SEBI sets conditions for AIFs to retain wind-up proceeds and creates a new 'Inoperative Fund' status
AIFs and erstwhile VCFs must meet specified conditions to retain wind-up proceeds beyond fund life, and may obtain 'Inoperative Fund' status — barring new schemes and management fees — with annual reporting until liabilities are resolved
Change
On 16 June 2026 SEBI specified conditions under which AIFs and erstwhile VCFs may retain liquidation proceeds beyond their permissible fund life (litigation/demand receipt, 75% investor consent, or substantiated operational expenses) and created a new 'Inoperative Fund' status for funds awaiting resolution of liabilities before surrendering registration, barring new schemes and management fees and requiring annual status reporting; in force immediately.
Why it matters
SEBI's circular operationalises the 18 April 2026 AIF Regulation amendments on winding up and surrender of registration. AIFs/schemes may retain liquidation proceeds beyond permissible fund life on satisfying at least one condition — demonstrable receipt of a litigation or tax/regulatory/legal demand (broadly defined), consent of 75% of investors by value for anticipated liabilities, or substantiated residual operational expenses (capped at three years). A new 'Inoperative Fund' status lets an AIF intending to surrender registration, or one continuing solely for a pending litigation outcome, be tagged by SEBI: such funds may not launch new schemes or charge management fees, must invest retained monies per Regulation 15(1)(f), are exempted from specified regulatory requirements (activity reports, PPM audit, compliance test report, benchmarking, NISM certification, custodian), and must file an annual status report to SEBI and investors within 30 days of financial year-end until liabilities are resolved and monies distributed. The facility extends to erstwhile VCFs.
Implications
- — AIF and VCF managers must justify any retention of liquidation proceeds beyond permissible fund life against the specified grounds — demonstrable receipt of a litigation or tax/regulatory/legal demand, 75% investor-by-value consent for anticipated liabilities (with disclosure of the amount and estimated retention period), or substantiated residual operational expenses (capped at three years from end of permissible fund life) — and invest retained monies per Regulation 15(1)(f).
- — AIFs intending to surrender registration while holding retained monies, or continuing solely in anticipation of a favourable litigation outcome, may apply to SEBI for 'Inoperative Fund' status via the Annexure A format, after which they may not launch new schemes or charge management fees and may surrender registration only once liabilities are satisfied and retained monies distributed.
- — AIFs holding retained monies and those tagged 'Inoperative Fund' must file an annual status report on retained monies and outstanding liabilities to SEBI and to investors via the SEBI Intermediary portal within 30 calendar days of each financial year-end, continuing until liabilities are resolved.
- — The same retention and 'Inoperative Fund' framework applies to Venture Capital Funds registered under the erstwhile 1996 VCF Regulations, which must apply the conditions and exemptions on the same basis as AIFs.
Who is affected
- — Managers of Alternative Investment Funds and erstwhile Venture Capital Funds winding up schemes or surrendering registration
- — Trustees, boards and designated partners of AIFs providing the bona-fide undertakings for 'Inoperative Fund' applications
- — AIF compliance and reporting teams handling retention conditions, investor consent and annual status reporting to SEBI