Co-Investments and SEBI’s CIV Model: A Reform SHADOWED BY AMBIGUITIES

[Anshika is a student at National Law Institute University Bhopal.]

SEBI through its Broad meeting dated June 16,2025, has approved co-investment (CI)  opportunities within the alternative investment fund (AIF) structure. This decision comes against the backdrop of enhancing the ease of doing business in India and building a robust CI ecosystem. While the decision is progressive, it leaves some key questions unclear. This blog critically analyses the proposed changes and their implications on the AIF market. 

What is Holding Back CIs in India

CIs particularly refer to the investments made by the investors in the investee companies in which the AIFs invest. This adds to the investment opportunities of investors by providing an alternative route to the AIF structure. 

Earlier, SEBI’s 2020 notification allowed only discretionary portfolio managers to invest in listed securities. However, non-discretionary managers faced a 25% cap on advising in unlisted securities. This left them with limited ability to facilitate CIs. This was later addressed by SEBI‘s 2021 amendment which allowed CIs in unlisted securities for Category I and II AIFs for both categories of portfolio managers.  Thus, under the extant framework CIs are allowed in unlisted securities for Category I and II AIFs. These CIs are allowed through the Portfolio Management Services (PMS) route and regulated by Portfolio Managers Regulations 2020 (PMS Regulations). Thus, CI opportunities were not available within the AIF structure. Although these regulatory changes opened the door for CIs, they triggered significant industry pushback. As per Regulation 20(15) of the AIF regulations, a fund manager could not directly advise an investor on CIs unless the investor was a client of the Co-investment Portfolio Manager (CPM). This required an AIF to establish its own PMS arm. This was further followed by several layers of compliance such as registration as CPM and opening of a separate PMS account. Investors had to sign a separate PMS agreement to become clients. Only after these formalities could an AIF manager advise on CIs. These compliances were not just seen as costly but also restricted CI opportunities due to PMS regulations.     

Another concern was the overburdened cap table of portfolio companies due to the participation of a large number of individual CIs in the same deal. This was challenging for the companies due to their sensitivity to the investor portfolios, varied internal compliances and differing approval processes across the investors which ultimately affected the timely closure of deals and in some cases even led to loss of investment opportunities. Moreover, the requirement to follow the same exit terms and timelines created friction among the investors, as each investor would operate under internal policies that prioritised their individual exit decisions.

Taken together, these constraints have also kept the Indian CI ecosystem at a competitive disadvantage compared to foreign private equity funds (foreign funds), which operate through foreign investment routes and are not subject to the PMS regulations.  As a result, foreign funds appear more attractive to investors and offer them better flexibility.

The Roadblocks in SEBI’s New Co-Investment Vehicle Model

SEBI has now approved the co-investment vehicle (CIV) model to allow co-investing, whereby a separate CIV will be created linked to the main AIF fund. These CIVs will be mandated to register under the same Category I or Category II as that of the main AIF. Unlike regular AIF schemes, each CIV scheme will be used solely for investing in a single investee company, with no pooling across deals. Thus, the pro rata rule will not apply here as the scheme will be exclusive to a specific CI. CIVs will also be exempt from diversification norms and will be allowed to deploy 100% of their capital into a single investee company. While this is a welcome move, several ambiguities persist.  

First, the report defines CI as an investment in unlisted securities of an investee company where the main AIF scheme is investing or has invested. This provides no clarity on whether investors of a separate scheme can invest in CI opportunities of another AIF scheme when there is a common linkage through a fund manager. This issue can be better understood if we consider a scenario where both AIF A and AIF B are managed by the same fund manager. Suppose AIF B already owns shares in a startup and now seeks to increase its stake by bringing in co-investors. Under the current framework, this would not be permitted if the startup is also part of AIF A’s portfolio, even if AIF B is the one initiating the follow-on investment round.

While the intent behind such a restriction is to avoid conflicts of interest, it creates practical challenges as fund managers often structure their platforms to have multiple AIFs investing in the same or related companies. Prohibiting managers from advising on such opportunities hampers their ability to syndicate deals effectively and limits the flexibility that investors typically seek. This eventually results in hurting the ease of doing business and delaying capital deployment. Notably, the issue was also highlighted in the earlier consultation paper wherein the EoDB Working Group had recommended allowing fund managers to advise on such opportunities. However, currently, no clarity has been provided by SEBI in this regard. 

Second, there is still no clarity on the issue of sponsor linkage which was also highlighted earlier. The extant framework offers CI opportunities to investors where the sponsor of AIF and CPM are same. However, the board meeting provides no clarity on this. This becomes more concerning as the existing PMS route is still available for investors. Therefore, such issues must be clarified as the sponsor linkage requirement restricts flexibility across the fund structure and often results in low investment opportunities. 

Third, the proposed framework seems to completely overlook the issue of co-terminus exit timelines. The present framework mandates that the terms of exit and timing of exit for CIs must mirror those of the AIF. Co-investors are forced to follow these uniform timelines which ultimately leaves no room for their independent exit strategies. The justification given for this uniform timeline is to mitigate conflict of interest concerns between fund managers, investors of AIF and co-investors. However, this does not reflect commercial viability, particularly because different investors may have their respective investment horizons and return expectations. It is pertinent to note that AIFs are pooled structures while CIs are not. Thus, the very nature of CIs may require the co-investors to stay longer even if the AIF exists. Although this concern was acknowledged in SEBI’s earlier consultation paper, the issue continues to persist within the CIV model.

Lastly, clarity must be provided on the scope and ambit of the definition of CIs. It remains to be clarified whether investments made without the formal participation of an AIF manager would still count as CI. Especially in scenarios where the investee company directly approaches the AIF investor for additional capital. Even though these arrangements do not involve formal participation of an AIF manager, they can still fall within the broader definition of CIs. As the consultation paper itself highlighted the complexities around the expansive definition of CI, it becomes all the more important to address this so as to avoid compliance ambiguities within the CIV model.

Conclusion and Suggestions 

CIs allow an investor to enhance its commitment to a fund, meet large capital requirements, and improve the overall returns. As these benefits become more apparent, the competition around CI opportunities also grows, which makes it essential for India to have a robust CI framework that does not pose an undue compliance burden. Although the proposed framework aims to give substantive realization to ease of doing business, some clarifications and practical viability still need to be addressed regarding the issues highlighted above. It is suggested that India should not adopt an expansive definition of CIs as such an understanding risks overregulating transactions that do not involve formal manager participation and where no conflict of interest arises. Thus, in such situations, flexibility in investments must be ensured. Additionally, the sponsor linkage requirement must be reconsidered, as it curtails manager’s ability to advise on viable investment opportunities. It is suggested that concerns around conflict of interest should be dealt with through robust disclosure norms and approval processes that do not restrict cross-fund participation. 

While the intent behind the uniform exit requirement is to ensure that co-investors are not unduly favored over the main AIF, such concerns can also be addressed through proper disclosures without resorting to excessive regulations. The US’s model offers some guidance in this regard. The US’s SEC has shifted from its earlier “board-established criteria” to a new principal-based framework, which allows advisors to adopt policies that are reasonably formulated to ensure the interests of all the participants are well accounted for. Thus, India can draw on such a principle-based approach rather than rigid exit requirements.

As foreign jurisdictions adopt flexible CI frameworks, India must also reform its approach to overcome its competitive disadvantage. Thus, timely corrections will be key to unlocking the full potential of the Indian CI ecosystem.