Unlocking New AIF Deals: Regulation 17A Simplifies Co-Investment Terms

Introduction

The Alternative Investment Fund (hereinafter referred to as “AIF”) ecosystem, an important engine for funding startups, high-growth private companies and infrastructure, has experienced a prominent growth. However, this significant market requires equally significant and efficient regulatory tools to function in alignment. The introduction of Regulation 17A into the SEBI (Alternative Investment Funds) Regulations, 2012, dated September 8, 2025, would act as one such landmark tool.

This framework defines and establishes a process for “Co-Investment Schemes, is not just an update but rather a strategic method introduced which is designed to streamline capital deployment, decrease transaction costs, and bring in alignment the interests of top-tier investors of India with their fund managers. This move has enabled Category I and Category II AIFs to seamlessly offer the accredited investors the opportunity to invest directly along with the main fund in unlisted companies. The SEBI has effectively unlocked a new area of efficiency and capital velocity in the evolving private markets of India.

Pre 17A Scene: The Cumbersome Co-Investment Route

The process before this regulation was brought in, required for a large investor to co-invest meaning to invest extra capital and finance directly into a particular company which is already decided by the AIF. This process was structurally inefficient as it primarily relied on the Co-Investment Portfolio Manager (CPMS) Route under the SEBI (Portfolio Managers) Regulations, 2020. The difficulties faced because of the CPMS Route were:

Dual Regulatory Force: The AIF manager needed to seek a separate registration as a Portfolio Manager (PM), subjecting the same deal to two distinct regulatory process, that is, AIF Regulations and PMS Regulations. This implied increased costs, distinct reporting, and operational overhead.
Inflexibility in Structure: The CPMS Route mandated that the Co-Investment terms cannot be more in favour than the AIF’s, the structures remained separate. This led to practical issues which laid concerns regarding the alignment of interests, especially during such times when critical decisions like fund exits or follow-on capital deployment were to be done
Limits for Minimum Investment: The PMS Regulations put minimum investment limits and required compliances specific in nature like appointment of a custodian, which although were necessary for retail clients, added unwanted frictions and boundaries for the already sophisticated and ‘Accredited Investor’ of an AIF.
Operational disbalance: The process along with its execution led to unnecessary delays and time lag, which further complicated the deployment of capital needed to close fast-moving private markets.

The New Change: Co-Investment Vehicle (CIV) Scheme

The newly released SEBI regulations aim to address and deal with the pain points by letting an eligible AIF establish a CIV Scheme within its already existing structure for a particular investment.

Main features of the framework include:

Integrated Combined Structure: The most prominent change that has been introduced is the ability of Category I and II AIFs to offer Co-Investment the opportunities with the help of CIV Scheme, under the AIF regulations itself. The need for a distinct Portfolio Manager and its registration is now eliminated, which has cut down the complexities faced along with the compliance costs.
Accredited Investors (AIs) Exclusivity: AIs are high-net worth individuals or institutions who meet a specific financial threshold fixed, for example, net worth of 7.5 Crores or certain criteria, and are certified by an authorised agency. The CIV Scheme has been restricted only to the Accredited Investors to the main AIF. The SEBI’s philosophy of offering a regulatory flexibility to the investors who have the financial capacity and ability to understand and take in the risks associated with private equity and venture capital.
Deal-Specific and Ring-Fenced: A distinct CIV Scheme should be initiated in respect of every specific co-investment. More importantly, the assets, bank accounts, and demat accounts of the CIV should be fully separated of the funds of the main AIF scheme and other CIV schemes. This will guarantee the capital and returns of the co-investors are well segregated and insulated.
Alignment and safeguarding: SEBI has laid stringent rules of alignment to make sure the integrity of the main AIF and the investors is safe.
No Favourable Terms: The co-investment terms of the CIV, the Manager, or the Sponsor cannot exclude terms that are more favourable than the terms provided to the main AIF scheme in the same investee company.
Co-terminus Exit: The exit of the co-investment should coincide with the exit of the primary AIF scheme of such an investee company. This is critical to avoid the case of co-investors dropping out early and the resultant exit strategy of the main fund being compromised. Investment Cap.
The 3x Rule: SEBI has put a limit to ensure that an investor does not end up taking control of a single deal using co-investment capital and circumvent the diversification purpose of the underlying AIF. The amount that an investor will contribute to a particular company under the CIV schemes will not surpass three times the contribution of the investor to the company under the main AIF scheme. The exception above is waived where large institutional investors such as Development Financial Institutions and Sovereign Wealth Funds are involved.

Remaking Fund Management and Capital Flows

The new Regulation 17A is a vivid sign that SEBI has taken the issue of Ease of doing Business to heart with an effort to enhance the protection of investors in the advanced private capital market in India. The consequences are two-fold and exceedingly encouraging.

Better Deal Capacity and Efficiency among Fund Managers

Ability to Scale Deals- The CIV scheme has allowed managers to rapidly access incremental capital through their current base of investors, and allows them to take more capital-intensive deals without straining the internal limits of the main fund or rush to find external co-investors at the eleventh hour.
Reduced Friction & Cost – The fact that the two separate PMS registration have been eliminated saves time, legal fees as well as repetitive compliance costs which make the operational efficiency of the manager extremely better.
Enhanced Investor Relationships – Through a structured, easy and controlled in-house co-investment opportunity, managers are able to strengthen their relationship with their best Limited Partners (“LPs”) coerce them to make repeat investments in future funds.

Accuracy, Reduced Costs and Investor Control

Selective Exposure- The investors are free to exercise conviction. They have the option of exponentially enhancing their investment exposure to the high potential companies in the portfolio of the AIF that fit their own investment thesis, instead of being restricted to the overall diversified performance of the fund.
Fee Efficiency- One of the greatest lures of co-investments is fee structure. CIV schemes are usually accompanied by much lower management fees or none at all on the capital raised alongside the accredited investor which directly boosts the net returns to the accredited investor.
Regulatory Assurance – The CIV scheme is also regulated under the AIF Regulations of SEBI unlike other ad hoc parallel investment arrangements. This gives the accredited investors more transparency and a higher level of regulatory assurance when it comes to the structure, disclosures and fair treatment.

In the case of Indian Startup and Private Company Ecosystem

Deeper Capital Pool- The CIV structure brings more domestic institutional capital to unlisted space. The overall amount of funding accessible to Indian startups and growth companies is technically increased by facilitating the deployment of large and complex capital by large and sophisticated investors.

Cleaner Cap Tables – Co-investments can be managed by a single CIV entity, making the management of the cap table of the investee company easier than it would be with dozens of co-investors on their books. This administrative simplicity is of great importance to companies.

AMLEGALS REMARKS

The advent of the Regulation 17A and CIV Scheme by SEBI can be seen as a positive indication of an increasing maturity in the Indian private capital market. It aligns regulatory needs, makes a globally recognized and generally acceptable practice of investment a reality and maximizes the amount of smart money entering the economy. SEBI has not only provided a clean, single-point regulatory route of co-investments, but has also succeeded in being strategic on the appeal of Indian AIFs, to both local and international institutional investors. The framework has managed to provide sufficient operational flexibility to fund managers as well as providing strong protection to investors by ensuring mechanisms such as ring-fencing, anti-abuse clauses and compulsory alignment of exit terms. The end consumers will be the new and unlisted companies which can now tap into vast and more efficient pools of capital which will speed up their development and make India a leading destination of global investors in the global private market.