For years, a quiet but expensive problem plagued India’s AIF industry. Funds that had finished investing and returned most capital to investors were still stuck. Pending tax notices, unresolved litigation, and residual costs kept them registered – and fully compliant – long after active management had ended.
SEBI addressed this directly on March 23, 2026. In its 213th Board Meeting, the regulator approved a new exit framework for AIFs – one that allows funds to retain residual proceeds under defined conditions and introduces a lighter-touch “inoperative fund” status for schemes winding down.
For investors in close-ended AIFs approaching maturity, understanding these changes is not optional. They alter how fund closure works, what consents may be required, and what to expect from the distribution timeline.
Key Takeaways
- SEBI’s March 2026 Exit Framework: The SEBI 213th Board Meeting (PR No. 18/2026) on March 23, 2026, approved new rules allowing AIFs to retain liquidation proceeds beyond their permissible fund life under three defined conditions.
- 75% Investor Consent Threshold: If an AIF anticipates litigation or tax liabilities, it may retain proceeds – but only after securing consent from at least 75% of investors by value. This is a binding governance requirement, not a formality.
- Operational Expense Retention Capped at 3 Years: Funds may retain amounts for residual operating costs for a maximum of three years from the end of the permissible fund life. Amounts must be substantiated by invoices or prior-year comparables.
- “Inoperative Fund” Status: AIFs that qualify may now be tagged as inoperative – exempt from periodic filings, PPM updates, and performance benchmarking – while still submitting an annual status report to SEBI and investors.
- Industry Context: India’s AIF industry held ₹15.74 lakh crore in total commitments and ₹6.45 lakh crore in actual investments as of December 2025, per SEBI data, underscoring the scale of capital this framework governs.
- SEBI Risk Reminder: AIF investments are subject to market risk, illiquidity risk, and regulatory change. Past fund performance does not guarantee future results. Investors must read fund documents carefully and seek independent advice before making decisions.
Why the Old Rules Were Creating Problems
Under Regulation 29(7) of the SEBI (Alternative Investment Funds) Regulations, 2012, AIFs were required to liquidate all assets and distribute proceeds within the permissible fund life. Registration could only be surrendered after the fund achieved a nil bank balance.
In practice, this was unworkable for many funds. A pending tax demand from authorities, an unresolved dispute with a portfolio company, or simply the cost of keeping a fund legally alive – any of these could block closure. The fund remained registered and fully compliant even when no active investment management was taking place.
SEBI observed this pattern across multiple AIF registrations. The result was an unnecessary cost, regulatory drag, and administrative burden for managers and investors alike. The March 2026 changes address this gap.
The Three Conditions for Retaining Proceeds
SEBI’s new framework permits AIFs to retain liquidation proceeds beyond fund life under any one of three conditions. First, the fund must have received a demonstrable litigation notice or formal tax or regulatory demand.
Second, where liabilities are anticipated but not yet crystallized, the fund may retain proceeds after obtaining consent from at least 75% of investors by value. This consent requirement protects investors from discretionary holdbacks by fund managers.
Third, for residual operational expenses – auditor fees, custodian costs, or similar items – the fund may retain funds for up to three years, provided the amounts are backed by invoices or comparable prior-year expense records. All retained funds must be invested in liquid instruments as specified under Regulation 15(f) of the AIF Regulations.
What “Inoperative Fund” Status Means in Practice
AIFs intending to surrender their registration while one or more schemes still hold residual proceeds will now be tagged as “inoperative funds.” Previously, such surrender applications were returned by SEBI – forcing funds to remain fully registered and compliant.
Under inoperative status, the compliance burden is significantly reduced. Periodic filings, Private Placement Memorandum updates, and performance benchmarking are suspended. The fund is required to submit only an annual status report to SEBI and its investors, covering the nature and quantum of retained proceeds.
Registration is formally surrendered once all liabilities are settled, and a nil bank balance is achieved. The inoperative tag is a transitional classification, not a permanent shelter. SEBI retains oversight throughout this period.
How Investors in Maturing Funds Should Respond
Investors in close-ended AIFs approaching their tenure end should request a formal fund lifecycle update from their investment manager. This includes the current distribution status, any pending tax or litigation of exposures, and whether the manager intends to apply for inoperative status.
If a fund intends to retain proceeds beyond its permissible life for anticipated liabilities, investors must track whether the 75% consent threshold has been met and by whom. This is a governance right – investors should actively verify it rather than assume compliance.
AIF investments carry inherent illiquidity risk. Close-ended structures have defined timelines, but tax proceedings and litigation can extend actual distributions. All investments in AIFs are subject to market risk. Past fund performance does not guarantee future results. Investors should ensure their AIF allocation is sized appropriately relative to their overall liquidity needs.
Conclusion
SEBI’s March 2026 exit framework brings long-overdue clarity to the AIF wind-down process. It reduces the compliance burden on dormant funds, protects investors through the 75% consent requirement, and sets a defined maximum window for operational expense retention.
For sophisticated investors, these changes reinforce a critical principle: understanding the lifecycle of a fund – not just its entry terms – is essential to managing returns after tax. The quality of exit is as important as the quality of investment.
Steptrade Capital’s research-first approach evaluates each AIF investment across its full lifecycle, including governance at exit. To explore how SEBI-regulated AIFs are structured for both performance and compliance, visit steptrade.capital.
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