Market regulator SEBI has floated a consultation paper proposing more operational flexibility for Alternative Investment Funds (AIFs) to wind up schemes and surrender their registration, arguing that “exit” processes should be clear, predictable and efficient especially when a fund is seeking to discontinue activities.
A key trigger is the practical difficulty some AIF schemes face in meeting the current requirement to distribute proceeds after satisfying liabilities and reach a NIL bank balance within the “permissible fund life”, even after assets are liquidated.
SEBI notes that certain schemes retain proceeds beyond this period due to (i) pending litigation or tax demand, (ii) anticipated litigation or tax demand, and (iii) residual operational liabilities --- creating hurdles in processing surrender applications.
Under the proposals, schemes could be allowed to retain liquidation proceeds beyond the permissible fund life in limited circumstances, subject to safeguards. For ongoing litigation or subsisting tax demands, the AIF would need to demonstrate receipt of a litigation or demand notice from tax authorities or other regulators/law enforcement agencies. Retained money would have to be parked only in permitted liquid/low-risk instruments as per Regulation 15(f).
For “anticipated” liabilities (where there is no demonstrable claim yet), SEBI proposes allowing retention only with consent from at least 75% of investors by value.
For operational expenses (such as consultant, legal and other residual costs), retention could be permitted if supported by invoices/documents or comparable past expenses, with a maximum retention period of three years.
SEBI also proposes an “inoperative fund” tag for AIFs seeking surrender where no active fund management is undertaken, with proportionate compliance relief: discontinuation of PPM audit report, CTR report and quarterly filings, replaced by an annual status report to SEBI and investors; plus a ban on launching new schemes and on charging management fees while tagged inoperative.
Comments are invited up to February 26, 2026; the paper is dated February 5, 2026.
