SEBI's New AIF Rules: What They Mean for Investors
SEBI has released new rules for Alternative Investment Funds (AIFs) to ensure fair treatment for all investors. Here's what you need to know about the changes and their implications.
SebiAifsProrataParipassuInvestment FundsReal EstateNov 13, 2025
But what if you’re an investor with crores lying idle, looking for something high-risk and high-reward? Then you start looking beyond your typical assets like bonds, equities, or real estate. The basic mutual funds don't impress you. And that’s where Alternative Investment Funds, or AIFs, come in.
AIFs have a high entry bar, and fund managers operate by a different rulebook. You’re not buying listed shares or government securities anymore. It’s more like betting on startups, private companies, hedge strategies, or even exotic assets like art. Because of this exclusivity, the rules in AIFs have always been... flexible. A ₹500 crore AIF could raise money from just a handful of investors, and some of them could negotiate special terms like early payouts or priority exits. Essentially, the bigger the cheque, the better the deal. And that didn’t sit well with SEBI. So the regulator decided to step in.
Back in December 2024, SEBI released a circular stating that all investors in an AIF must have fair and equal rights when it comes to their undrawn commitments. This fairness rested on two terms: pro-rata and pari-passu. Pro-rata means paying in proportion to your share, like dividing rent based on how long you stayed. Pari-passu means equal treatment, where everyone pays the same rent, under the same agreement, and on the same day.
The reason these terms were introduced is that SEBI noticed unequal treatment in some AIFs. Two people in the same fund, investing in the same deal, could walk away with very different results. This went against the spirit of a pooled fund, where everyone’s money is supposed to share the same risk and reward. However, enforcing fairness in complex funds like AIFs is easier said than done.
Unlike mutual funds, where all the money is invested upfront, AIFs don’t take your entire investment on day one. Fund managers call for capital in stages, only when they find a company or project worth investing in. The rest stays with the investor until it’s needed. For example, if you commit ₹10 crore to an AIF, the manager might draw ₹6 crore immediately and call the remaining ₹4 crore later. This ₹4 crore is your “undrawn commitment” or money you’ve promised but not yet deployed. It’s still part of the total amount you’ve committed, but it’s just not invested yet.
This is where confusion began. Did SEBI’s fairness rule apply to the total commitment or only the undrawn part? How should existing schemes transition to the new system? Could fund managers stick to old agreements signed through Private Placement Memorandums (PPMs)? PPMs are legal documents that tell potential investors about the risks, terms, and opportunities of the investment. All these uncertainties led to a difference in what the rules say and what’s practiced in real life, leaving fund managers caught between breaching old contracts or violating the regulator’s circular.
Even the word ‘commitment’ didn’t have a clear meaning. Is it the total amount that an investor promised to the fund, or only the undrawn amount? Depending on which it is, an investor’s profit or loss could look very different. Then came structural confusion, particularly with close-ended schemes. Close-ended AIFs raise money and have it invested in levels or tranches, so the rules seem straightforward. But what if it’s an open-ended fund? Capital flows in and out every day, so following something like pro-rata becomes tricky.
Despite these issues, SEBI’s goal was simple: fairness and protection. When some investors get preferential rights or early exits, it distorts the level playing field of pooled funds. Fund managers were left scratching their heads, wondering how to fix these issues without reopening old contracts. That was until last week, when SEBI released a consultation paper on the new rules for AIFs, starting with defining what ‘commitment’ actually means.
For close-ended AIFs, the regulator says that funds may calculate pro-rata rights either on the basis of an investor’s total commitment or on the undrawn commitment. Whichever method the fund chooses to follow must be clearly stated in the PPM and can’t be changed later during the scheme’s lifetime. This ensures that investors know the rules from the start, and fund managers don’t have to sway in confusion.
Next, the paper addresses what funds can do with the undrawn commitment, which is basically idle funds. It clearly states that they cannot be deployed elsewhere secretly, keeping things fair, transparent, and maintaining the pro-rata rule. For funds already operating under old PPMs, there’s a transition phase. As long as they follow one of the approved drawdown methods and disclose it clearly, they won’t have to reopen contracts.
Not all AIFs function the same way, and SEBI knows that. So open-ended category III funds, the type where anyone can enter and exit whenever they want, don’t have to follow the same rules as close-ended funds. SEBI says they don’t need to apply the pro-rata rule to drawdowns. Instead, they just need to make sure that profits are shared in proportion to the units each investor holds.
SEBI also clarified that the new fairness rules won’t affect how fund managers get paid. The profit share that managers or sponsors earn, called carried interest, is a reward for performance, not part of the investor pool. So it doesn’t fall under the pro-rata or pari-passu rule. This means managers can still earn their usual performance fees without breaking any regulations.
Lastly, SEBI wants funds to keep better records. This means logging every investor’s commitment in rupees, showing clearly how pro-rata rights are applied, and ensuring trustees verify it in their reports. Past deals (before December 2024) can stay as they are, but every new investment from here on must follow the updated pro-rata rules.
For now, this is still a draft paper, open to public comment. But if it becomes regulation, India’s AIF ecosystem could finally strike the right balance between fairness and flexibility. Because in a market where big risks often chase big rewards, maybe fairness is the safest bet of them all.
Frequently Asked Questions
What are Alternative Investment Funds (AIFs)?
Alternative Investment Funds (AIFs) are investment vehicles that pool money from investors to invest in a variety of assets, including startups, private companies, and exotic assets like art. They are designed for high-net-worth investors looking for high-risk, high-reward opportunities.
What is the difference between pro-rata and pari-passu?
Pro-rata means paying in proportion to your share, like dividing rent based on how long you stayed. Pari-passu means equal treatment, where everyone pays the same rent, under the same agreement, and on the same day.
Why did SEBI introduce new rules for AIFs?
SEBI introduced new rules to ensure fair and equal treatment for all investors in AIFs. Previously, some investors could negotiate special terms, leading to unequal treatment and distorting the level playing field of pooled funds.
What is a Private Placement Memorandum (PPM)?
A Private Placement Memorandum (PPM) is a legal document that provides potential investors with information about the risks, terms, and opportunities of an investment. It is used for private securities and helps investors make informed decisions.
How will the new rules affect existing AIFs?
Existing AIFs can continue to operate under their current Private Placement Memorandums (PPMs) as long as they follow one of the approved drawdown methods and disclose it clearly. They won’t have to reopen old contracts, but new investments must follow the updated pro-rata rules.
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