlying portfolio which generated the income rather than at the AIF level. The tax regime applicable to investors is discussed further in 4.9 Tax Regime for Investors.

Category III AIFs, by contrast, do not have a codified tax-pass-through status under the Income-tax Act, 2025, and different types of tax models are adopted by Category III AIFs depending on, inter alia, their strategy and choice of form.

GIFT IFSC schemes are treated as Category I, II or III AIFs for tax purposes depending on the nature of their strategy, and are taxed accordingly.

Neither SEBI-regulated AIFs nor GIFT IFSC funds may generally originate loans directly under the regular categories. There is no separate licensing option available for such AIFs to provide loans. They are not permitted to double up as a finance entity (banking or non-banking). A Special Situation Fund under either the SEBI or the GIFT IFSC framework is permitted to acquire loans which qualify within the definition of “special situation asset”. Both may, however, invest in permitted debt instruments, including instruments providing exposure to consumer credit or other loan portfolios, subject to applicable investment restrictions.

SEBI-regulated AIFs may generally invest only in securities and therefore cannot directly invest in non-traditional asset classes such as digital assets or litigation funding arrangements. An AIF may, however, invest in securities issued by companies engaged in such activities, subject to the legal and regulatory framework applicable to the underlying business.

GIFT IFSC Restricted Schemes have a broader investment universe and may invest up to 20% of their corpus in specified physical assets, including real estate, bullion and art with attendant requirements.

Subsidiaries or special purpose vehicles (SPVs) are commonly used as a structuring tool for particular investments or deals at the portfolio level, rather than as part of the fund structure of the AIF itself. This is particularly relevant for asset-intensive or structurally complex strategies such as infrastructure, real estate, project finance and certain private credit strategies. An SPV may be used to ring-fence liabilities at the asset or project level, facilitate acquisition financing, accommodate regulatory or structuring requirements applicable to the underlying asset or jurisdiction, and provide flexibility for financing and exit arrangements. The use of such SPVs is therefore a transaction-level structuring consideration and is not, in itself, a feature of the AIF regulatory framework.

Under the AIF Regulations, co-investment opportunities may only be offered to investors of the main AIF, and are structured through one of two routes. Under the first, the manager obtains a co-investment portfolio manager licence under the SEBI (Portfolio Managers) Regulations, 2020, which permits investors to invest directly in the portfolio company and be reflected on its capitalisation table. Under the second route, the manager launches a Co-investment Scheme tagged to a specific portfolio company, which may only be offered to accredited investors and is subject to a cap of three times the investor’s contribution to that company through the main AIF.

The GIFT IFSC framework permits the use of SPVs in specified circumstances, including for co-investments by certain schemes. While this provides additional structuring flexibility, such SPVs are not commonly used in practice for co-investment by GIFT IFSC funds. As with SEBI-regulated AIFs, the use of SPVs in the GIFT IFSC context is generally a transaction-level structuring tool for implementing particular investments, rather than a feature of the fund structure.

There are certain substance requirements in the case of funds in the GIFT IFSC, and other local requirements with respect to eligibility criteria and investment committee membership for SEBI-regulated AIFs. These are more relevant in the context of the GIFT IFSC than SEBI-regulated AIFs. Refer to the detailed response provided in 3.8 Local Substance Requirements.

Under the SEBI framework, there is a requirement for certain service providers to be registered with SEBI such as the custodian, registrars to an issue and share transfer agent and merchant banker, each of which are practically required to have presence in India.

For funds established in the GIFT IFSC, the requirements are more prescriptive. The trustee of the fund is required to be located in the GIFT IFSC. In addition, where a scheme is required to appoint a custodian under the FM Regulations, the custodian is required to be based in the GIFT IFSC, subject to limited exceptions, and other service providers such as fund administrators may also practically need to have local presence. Where a service provider is established in the GIFT IFSC and undertakes a regulated activity, it is required to obtain the relevant registration or authorisation from IFSCA.

Across both SEBI-regulated AIFs and GIFT IFSC funds, the compliance function is required to be performed by the designated compliance officer who is an employee of the investment manager, and cannot be outsourced.

While SEBI and IFSCA frequently issue consultation papers and amend their respective regulatory frameworks in response to industry feedback, there are no proposals or consultation papers currently available in the public domain which would materially impact the responses provided in 2. Funds.

Promoters and sponsors of alternative funds established in India and GIFT IFSC come from a broad range of jurisdictions, reflecting the international investor and fund-management base in the market. In addition to India, sponsors and promoters are commonly associated with the United States, Japan, the United Kingdom, Singapore, and the UAE. The mix varies depending on the fund strategy and investor base. The GIFT IFSC, in particular, has attracted international fund managers and sponsors seeking an India-focused or Asia-focused platform, with increasing participation from managers based in the US and the Middle East.

In India, the investment manager and sponsor of an AIF may either be the same person or a different person. Investment managers are most commonly structured as either private limited companies or LLPs. LLPs tend to be preferred by newer GPs operating with smaller teams, given their relatively lower compliance requirements and the fact that income is taxed only once at the LLP level, with distributions to partners not subject to a further tax in their hands (ie, personal tax). By contrast, a company is subject to tax at the corporate level and dividend distributions to shareholders are again taxed in their hands. Institutional GPs may nevertheless prefer a private limited company especially in instances where the majority of income earned by the manager is expected to be expensed out or given its greater familiarity among institutional investors and ability to be listed on stock exchanges in future.

Historically, it was common for the investment manager and sponsor to be constituted as the same entity, in part for regulatory and compliance convenience. Increasingly, however, tax considerations have driven a trend towards separating the two entities. In such structures, the investment manager typically receives only management fees, while the sponsor, which is often structured as an LLP, receives the carried interest. The sponsor structure facilitates the allocation of carried interest among individual personnel through partnership interests or other profit-sharing arrangements. At present, there are regulatory concerns among SEBI-regulated AIFs around who is eligible to receive carried interest directly from the fund. Until December 2024, there were no restrictions around eligibility to receive carried interest from the fund, but thereafter, considerable industry-level concern arose because SEBI restricted the pool of eligible carry beneficiaries from the fund to only the sponsor and the manager. There is a consultation paper under works from SEBI currently which indicates that the pool is being expanded to include employees of the manager, however, there is no further regulatory clarity about the timing of release of these amendments.

In the GIFT IFSC, a branch structure is also permitted for a fund management entity, provided the parent entity is already registered with, or regulated by, a financial sector regulator in India or a foreign jurisdiction for conducting similar activities, and subject to additional conditions specified by IFSCA, including a requirement for the parent entity to maintain specified minimum capital earmarked specifically for the branch.

Investment managers of AIFs are not separately registered with SEBI as investment managers. However, they are regulated through SEBI’s AIF framework which governs both the AIF and its investment manager. Specifically, SEBI prescribes a Code of Conduct for managers and requires them to act in the interests of the investors and refrain from taking any action that is prejudicial to their interests. Managers are also required to maintain high standards of integrity and fairness, exercise due diligence and independent professional judgment, and comply with applicable conflict-of-interest requirements.

The regulatory framework therefore imposes obligations on the manager that are fiduciary in nature, although the precise scope of the manager’s fiduciary duties will also depend on the fund documents and applicable general law.

The AIF’s PPM must contain specified disclosures regarding the fund, its manager and sponsor. In particular, the manager’s disciplinary history must be disclosed, including specified litigation, regulatory proceedings, defaults, economic offences, adverse findings under securities laws and certain tax liabilities. These disclosures are made available to prospective investors through the PPM rather than being generally available to the public.

In the GIFT IFSC, investment managers are not simply only regulated but are also required to obtain a registration from IFSCA under the FM Regulations. Similar to the AIF Regulations, the FM Regulations also prescribe a Code of Conduct requiring the investment manager to act in the best interests of the investors, exercise due diligence and independent professional judgment, maintain high standards of integrity and fairness, and manage conflicts of interest appropriately. The investment manager is also required to ensure that its personnel act in the best interests of the fund and its investors. Similar disclosures as required for AIFs (as set out above) must be made in the PPM of the GIFT IFSC funds.

The tax treatment of an alternative fund manager depends on the legal form of the manager and the nature of the income earned. Managers typically earn management fees or performance fees which would generally be taxable as business income, whereas their income through participation as unitholders in the funds, whether on account of sponsor commitment or for carried interest, is taxed differently.

Where the manager is constituted as an LLP, its business income is subject to tax at entity level and income distributed by the LLP to its partners is not subject to further tax in the hands of the partners. Where the manager is constituted as a company, its business income is taxable at the entity level and dividends distributed by the company are also generally taxable in the hands of the shareholders. Management and performance fees are also subject to Goods and Services Tax (GST).

For managers established in the GIFT IFSC, business income in the nature of management fees or performance fees is eligible for a 100% tax deduction for 20 consecutive tax years out of 25 years, irrespective of whether the FME is a company or an LLP. Management and performance fees are also not subject to GST.

India has a specific safe-harbour regime under Section 9A of the Income-tax Act, 1961, which has been continued with certain changes under the Income-tax Act, 2025, for certain offshore investment funds managed from India. Where the conditions are satisfied, fund-management activities undertaken by an eligible fund manager in India do not constitute a “business connection” in India of the offshore fund. The fund is also not regarded as an Indian tax resident merely because its eligible fund manager is situated in India. The remuneration paid to the eligible fund manager must also satisfy the prescribed requirements. A specific relaxation is available for funds managed from the GIFT IFSC.

India does not have specific statutory provisions governing the income tax treatment of carried interest as being separate from the general tax-pass-through provisions discussed otherwise in the context of Category I and Category II AIFs.

In the context of service tax, the characterisation of carry as a fee for services was considered in ICICI Econet Internet and Technology Fund v Commissioner of Central Tax, where the Bangalore CESTAT observed that carried interest distributed to a special class of unit holders should be subject to service tax in the hands of the fund. The Karnataka High Court subsequently set aside the CESTAT’s decision, holding, among other things, that the distributions representing returns on investment, including carried interest, could not be treated as consideration for services.

The judgment concerned the erstwhile service tax regime rather than GST, and there remains no specific statutory rule under the GST or income-tax legislation conclusively determining the character of carried interest. Accordingly, the precise structuring and documentation of the investment and carry arrangements remain important.

Managers are permitted to outsource certain ancillary activities; however, core activities such as business functions for investment management, and compliance functions, cannot be outsourced. The manager also cannot outsource activities that would impair its ability to assess or supervise a third party to which activities have been outsourced, and such third party is required to be chosen after a thorough due diligence has been conducted by the manager.

Managers may outsource functions such as fund administration, including investor onboarding and KYC diligence, accounting, valuations, and drafting of management reports. They may also engage distributors or placement agents to help raise funds and advisers to help source deals.

Larger conglomerates often have arrangements where the manager avails services directly from another group entity, typically its parent or subsidiary, which cross-charges the manager for such services. Such arrangements should be evaluated on a case-by-case basis and systems should be put in place to ensure an arm’s length relationship to mitigate any potential conflicts of interest.

The manager (including a fund management entity, incorporated in the GIFT IFSC) is required to maintain an outsourcing policy setting out the risks arising from outsourcing and the types of activities that may be outsourced and have a proper contract detailing all material aspects of the arrangement.

Investment managers of AIFs in India should be incorporated in India and maintain adequate infrastructure and personnel to carry out their functions as an investment manager. Other than this, SEBI does not prescribe specific local substance requirements, such as minimum headcount (other than specified personnel such as the key investment team and compliance officer) or minimum expenditure (other than net-worth requirements for the sponsor). Decision-making is expected to be done by the investment manager because SEBI does not permit outsourcing of core activities.

Further, the presence of non-resident general partners, key decision-makers or investment personnel can give rise to additional considerations under India’s foreign exchange laws. In particular, where an AIF’s manager or sponsor is not owned or controlled by resident Indian citizens, the investments made by the AIF may be subject to certain restrictions in terms of permitted sectors and pricing guidelines that would otherwise apply to foreign investors investing directly into India. Accordingly, the structuring of the investment manager and sponsor and the roles and activities of non-resident and non-citizen GPs or other decision-makers therefore require careful consideration. SEBI currently does not process applications for AIFs which propose to have non-resident members on the Investment Committee of an AIF which has binding authority on investment decisions of the AIF.

From a corporate law perspective, an investment manager incorporated as a company is required to have at least one director who has stayed in India for the prescribed period during the relevant financial year. An investment manager constituted as an LLP is required to have at least one designated partner who is resident in India.

Under the FM Regulations, an FME is required to operate from the GIFT IFSC. As such, the FME is required to maintain an office in the GIFT IFSC with adequate infrastructure and humanpower commensurate with the scale and nature of its operations. The FME must have a principal officer (and a compliance officer, in the case of a Registered FME) based in the GIFT IFSC. Importantly, the proposal on the portfolio composition of the fund should be initiated by a person who is based in the GIFT IFSC office of the FME. The framework therefore requires genuine local substance and decision-making in the GIFT IFSC, rather than merely a registered or administrative presence.

The FM Regulations also permit third-party fund management arrangements, under which a fund management entity that does not wish to establish a physical presence in the GIFT IFSC may engage a Registered FME already established in the GIFT IFSC to launch and manage a Restricted Scheme on its behalf. This route is subject to certain limitations including that it is currently available only for Restricted Schemes with a corpus of less than USD50 million, and the third-party fund manager must meet specified eligibility requirements, including being regulated for fund management, portfolio management, investment advisory or a similar activity in its home jurisdiction.

A change of manager or sponsor, or a change in control of the manager or sponsor (whether direct or indirect), is treated by SEBI as capable of significantly influencing an investor’s decision to remain invested in the AIF. Such a change therefore constitutes a “material change” and requires the approval of at least 75% of unitholders by value of their investment in the AIF. If this threshold is not met, dissenting investors must be offered an exit, to be completed within three months from the date of expiry of the last date for offering dissent. However, no investor approval is required where the change results from a scheme of arrangement sanctioned by the National Company Law Tribunal under the Companies Act, 2013, or from an internal restructuring within the group in which the manager or sponsor is housed.

IFSCA may similarly require that an exit opportunity be accorded to investors while considering an application for a change in control of the fund management entity.

In both cases, prior regulatory approval is required for change in control or change in sponsor/manager entities by SEBI and IFSCA (for FMEs). While SEBI excludes change in control arising from internal restructuring within the group from investor consent requirements, it still requires regulatory approval to be obtained for such a change in control.

In addition to these regulatory requirements, the PPM will typically also include commercially agreed terms requiring investor consent in connection with a change of control of the manager.

SEBI has not prescribed a specific regulatory framework governing the use of artificial intelligence or predictive data in the context of AIFs. It has, however, taken a cautious approach, issuing an advisory on emerging artificial intelligence technologies and forming a task force titled “cyber-suraksha.ai”, to examine the risks posed by these AI models, facilitate the sharing of threat intelligence and best practices on vulnerability management, and support reporting of cyber incidents. The task force has urged all regulated entities, including AIFs, to update their operating systems with the latest security patches and conduct vulnerability and periodic risk assessments, among other measures, in line with the cyber security and cyber resilience framework issued by SEBI in 2024.

Similarly, IFSCA has not prescribed a specific framework governing the use of AI, predictive analytics or big data by FMEs. However, in June 2026, IFSCA issued an advisory on the heightened cybersecurity risks arising from frontier AI models. The advisory calls on regulated entities to strengthen governance and risk-management practices around the use of such models, including assessing associated cybersecurity risks, monitoring for vulnerabilities and threats, and maintaining appropriate security and incident-response measures.

While SEBI and IFSCA frequently issue consultation papers and amend their respective regulatory frameworks in response to industry feedback, there are no proposals or consultation papers currently available in the public domain which would materially impact the responses provided in 3. Fund Managers.

Investments in AIFs are inherently risky, could be illiquid and are reserved for investors with a high risk appetite. Most investments are concentrated in Category II AIFs, which have the flexibility to invest entirely in unlisted securities. Real estate, financial services, and information technology are the most allocated sectors. Both retail and institutional LPs invest in AIFs. Government-backed funds, such as NIIF, SIDBI, SRI, and RDIF, are sought after by GPs as strategic investors on their cap tables, though their participation typically comes with heavily negotiated terms depending on the GP’s nascency/track record in the market.

Certain investors face restrictions on investing in AIFs due to the legislation governing such institutions. Insurance companies, for instance, cannot allocate towards overseas investments, and are granted a standing right of excusal where an AIF they have invested in makes such investments. Certain entities regulated by the Reserve Bank of India also have individual exposure restrictions of 10% for investment into AIFs, and collectively as a pool, cannot exceed 20% of the fund’s corpus. There are other attendant restrictions to prevent evergreening of loans.

AIF managers are required to conduct a specified due diligence on their investors to prevent circumvention of other financial sector regulations which apply to their investors.

Foreign investors may prefer to access Indian AIFs through a feeder fund in offshore jurisdictions such as the United States, Cayman Islands, Singapore, Mauritius or GIFT IFSC. This is for several reasons including greater comfort with enforcement measures and precedent in such offshore jurisdiction, and the ability to participate in the Indian market without obtaining a Permanent Account Number (PAN) from the Indian income tax authorities or filing tax returns in India.

Side letters are typically offered to investors based on their strategic importance to the AIF and/or the size of their capital commitment. In practice, the scope of side letters varies considerably. While some investors may receive relatively standard rights, side letters with institutional LPs are often extensively negotiated and may address a range of commercial, governance, reporting and investor-specific requirements.

Such arrangements must not have an adverse impact on other investors, alter their rights or confer control over the AIF’s decision-making on any investor, except where the investor is part of a binding investment committee. The eligibility criteria and terms of such rights must also be disclosed in the AIF’s private placement memorandum.

A positive list of commercial and non-commercial terms that may be agreed through side letters has also been prescribed for AIFs, including terms relating to fund expenses, management fees, hurdle rates, carried interest, reporting or information rights, co-investment rights and most-favoured-nation clauses. Where a side letter provides an investor with more favourable commercial terms, such as reduced fees or expenses, the resulting reduction in amounts payable by that investor cannot be passed on to the AIF or its other investors and must instead be borne by the manager.

No specific regulatory approval is required for side letters, and there is no regulatory requirement to offer them to any investor. An investor may therefore invest on the basis of the terms set out in the PPM and its contribution agreement without being offered a side letter.

For funds established in the GIFT IFSC, side letters are not subject to a prescribed regulatory framework and their terms are generally freely negotiable between the FME and the investor. In practice, however, similar considerations would apply, particularly for institutional LPs, as investors generally expect that rights granted to one investor do not adversely affect the rights or economic interests of other investors.

AIFs in India are generally placed with investors who have a commensurate risk appetite. Neither SEBI nor IFSCA prescribes a qualitative eligibility test for investors; instead, participation is generally subject to minimum investment thresholds. These thresholds do not apply to accredited investors, although accreditation itself is subject to prescribed net worth and/or income criteria.

Foreign investors may also invest in AIFs and GIFT IFSC funds, subject to certain guardrails such as investors being from a jurisdiction whose securities market regulator is an IOSCO signatory or has entered into a bilateral MoU with SEBI/IFSCA, and is not from a jurisdiction identified by FATF as a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies or been included on the UN Security Council sanctions list. Any marketing or fundraising from investors outside India would also be subject to the applicable laws of the relevant foreign jurisdiction on fundraising.

Distributors of alternative investment funds are not required to obtain a separate registration as of the time of writing this Law and Practice section, however, SEBI considers them as agents of the AIF manager.

SEBI also regulates the commission structure, ie, no more than one-third of the commission payable to distributors of Category I and II AIFs may be paid upfront, and no upfront commission may be paid to distributors of Category III AIFs at all. The remaining commission for Category I and II AIFs needs to be paid through the tenure of the fund on an equal trail basis. AIFs are required to offer a direct plan to those investors who are not coming through distributors into the fund, where such direct plan entails no distribution fees. It is compulsory for AIF managers to admit certain investors into the direct plan, when such investors have come into the AIF through SEBI-registered intermediaries.

Any foreign or domestic player who is looking to either provide investment advice on AIFs to investors, or manage their AIF investments as part of the portfolio, would need to assess appropriate registration requirements with SEBI whether as investment advisers or portfolio managers, as applicable. Foreign players who are looking to raise monies from domestic investors on behalf of foreign funds may also be required to assess whether the engagement falls within the definition of investment advice.

IFSCA prescribes a code of conduct for advertisements which specifies that:

• advertisements must be accurate, fair, clear, complete, and concise, and must not be false, misleading, biased, or based on unsubstantiated assumptions or projections;
• testimonials and rankings based on any criteria are not permitted;
• advertisements must not be designed in a manner likely to be misunderstood, or to disguise or omit information in a way that could mislead investors;
• slogans must not be exaggerated or unrelated to the product’s actual risk and return profile;
• advertisements must not exploit investors’ lack of experience or knowledge, and should avoid excessive technical or legal terminology or unnecessary complexity; and
• advertisements must be timely and consistent with the disclosures made in the scheme documents.

The AIF framework in India permits investment managers to launch an AIOF which is available exclusively to accredited investors. AIOFs are subject to a number of regulatory relaxations reflecting the sophistication of their investor base.

An LVF is a specific type of AIOF under the AIF framework, under which each investor is required to be an accredited investor and commit a minimum of INR25 crores. In addition to the relaxations applicable to AIOFs generally, LVFs benefit from certain further exemptions, including exemption from the certification requirement for members of the key investment team, no template PPM requirements and no annual PPM compliance audit.

AIOFs including LVFs also benefit from a streamlined PPM filing process. They are not required to appoint a merchant banker for the PPM filing, and are permitted to launch (unless they are the first scheme of the AIF) immediately upon filing the PPM to SEBI, as opposed to regular schemes that are required to wait for ten working days from the date of filing. In case of the first scheme of the AIF for (i) a regular scheme, the wait time for launch of the scheme is from the date of grant of SEBI registration or after ten working days of filing of application with SEBI, whichever is later; and (ii) an AIOF including an LVF can be launched from the date of grant of SEBI registration.

No specific products or distribution channels have been designed in India to give pension or self-directed retirement plan investors access to alternative investment strategies individually.

However, recently, the National Pension System (NPS), which is a voluntary, market-linked retirement savings scheme backed by the government of India, has introduced the NPS Bharat FoF Platform. The platform is a centralised platform that facilitates the end-to-end process of mobilising a portion of NPS assets into the AIF ecosystem. Only SEBI-registered Category I and Category II AIFs are eligible for investment, in accordance with the applicable Pension Fund Regulatory and Development Authority (PFRDA) investment guidelines.

Both SEBI and IFSCA prohibit public solicitation or marketing of AIFs and GIFT IFSC funds. While there are no specific definitions provided for private placement, there is a prohibition by SEBI on accepting more than 1,000 investors in a single scheme of an AIF regulated by SEBI, and for this purpose, SEBI allows excluding accredited investors from the count (so, if a scheme has 1,005 investors but 5 of them are accredited investors, the scheme should be compliant).

The use of placement agents or distributors is common among AIFs in India, particularly for marketing to retail investors in tier 2 and tier 3 cities and for raising capital from high-net-worth individuals. Unlike distributors of other products such as mutual funds, AIF distributors are not currently subject to any separate regulatory registration, though SEBI may introduce a certification requirement for them in future.

Distributors can be compensated, and SEBI regulates the terms of payment. Category I and II AIFs may pay up to one-third of the total placement fee upfront, with the remaining two-thirds paid on an equal trail basis over the fund’s tenure, while Category III AIFs cannot pay any placement fee upfront and must fund such fees only from the management fee received by the manager.

Distribution Agreements are often highly negotiated to address situations such as raising in overseas jurisdictions and responsibility of complying with local laws for such purpose, investor default or a change-in-distributor request received from the investor.

Income derived by Category I and Category II AIFs is generally subject to a pass-through regime under Section 224 of the Income-tax Act, 2025 (ITA) other than for income in the nature of profits and gains from business or profession. Under this regime, income arising from investments made by the AIF is generally taxed in the hands of the investors as if the investments had been made directly by them, rather than at the level of the AIF. The character of the income is generally preserved on such pass-through. Accordingly, capital gains, dividend income and interest income are generally taxable in the hands of investors in accordance with the provisions applicable to the relevant type of income and the status of the investor. However, income distribution by Category I and Category II AIFs is subject to withholding at the AIF level, the rate for which may be different for domestic and foreign investors. No withholding is required to the extent that the income is not chargeable to tax in India. Treaty relief may also be available to an eligible non-resident investor.

Capital gains are taxed at the rates applicable to the relevant type of capital asset and the period for which it is held. Dividend and interest income are generally taxable in the hands of investors at the rates applicable to the relevant investor and income. For corporate investors, the applicable rate depends on the corporate tax regime and other circumstances applicable to the investor. Non-resident investors are generally subject to the rates applicable to their status and the relevant category of income, subject to any lower rate available under an applicable tax treaty.

The ultimate tax liability therefore depends on both the nature of the income earned by the AIF and the tax status of the investor. The pass-through regime does not impose a single rate of tax on investors; instead, the applicable rate is determined by reference to the income and the investor’s applicable tax regime.

Category III AIFs, by contrast, are taxed depending on their structure and strategy as they do not have a codified tax-pass-through status. It could be a pass-through structure, or it could be subject to tax at the level of the fund itself. The choice of vehicle is therefore particularly significant for a Category III AIF.

Non-resident investors in AIFs may generally claim applicable treaty benefits, subject to satisfying the relevant treaty conditions, including tax residency and other prescribed requirements.

India has implemented FATCA through its inter-governmental agreement with the United States and CRS through the OECD’s automatic exchange of information framework. AIFs that qualify as reporting financial institutions are required to undertake prescribed investor due diligence, obtain tax-residency self-certifications and report information on reportable accounts to the Indian tax authorities for exchange with the relevant foreign tax authorities. Similar FATCA and CRS requirements apply to funds established in the GIFT IFSC. GIFT IFSC funds that qualify as reporting financial institutions are required to comply with the applicable due diligence, classification, record-keeping and reporting requirements under the Indian FATCA and CRS framework, including obtaining investor self-certifications.

AIFs and their investment managers are subject to the anti-money laundering and KYC framework under the Prevention of Money Laundering Act, 2002 (PMLA), the rules made thereunder and SEBI’s regulatory framework. At the time of onboarding, investors are required to undergo customer due diligence, including identification and verification of the investor and its beneficial owners, assessment of the investor’s risk profile and screening against applicable sanctions and other prescribed lists. AIFs are also required to maintain appropriate records and undertake ongoing monitoring, with enhanced due diligence for higher-risk investors.

With respect to GIFT IFSC funds, the fund managers are subject to IFSCA’s AML, CFT and KYC Guidelines, which adopt a risk-based approach broadly aligned with the PMLA framework and FATF standards. Investor onboarding similarly involves customer identification and verification, beneficial ownership checks, risk assessment and sanctions screening, together with ongoing monitoring and enhanced due diligence where appropriate. In both regimes, these requirements are an integral part of the investor onboarding process and apply irrespective of the investor’s jurisdiction.

The Digital Personal Data Protection (DPDP) Act, 2023, read with the Digital Personal Data Protection Rules, 2025, governs data security and privacy compliance in India. It applies to the investment manager’s processing of an investor’s personal data, including KYC data, contact details, and nominee information, and extends to foreign GPs where they process the personal data of investors situated in India. As the investment manager drives investor onboarding and KYC verification, it is likely to be treated as a data fiduciary, and all compliance obligations under the DPDP framework attach to it accordingly; the data fiduciary bears sole responsibility for such compliance.

Explicit, granular consent is required for each specific use case involving an investor’s personal data, and bundled consent is no longer permissible. The consent notice must set out an itemised description of the personal data being processed and the specific purpose of such processing, along with an itemised description of the goods, services, or uses the processing enables. Consents should accordingly be structured to separately cover each distinct purpose, such as onboarding and KYC, regulatory reporting, investor communications, marketing updates, and data sharing with service providers, since data initially collected at the KYC stage is often subsequently used for multiple downstream purposes.

Certain processing activities do not require investor consent, such as processing to fulfil a legal obligation to disclose information to regulatory authorities, or using contact details voluntarily provided by the investor during onboarding to send drawdown notices. For consents obtained prior to the Act coming into force, a fresh notice must be issued to investors, informing them of the personal data being processed and the purpose of such processing.

SEBI has released a consultation paper proposing a comprehensive review of the framework for obtaining accreditation for investors.

Accredited investors are those considered to possess greater financial wherewithal, sophistication, and the ability to comprehend the risks associated with products such as AIFs. Under the current framework, an investor must approach an accreditation agency, furnish proof of net worth or income, and provide affirmative consent to bear the associated risk. SEBI has received feedback from industry stakeholders on several issues with this framework, including the high cost of accreditation, limited accreditation agencies, procedural inefficiencies, and duplication of touchpoints during onboarding.

In reviewing the framework, SEBI examined comparable regimes in other jurisdictions. For instance, in the United States, holders of certain professional securities licences with demonstrable financial market knowledge may qualify as accredited investors without meeting a financial threshold, while the European Union and France permit accreditation based on an investor’s prior exposure to, or transactions in, similarly sophisticated products.

Whilst there is no common standard for obtaining accreditation across jurisdictions, SEBI has examined the different frameworks and proposed the following key changes.

• Manager-led accreditation, at the time of onboarding, alongside the existing accreditation agency route. However, this does not permit an investor to self-certify or self-declare their own accredited investor status.
• Continuation of accreditation for the entire tenure of the scheme, dispensing with the current requirement to renew accreditation every two or three year.
• A new eligibility route based on financial assets capable of being independently digitally verified, in addition to the existing income and net-worth criteria, with a proposed threshold of INR5 crore for individuals and INR20 crore for body corporates.
• Expansion of the deemed accredited investor category to cover all persons resident outside India, including foreign portfolio investors.