Streamlining Co-Investments: CIV Schemes Rewiring India’s AIF Ecosystem

Written by Mahati Arun and Ayushika Sinha, the authors are law students currently pursuing BA.LLB from Symbiosis Law School, Pune.

INTRODUCTION

On September 9th, 2025, the Securities Exchange Board of India (“SEBI”) through SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025 (“AIF Regulations”) introduced the Co-Investment Vehicle Scheme (“CIV Scheme”) signalling a major reform in the India’s alternate investment fund framework. Co-Investments are nothing but minority investments made by investors alongside a lead fund manager that is outside of the main fund, enabling specific investors to participate directly in transactions without having to join the primary fund corpus. In India such co-investments have traditionally been executed through parallel structures, that raise regulatory and compliance costs, fragment cap tables of unlisted companies and create misalignments in exits between AIFs and individual co-investors. This article shall examine how the CIV Scheme addresses these challenges and shall critically examine its structure, operations, limitations and policy measures to optimise India’s AIF landscape.

BACKGROUND

The SEBI (Portfolio Managers) Regulations, 2020, establishes the Co-investment Portfolio Manager Scheme (“CPMS”), which permitted accredited investors in Category I/II AIFs to pool their funds independently through a registered Portfolio Manager (“PM”) and co-invest in the same unlisted deals as the AIF. This led to the creation of a parallel structure wherein the CPMS functions as a separate vehicle with its own PM registration, net worth (minimum of ₹5 crore), compliance setup, and fees, whereas the AIF invests as a single unit. This frequently forces AIF managers to look for two licenses or find an external partner. This also led to an escalation of costs 2 to 3 times more than integrated structures.Previous to the change, the Regulation, only offered the Co- CPMS approach that allowed investing in Category I and II AIFs. Meanwhile, investors’ direct investment in unlisted securities led to an increase in costs for managing compliance, which necessitated registration for separate CPMS by AIF managers.

These inefficiencies were tackled in the SEBI consultation on May 9, 2025, and SEBI Board meeting on June 18, 2025, where the CIV scheme introduced. Both reiterated how direct investor ownership, in effect creates fragmented cap-tables for unlisted investee companies where the unified stake of the AIF splits into many holdings making exits and governance more difficult, delay in timely closure of deals due to individualised paperwork and may lead to independent exits creating a possible conflict of interest, wherein co-investors exiting prematurely and hence impacting AIF strategies in illiquid markets. Lapses in regulations along with misalignment between AIF and individual investor likely diluted AIF certainty on the strategy and negotiating power. Thus, there came a need for a low-cost approach, considering both the Union Budget 2025-2026 pushing ease of business and safeguarding investors without an additional registration.[2] 

KEY PROPOSALS AND ITS IMPLICATIONS

●      CIV Scheme Structure

CIV schemes will be classified as “side-pools” within the AIF framework, allowing managers to structure separate schemes for co-investment into specific investee companies. Each CIV shall have its own bank and demat accounts and ring-fence the assets from other schemes. These co-investments will leverage the existing AIF regulations, easing its setup and administration which would result in lower set up costs as compared to the PMS route, which has independent licensing, and relatively higher legal and other administrative costs. Refraining from fractured structures will further keep the investee company’s cap tables cleaner.

Secondly, framework limits co-investments, to ensure that the total investment of the investor in CIV schemes, does not exceed three times their investment in the primary AIF scheme’s investment in the investee company. The cap, for accredited investors engaging in unlisted securities, preserves the financial strength of the association, by assuring that co-investments are proportionate to that of the primary fund.

Moreover, strategic entities such as such as multilateral/bilateral development financial institutions, state industrial development corporations, and government owned/ managed/ established entities (including central banks and sovereign wealth funds) are excluded from the framework. This increases the diversity and scope of the co-investments while advancing economic and infrastructure development goals.

●           Shelf Placement Memorandum (SPM) filing

According to the new framework, before launching the CIV schemes, the AIF managers are required by the new framework to submit a shelf placement memorandum. The SEBI circular offers the “Confidential Shelf Private Placement Memorandum for Co-Investment Schemes” template. By giving investors, the SEBI clarity on the co-investment management, this fosters transparency.

In contrast to a typical AIF Placement Memorandum (PPM), which is a comprehensive investor document that covers the fund's entire strategy, risks, governance, fees, and dual structure of disclosures including terms filed during registration, the SPM is a reduced, targeted template that is exclusively focuses on CIV-specific components like investment caps, exit procedures, and asset isolation. By relying on the parent AIF's previous disclosures rather than requiring new, it implements without compromising transparency. It adheres to the core AIF PPM format but marks ineffective sections as "not applicable," making it considerably easier to implement than a full PPM. This structure gives investors a clear understanding of how to handle co-investments.. Hence, reputable AIFs might follow standardised procedures which could increase investor trust.[3] 

●      Leverage Ban and Exit Requirement

By restricting speculative borrowing, the leverage ban protects CIVs a[4] gainst market volatility and deb-driven losses in illiquid assets. Speculative borrowing involves a large use of borrowed funds to double up on bets related to asset price movements, usually without adequate underlying capital or protection against losses, thereby increasing the risk of default in case of market volatility. This typically depends on short-term market price changes, not based on fundamental value, where the borrower uses leverage to magnify the potential return, along with raising the potential for substantial loss. This aligns with AIF Regulations 15(1)(b) on leverage limits and SEBI’s investor protection agenda and minimises risks in unlisted markets.

Conventional AIF’s have a lock in period of at least 3 years unless it falls under the exceptions as provided under the SEBI regulations. The CIV scheme in contrast does not prescribe a lock in period, instead directing that the terms of exit from the CIV must align with that of the AIF. Thus, this synchronisation addresses the drawbacks of the previous CPMS route by ensuring investor alignment and preventing premature exits by co-investors.  In order to address this and prevent illiquidity, it is suggested that SEBI may permit investors to conditionally exit under a specified set of conditions.[5]  By providing smaller institutional investors with partial exemptions, investors can further level the playing field while encouraging inclusivity and oversight. Additional refinement can be carried out by applying Special Situation Funds standards which promote exit flexibility against liquidity.

●      Investor Eligibility Criterion

The amendments allow accredited investors of Category I and Category II AIFs, with yearly income of at least ₹2 crore or a net worth of ₹7.5 crore per Regulation 2(1)(ab) (₹3.75 crore must be in financial assets) in the CIV scheme, expressly prohibiting participation investors who defaulted on AIF obligations related to the relevant investee company through the scheme. This lowers the risk of uninformed participation in intricate unlisted securities by guaranteeing that only financially savvy investors participate. By prohibiting defaulting investors, SEBI prevents investors from selecting only the most lucrative co-investment improving investor alignment and fund cohesion. It also centralizes the funds interests by reducing potential conflicts that might jeopardizes its strategies.

●      Advisory and Compliance Rules

The amendment and circular impose strict advisory and compliance guidelines that prohibits AIF manager from providing non-CIV advisory services on the securities of investee companies, require adherence through yearly Compliance Tests Report (CTRs) and enforce investors pro rata rights (apart from carried interest allocations) to avoid CIV restrictions or obtain favourable terms by using parallel advisory roles. By requiring documentation of ring-fenced assets and synchronised exits, CIV compliance enhances transparency and fosters investor trust in CTRs. Pro rata rights guarantee a fair distribution of profits, balancing the interests of investors with those of the primary AIF.

●      Exemptions from AIF Regulations

CIV schemes are exempted from the standard AIF requirements regarding minimum corpus, fund tenure and investment concentration/diversification norms as outlines in the Regulation 17A(10) of the AIF Regulations, 2012. This enables CIVs to function as targeted CIVs restricting their responsibilities to the more expansive fund terms present in primary AIF schemes and providing flexibility for smaller co-investments to encourage participation in certain deals. However, without clear prohibition against co-investment vehicle leveraging this flexibility could also be abused to create unintended risk. With the help of exemption, it can draw in more development for financial institutions and sovereign wealth funds. This encourages quicker investments in venture capital and infrastructure, two strategic areas for India. 

THE IFSCA FRAMEWORK

The CIV scheme and the (“IFSCA”) International Financial Services Centres Authority Special Scheme  framework present different strategies for facilitating co-investment that reflect India’s domestic and international financial markets. Only Category I and II AIFs that prioritise investor alignment and risk management from an economical structure (Rs. 1 lakh Shelf PPM fee) are eligible for the CIV. However, the IFSCA for GIFT City’s global hub for sophisticated investors who value flexibility within the tax-advantaged jurisdiction permitting investment in both listed and unlisted securities, offers leverage and has higher setup cost (USD 7,500 fee). While the IFSCA’s investment strategy increases transactional flexibility, the CIV scheme guarantees seamless integration within AIFs. In contrast to invest preference based on requirements and risk tolerance illustrating SEBI’s emphasis on domestic stability[6].

COMPARATIVE ANALYSIS

The newly introduced CIV scheme aligns India with international co-investment trends. Co-investment arrangements are made possible by private equity hubs (e.g. US, UK and Singapore) allowing limited partners (LPs) to contribute funds directly to certain transactions without additional fees. Both Singapore (MAS guidelines) and the United States (SEC regulations) allow listed and unlisted securities, leverage with risk disclosure and exit flexibility. This attracts investors globally despite its misalignment. Strict integration, pro-rata rights and annual reports prioritise stability over agility in a way that SEBI’s scheme carefully handles the problem while boosting India’s competitiveness through facilitation of co-investments. However, this shifts investor allocation to less restrictive jurisdiction requiring future adjustments balancing investor protection.

DRAWBACKS

The below points highlight the drawbacks and limitations inherent in the key proposals of the CIV Scheme:-

Exit Rigidity: The strict exit requirement of it being aligned with that of the AIF may trap AIF co-investors in illiquid holdings if the AIF delays exiting because of its strategic interests, market conditions or compliance issues particularly with unlisted securities or limited liquidity.

Absence of Timelines for Shelf PPM Approval: Absence of defined timelines for Shelf Placement Memorandum review may delay transactions and reduce deal agility.

Regulatory Assymetry Between Investor Classes: The exclusion of multilateral institutions, sovereign wealth fund and government-owned entities creates unequal treatment, putting private accredited investors at a disadvantage, subject to more limitations and may not be permitted to engage in high-value transactions. This could skew the market and limit CIV participation by smaller players.

Higher Compliance Burden: CIVs require separate bank and Demat accounts, asset ringfencing, Shelf Placement Memorandum filings and even annual compliance test reports. These obligations may impose a significant burden on smaller AIFs. Mandatory CTRs also burden smaller AIFs that are moving towards the less regulated CPMS route by increasing audit and reporting cost by an estimated Rs. 5-10 lakh per year.

Limited Investor Base: The scheme restricts access for non-accredited investors who do not meet the accreditation threshold and high-net worth individuals (HNIs). As a result, this might steer investors toward the CPMS route which does not provide CIV safeguards. This limits capital flow and favors bigger players.

Reduced Managerial Flexibility: The advisory restrictions imposed on AIF managers restricts their ability to advise co-investors on listed securities limiting their flexibility in volatile markets.

Restrictive Investment Cap: The three-times investment caps can curtail capital intensive investments reducing their attractiveness and requiring more financial flexibility and limiting the CIVs scalability.

Constraints on Capital Amplification: The prohibition on leverage limits capital amplification which consequently excludes high- growth opportunities for investors who depend on borrowing to boost their returns in industries like startups or infrastructure. make this a drawback

RECOMMENDATIONS

Below are the authors suggestions to optimize the CIV Scheme's efficacy while resolving its drawbacks:

1.     SPM Approval Timelines: Mandate a 21-30 day review period for Shelf Placement Memorandums with deemed approval similar to the timelines provided for the Merchant Banker PPM filing timelines under SEBI AIF Master Circular 2024.

2.     Tiered Caps for Fund Size: Schemes in AIFs with AUM less than ₹500 crore, the restriction of 3x should be increased to 5x for co-investment. This enables smaller Schemes to raise capital-intensive infra and venture capital deals without undermining the safeguards for accredited investors aligned with Category I AIF exemptions under Regulation 16.

3.     Conditional Leverage Framework: Allow limited non-speculative leverage of up to 1.5x for those CIVs that either have listed securities or where an independent valuation is provided, based on an enhanced CTR disclosure.

4.     Exit Windows for Minority Stakes: Enable co-investors to exit up to 25% of the holdings after two years through secondary sales to the primary AIF or the sponsor, along with pro-rata rights, drawing from Special Situations Fund flexibility. This will reduce incidences of an illiquidity trap.

Onboarding Smaller Accredited Investors: Reduce the net worth threshold for repeat AIF investors with three or more years of track record to ₹5 crore (₹2 crore in financial assets), extending participation beyond ultra-HN.is while maintaining the necessary level of sophistication.

CONCLUSION

The scheme changes the AIF landscape in India by offering affordable and ring-fenced co-investment opportunities prioritising investor protection and take leverage and investor exit restrictions into consideration. The amendment and reduce leverage however can impact smaller investors causing marking segmentation and diverting funds to less regulated avenues like PMS route. Hence, SEBI should ensure a flexible mechanism aligning investor protection with global investment market.[7]