SEBI’S CIV Model: What's in Store for Investors?

[Sudarshana is a student at Gujarat National Law University.]

On 9 May 2025, the Securities and Exchange Board of India (SEBI) released a consultation paper proposing co-investment facilities to investors within the alternative investment fund (AIF) structure through a co-investment (CIV) scheme. This proposal was approved at the 210^th board meeting of SEBI on 18 June 2025. The move, prompted by industry demands, seeks to facilitate AIFs and investors to co-invest, thereby promoting capital formation in unlisted companies through AIFs. However, the practical implications for investors and fund managers, and the broader impact on the Indian alternative investment ecosystem, merit closer scrutiny. This article takes a closer look at the implications of this new co-investment model. 

Understanding Co-investment and the Need for Enhanced Flexibility

Co-investment refers to investments made by investors, managers, or sponsors of a Category I or II AIF in unlisted investee companies where such AIF invests. Co-investment has generally been routed through the portfolio management services (PMS) route under the SEBI (Portfolio Managers) Regulations 2020 (PMS Regulations). This route requires investment managers to obtain separate registration as portfolio managers, posing an additional cost and affecting the competitiveness of domestic investment managers with global private equity funds, which have no such constraints on co-investing. Cap-table sensitivity and delay in closing due to additional documentation under the PMS route made co-investments less attractive for investee companies. This propelled the need for change in the co-investment ecosystem by enhancing flexibility and the ease of doing business. 

SEBI’s New CIV Model: Key Features  

Accredited investors only 

While the PMS route allowed for all investors of the AIF to partake in co-investment opportunities, SEBI has restricted the CIV model to be available only to accredited investors. Regulation 2(ab) of the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) defines accredited investors to be those with an accreditation certificate and who meet the eligibility criteria laid down. Individuals, Hindu undivided families, family trusts, and sole proprietorships need to have an annual income of two crore rupees or a net worth of seven crore fifty lakh rupees or an annual income of one crore coupled with a net worth of five crore. Body corporates and trusts other than family trusts need a net worth of at least INR 50 crore rupees, while for a partnership firm under the Indian Partnership Act 1932 the eligibility criteria need to be met by each partner. 

To qualify as an accredited investor, a prospective investor or applicant needs to file an application with an accreditation agency in a manner prescribed, along with furnishing a self-certified copy of their income tax return for the preceding financial year. In case of body corporates, the audited accounts of the preceding financial year or more recent audited financials shall be considered for assessing eligibility. For trusts, the valuation data included in the statutory audit report of the preceding financial year or the most recent audited accounts shall be used to calculate the assets under management. Accreditation granted shall be valid for one year from the date on which accreditation was granted. If the eligibility criteria are met by the applicant for each of the 3 preceding years, the period of validity of accreditation is extended to 2. The accreditation agency, after verifying if the applicant is ‘fit and proper’ to participate in the securities market issues the accreditation certificate specifying name and permanent account number (PAN) of the applicant along with the date and validity of accreditation and a unique accreditation number. 

This restriction of CIV scheme to accredited investors would ensure that only sophisticated investors participate, thereby reducing regulatory burden on SEBI, while potentially limiting access to investors that are less wealthy. Further, wealthy investors who wish to co-invest through a CIV scheme would necessarily need to apply for an accreditation certificate. 

Separate CIV scheme for each co-investment 

Each co-investment needs the launch of a separate CIV scheme under the new regulations. This translates to all requirements for an AIF scheme being attracted for CIV schemes unless explicitly exempted. Therefore, as per existing regulations, for each co-investment, a CIV scheme has to be filed with a scheme fee of one lakh rupees, comments by SEBI must be incorporated, and a declaration of first close within 12 months must be made. Failing to declare close within the stipulated time would trigger a fresh application requirement. Thus, risk mitigation would require a comprehensive market analysis before the launch of the scheme. Unlike through the PMS route, a minimum corpus of twenty crore is mandated if co-investment is done through a scheme of the AIF. Additionally, the maximum number of investors must be limited to a thousand. 

The requirement to launch a separate scheme for each co-investment could result in increased administrative burden and transaction costs, thus deterring smaller and more frequent co-investment opportunities. Further, SEBI has provided no clarity on whether each scheme would have its own PAN number and identification as proposed in the consultation paper.    

Relaxation of regulatory requirements 

Although the board minutes do not mention which regulatory requirements for AIF would be relaxed for CIV schemes, the consultation paper on the topic enumerated three exemptions. First, they are exempted from the requirement of being able to invest only up to 25% of their investible funds in one investee company as required under Regulation 15(1)(c) of AIF Regulations. Secondly, the sponsor or manager is not required to maintain a continuing interest of 2.5% of the corpus or five crore rupees in the CIV scheme under Regulation 10(d). Lastly, they are not subjected to a minimum tenure of three years as per Regulation 13(2). These exemptions are likely to be granted when detailed regulations for the CIV model are notified. While relaxations would increase flexibility, the lack of clarity on precise regulatory exemptions has left uncertainties for investors and fund managers.   

Co-existence of the PMS route 

The PMS route has not been discontinued with the introduction of co-investment within the AIF structure. This would allow non-accredited investors to continue investing through the PMS route. Thus, one might presume that the concern over the exclusion of smaller investors is dispensed with. However, allowing accredited investors to invest through the CIV scheme while allowing others only through the PMS route, which is more burdensome in terms of compliance and cost, creates an uneven playing field. This would disincentivize investment managers from seeking co-investments through the PMS route. This dual-track approach could fragment the co-investment market, with accredited investors being able to access more efficient structures and other investors facing higher barriers. Over time, managers could migrate to the CIV model, marginalizing smaller investors. 

Additionally, a scheme of AIF is required to have a minimum corpus of INR 20 crore rupees, which could restrict smaller co-investment opportunities. The continued availability of the PMS route would be welcome here, given that it would keep the scope for smaller co-investment opportunities open. The trade-off that exists is that while the PMS route preserves inclusivity, the higher compliance cost makes it less viable. 

Unanswered Questions and Regulatory Ambiguities  

Shelf PPM filing

SEBI’s consultation paper had proposed the filing of a shelf PPM at the time of registration of the AIF. This aspect finds no mention in the board minutes. If this requirement, as proposed, is imposed, existing AIFs would be mandated to file shelf PPMs for co-investments at the time of registration itself. While existing AIFs could file shelf PPMs too, SEBI never provided clarity on what happens when an AIF that comes into existence post the regulations does not file such a shelf PPM and is desirous of offering co-investments through CIV at a later point in time. 

This uncertainty might result in all AIFs filing for a shelf PPM at the time of seeking registration for the AIF, if co-investment opportunities are likely in the future. The existence of the PMS route eases some worry for AIFs that are uncertain about the likelihood of offering co-investment opportunities, since co-investment would still be possible via the PMS route.  

Exit terms

The consultation paper had proposed that the tenure of a CIV be identical to the main AIF. However, the board minutes do not deal with the question of exit terms. Under the PMS Regulations, the terms of co-investment cannot be more favorable, and the exit timing has to be co-terminus. The consultation paper proposed identical terms for co-investment and investment in the main AIF, along with identical exit times. This raises the concern of limited flexibility being afforded to co-investors if they want to exit later. Global practices often impose similar exit rights for the AIF and co-investments through contract-driven rights such as drag-along and tag-along rights. In the Indian context, it raises concerns of misalignment of fiduciary duties. Thus, an ideal way of going forward could be to have a default rule of identical exit timing with an opt-out mechanism. 

Conclusion 

SEBI’s approval of the CIV scheme as a model for co-investing in AIFs is a significant step towards modernizing the private capital market of India and aligning it with global standards. Streamlining co-investment processes, it provides much-needed flexibility and enhances the ease of doing business. The move has been welcomed by stakeholders and market participants and is expected to benefit unlisted ventures and early-stage startups. To ensure the CIV model delivers on its promises, SEBI must act swiftly and address ambiguities, providing unambiguous regulations. The way forward includes providing comprehensive guidelines on exit terms and mechanisms, clarifying shelf PPM obligations, and monitoring of the model’s impact to prevent concentration in market and ensure equitable access to co-investment opportunities.