SEBI Circular: Guidelines for Winding Up of AIFs – Retention of Proceeds & Introduction of 'Inoperative Fund' Status
Circular No.: HO/19/34/11(2)2026-AFD-POD1/I/13764/2026
Date: June 16, 2026
Effective Date: Immediate
Applicable To: Category I, II & III AIFs and Venture Capital Funds (VCFs) registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996.
Source
Overview
SEBI has issued a significant circular providing long-awaited operational clarity on the winding-up process for Alternative Investment Funds (AIFs). The circular introduces a formal mechanism allowing AIFs to retain liquidation proceeds beyond the permissible fund life under specified circumstances and creates a new regulatory status called “Inoperative Fund.”
The objective is to enable fund managers to complete fund winding-up efficiently without remaining subject to the full regulatory framework solely because of pending litigation, tax matters, or residual operational expenses.
Key Highlights
1. Retention of Liquidation Proceeds Beyond Permissible Fund Life
SEBI now permits AIFs to retain liquidation proceeds after the end of the liquidation or dissolution period if at least one of the following conditions is met:
Pending litigation, tax, regulatory or legal proceedings supported by official notices or communications.
Anticipated litigation or tax liabilities with approval from at least 75% of investors by value.
Genuine residual winding-up expenses supported by invoices or comparable historical records.
Where retention is sought due to anticipated liabilities, managers must disclose both:
Amount proposed to be retained
Estimated duration of retention
to investors while obtaining their consent.
2. Cap on Retention for Operational Expenses
Where monies are retained solely for residual winding-up expenses:
Retention cannot exceed three years from the end of the permissible fund life.
Standard operating expense categories will be prescribed through implementation standards developed by the Standard Setting Forum for AIFs (SFA) in consultation with SEBI.
3. Introduction of ‘Inoperative Fund’ Status
AIFs that have substantially completed their winding-up process but need to retain limited amounts for pending liabilities may apply to SEBI for Inoperative Fund status.
This facility is available where:
One or more schemes retain monies under the prescribed conditions, or
The AIF wishes to continue registration solely because of an ongoing litigation where a favourable outcome is expected.
Applications must be submitted in the prescribed format provided in Annexure A of the circular.
4. Restrictions Applicable to Inoperative Funds
Once an AIF is granted Inoperative Fund status:
No new schemes can be launched.
No management fees can be charged.
Retained monies must only be invested in instruments permitted under Regulation 15(1)(f).
Registration continues only until all liabilities are settled and retained monies are distributed.
5. Major Compliance Relief
SEBI has granted substantial compliance exemptions for Inoperative Funds.
The following requirements will no longer apply after obtaining the status:
Limited Quarterly Activity Report
Annual Activity Report
Compliance Test Report (CTR)
PPM Audit
Intimation of changes in PPM
Benchmarking Agency reporting
NISM certification requirement for key investment team
Custodian requirement
Periodic investor disclosures
Regular valuation requirements (subject to annual retention reporting)
These exemptions significantly reduce the compliance burden and operating costs for funds that have effectively completed their investment lifecycle.
6. Annual Retention Status Report
Instead of routine regulatory filings, Inoperative Funds and schemes retaining monies must submit an Annual Retention Status Report.
The report must include:
Scheme details
Reason for retaining proceeds
Amount retained
Amount distributed
Balance outstanding
Status of litigation or liabilities
Expected resolution timeline
Details of investments made using retained monies
The report must be filed:
With SEBI
With investors
Within 30 calendar days from the end of March every financial year.
7. Applicability to Venture Capital Funds
The framework has also been extended to Venture Capital Funds registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996.
Such VCFs can also avail:
Retention of proceeds
Inoperative Fund status
Compliance exemptions under the circular.
Practical Impact
The circular addresses a long-standing operational challenge faced by AIF managers.
Previously, even after liquidating all investments, funds often had to continue maintaining full regulatory compliance because small amounts remained pending for:
Tax assessments
Litigation
Regulatory proceedings
Final operational expenses
The new framework enables managers to:
Complete liquidation of investments
Distribute proceeds to investors
Retain only necessary amounts for genuine liabilities
Obtain Inoperative Fund status
Benefit from reduced regulatory obligations until final closure
This is expected to lower compliance costs while ensuring continued investor protection.
Key Takeaways
Retention of liquidation proceeds beyond permissible fund life is now formally permitted under defined conditions.
A new Inoperative Fund status enables efficient post-liquidation administration.
Significant regulatory exemptions reduce ongoing compliance obligations.
Annual reporting on retained monies ensures transparency for both SEBI and investors.
The framework applies to both AIFs and erstwhile Venture Capital Funds.