Whalesbook
SEBI's regulatory adjustment acknowledges the practical challenges in the final stages of fund management. This increased flexibility aims to ease operational bottlenecks that have delayed AIF closures, potentially affecting investor returns and manager reputation.
Revised Winding-Up Rules
Effective March 23, 2026, AIFs facing closure delays due to ongoing tax demands, litigation, or residual operational expenses can now retain liquidation proceeds beyond their original fund life.
To retain funds, AIFs must meet specific criteria. These include showing receipt of litigation or tax notices, obtaining consent from at least 75% of investors by value for anticipated liabilities, or substantiating retained amounts for operational expenses. Operational expense retention is capped at three years from the fund's original end date.
SEBI has introduced a new classification: 'inoperative funds'. This status applies to AIFs winding down but unable to finalize closure due to these residual matters. These entities will benefit from significantly reduced compliance obligations, including exemptions from periodic filings, private placement memorandum (PPM) updates, and performance benchmarking, until their registration is formally surrendered. The initiative lowers the compliance burden for funds no longer actively managing investments, while maintaining essential regulatory oversight.
Market Context and Global Trends
This policy shift comes as India's Alternative Investment Fund sector experiences robust growth. Assets under management (AUM) for Indian AIFs have surged, crossing ₹15.74 lakh crore ($188 billion) as of December 2025, with strong double-digit compound annual growth. The AIF market, with over 1700 registered entities, is now a core component of investment portfolios, driven by wealth creation and a maturing regulatory environment.
Global fund termination practices often recognize complexities like illiquid assets and legal disputes that can extend closure timelines. SEBI's move aligns with these practical realities, adopting a more pragmatic approach that recognizes the operational lifecycle of investment funds. This evolution occurs as India's AIF industry expands, with AUM projected for substantial further growth.
Potential Risks and Oversight
While SEBI aims to ease compliance, the 'inoperative fund' status could lead to a category of dormant entities. This might obscure underlying asset issues or create prolonged administrative overhead for managers, even with reduced compliance. The transition could inadvertently create a less transparent situation regarding residual assets and liabilities compared to a fully closed fund, requiring SEBI's continued vigilance.
Retaining proceeds still requires investor consent or substantiation, which can be contentious. SEBI has a history of enforcement actions in the AIF sector for procedural missteps, signaling its commitment to regulatory principles and investor protection. The success of the new framework will depend on SEBI's ongoing monitoring to prevent 'inoperative' status from becoming an indefinite holding period.
Looking Ahead
SEBI's goal is to reduce compliance burdens while maintaining oversight, fostering a more efficient and predictable lifecycle for AIFs in India. As the AIF market grows, these revised norms should contribute to a more streamlined operational environment. The impact will depend on effective implementation and ongoing monitoring of the 'inoperative fund' framework for timely and fair resolutions.