The Securities and Exchange Board of India (SEBI) has notified a framework allowing Alternative Investment Funds (AIFs) to set up co-investment schemes within their structure. The move follows amendments to the AIF Regulations, 2012, and takes effect immediately.

Category I and II AIFs can now offer accredited investors a co-investment facility by launching a separate co-investment scheme (CIV scheme). This comes in addition to the co-investment route already available through portfolio managers under the SEBI (Portfolio Managers) Regulations, 2020.

According to SEBI, managers of AIFs must choose between the PMS route and the CIV scheme route for an investor’s co-investment. Managers will be required to file a shelf placement memorandum covering key terms, governance, and regulatory framework. Each CIV scheme must have separate bank and demat accounts, with assets ring-fenced from other schemes.

Investor co-investments in a company cannot exceed three times their contribution in the parent AIF scheme, except for multilateral and bilateral DFIs, state industrial development corporations, and government-controlled entities including central banks and sovereign wealth funds.

Investors who are excused, excluded, or have defaulted in the AIF scheme will not be eligible to co-invest. CIV schemes cannot create leverage or borrow funds. Investors’ rights and distributions will be proportionate to their contribution, except for carried interest payable to sponsors or managers. Expenses will be shared proportionately.

Industry associations such as IVCA and PE VC CFO Association will publish implementation standards in consultation with SEBI. Trustees and sponsors must confirm compliance in test reports.