Consultation Paper: SEBI Proposes Flexibility for AIFs in Winding-up Schemes and Surrender of Registration
Securities and Exchange Board of India (SEBI) has issued a Consultation Paper dated February 5, 2026 seeking public comments on proposals to provide regulatory flexibility to Alternative Investment Funds (AIFs) in relation to winding up of schemes and surrender of AIF registration.
The proposals aim to address practical difficulties faced by AIFs that have completed their investment tenure but are unable to surrender registration due to residual balances retained for litigation, tax demands, or operational expenses.
Public comments are invited up to February 26, 2026.
Background
Under the existing framework, Regulation 29(7) of the SEBI (Alternative Investment Funds) Regulations, 2012 mandates that:
Within the liquidation period, all assets must be liquidated and proceeds distributed to investors after satisfying all liabilities.
In practice, SEBI has observed that several AIFs and schemes are unable to achieve a NIL bank balance within the permissible fund life due to:
Pending litigation or tax demands
Anticipated litigation or tax liabilities
Residual operational expenses
As a result, such AIFs continue to remain registered and subject to full regulatory compliance despite having no active fund management activity.
Key Issues Identified by SEBI
SEBI has noted that:
Certain AIFs exist solely to await resolution of litigation
Compliance costs continue despite the absence of investment activity
Current surrender requirements lack operational flexibility
Industry participants have therefore sought a clear, predictable, and proportionate exit framework.
Key Proposals in the Consultation Paper
1. Retention of Funds Beyond Permissible Fund Life
SEBI proposes to permit AIF schemes to retain liquidation proceeds beyond the permissible fund life, subject to specified safeguards, in the following scenarios:
a. Pending Litigation or Tax Demand
Retention may be allowed where the AIF has received a formal notice from tax authorities, regulatory authorities, or law enforcement agencies.
b. Anticipated Litigation or Tax Liabilities
Where liabilities are anticipated but not crystallised, retention of funds may be permitted subject to consent from at least 75% of investors by value.
c. Operational Expenses
AIFs may retain funds to meet residual operational expenses, provided:
Such expenses are substantiated through invoices or comparable historical costs
The retention period does not exceed three years
All retained funds must be invested strictly in accordance with Regulation 15(f) of the AIF Regulations (i.e., liquid and low-risk instruments).
2. Introduction of “Inoperative AIF” Status
SEBI proposes a new classification of “inoperative AIFs”, applicable where:
No active fund management activity is undertaken
The AIF continues to exist due to pending contingencies (with or without retained funds)
AIFs intending to surrender registration but having such schemes may be tagged as inoperative instead of their surrender applications being returned.
3. Rationalised Compliance Framework for Inoperative AIFs
Once classified as inoperative, the AIF will be subject to a proportionate compliance regime, including:
Discontinuation of:
PPM audit report
CTR reporting
Quarterly reporting to SEBI
Submission of an annual status report on retained funds to SEBI and investors
Prohibition on:
Launch of new schemes
Charging management fees
Surrender of registration will be permitted once all liabilities are settled and a NIL bank balance is achieved.
4. Extension of Inoperative Status to Additional Scenarios
SEBI also proposes that AIFs:
With no retained funds
With no active management activity
Continuing solely in anticipation of contingent inflows (e.g., favourable litigation outcomes)
may also apply for inoperative status and avail the same compliance relaxations.
Proposed Regulatory Amendments
To operationalise the above, SEBI proposes to amend Regulation 29(7) of the AIF Regulations to allow distribution of proceeds subject to conditions specified by SEBI from time to time.
Further modalities are proposed to be prescribed through a circular.
Conclusion
SEBI’s proposals mark a significant step towards a pragmatic and risk-based exit framework for AIFs. By recognising the realities of litigation timelines, tax uncertainties, and residual operational costs, the consultation paper seeks to balance:
Investor protection
Regulatory oversight
Operational efficiency
If implemented, these changes are expected to reduce unnecessary compliance burden on dormant funds while maintaining adequate safeguards for investors.
Stakeholders are encouraged to review the consultation paper in detail and submit their comments to SEBI by February 26, 2026.