SEBI notified the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations 2025 in late 2025, with the revised provisions effective from 1 April 2026. The Amendment substantially revises the Alternative Investment Fund Regulations 2012 across three critical dimensions: Category III AIF leverage limits, investment manager registration and net worth requirements, and investment restrictions applicable to all AIF categories. Fund managers operating Category I, II, and III AIFs registered in India must review their fund structures, offering documents, and operational policies before the April 2026 effective date.
Category III AIF Leverage Limits
Category III AIFs — which include long-short equity funds, hedge funds, and multi-strategy funds — may employ leverage by borrowing and by using derivatives positions. The Amendment introduces a revised leverage computation methodology aligned with global regulatory frameworks, specifically the IOSCO leverage measure for alternative investment funds. Under the revised methodology, leverage is computed using both the gross notional exposure method (sum of absolute values of all positions, net of hedges) and the commitment method (positions expressed as equivalent market value of an underlying asset). The limit under the revised framework is 2x net asset value under the commitment method and 3x under the gross exposure method.
Funds that operate derivatives-heavy strategies — particularly funds using futures, options, swaps, or structured products to gain leveraged exposure to Indian equity or debt markets — must model their current leverage ratios under both methodologies and assess whether they breach the new limits. Category III AIFs that have been using the pre-amendment leverage interpretation — which was less prescriptive in its treatment of derivatives exposure — may need to de-leverage or restructure positions before 1 April 2026.
Investment Manager Registration Requirements
The Amendment introduces direct SEBI registration requirements for Investment Managers (IMs) of AIFs. Under the prior regime, the AIF itself was registered with SEBI, but the IM operated without a separate SEBI registration (except where it was already registered as a portfolio manager or investment adviser). The Amendment requires all IMs managing AIFs with a corpus above Rs 500 crore to register with SEBI as AIF Investment Managers by 1 October 2026 — a phased implementation timeline.
IM registration attracts a minimum net worth requirement of Rs 5 crore (for IMs managing up to Rs 1,000 crore corpus) or Rs 10 crore (for IMs managing corpus above Rs 1,000 crore). IMs that currently operate as private limited companies with thin capitalisation — common in the early-stage fund management sector — must either raise equity capital or restructure their IM arrangements through a stronger sponsor entity. The registration requirements also mandate that the IM employ at least one Key Management Person (KMP) with not less than 10 years of fund management experience.
Investment Restrictions
The Amendment introduces new restrictions on AIF investments in unlisted securities of entities associated with the fund's sponsor or investment manager. Category I and II AIFs are prohibited from investing more than 25% of their corpus in entities in which the sponsor, IM, or their associates hold a 20% or greater equity stake. This restriction targets co-investment structures and captive fund arrangements where AIFs are used primarily to channel capital into the sponsor's own portfolio companies rather than genuinely independent third-party opportunities. SEBI has indicated that existing investments that breach this threshold must be disclosed to investors within 60 days and a remediation plan submitted to SEBI.
The Amendment also revises the provisions governing extension of the tenure of Category II AIFs. Extensions beyond the initial close period and the two permissible one-year extensions now require approval from 75% in value of unit holders — up from 66%. This higher threshold gives minority investors greater blocking rights against indefinite fund extensions.
Disclosure and Reporting Obligations
SEBI has revised the format and frequency of AIFs' periodic disclosures to investors. Half-yearly reports must now include a portfolio-level liquidity assessment and a statement of the fund's total expense ratio broken down by category of expense. For Category III AIFs, the half-yearly report must include a risk-adjusted performance attribution showing net returns after leverage costs and derivatives trading costs. These disclosure requirements go beyond what most current fund reporting practices include and will require updates to fund administrator systems and reporting workflows.
Action Items for AIF Managers in Delhi NCR
- Model current Category III AIF positions under both the commitment method and gross exposure method to assess compliance with revised leverage limits.
- Assess IM registration requirement applicability based on AIF corpus and begin SEBI registration preparation if above the Rs 500 crore threshold.
- Review IM net worth and KMP qualifications against the new requirements and identify capital or talent gaps.
- Audit Category I and II AIF portfolios for associate entity investment concentration and prepare disclosures for any positions above the 25% cap.
- Update Private Placement Memoranda and investor agreements to reflect the revised leverage limits, disclosure standards, and extension approval thresholds before 1 April 2026.