Buying the Deal, Not Just the Fund

How SEBI brought co-investment in-house in 2025 and why a foreign LP still answers to a second regulator.

In the space of nine months last year, two amendments by the Securities and Exchange Board of India “SEBI” quietly changed how serious investors take exposure to Indian private markets. The SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025, notified on 8 September 2025, inserted Regulation 17A and created the Co-Investment Vehicle Scheme “CIV”. The SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025, gazetted on 18 November 2025, added the Accredited Investors only Fund “AIOF”.

Both changes are positive for the private investment industry. They allow investors to invest directly in a specific company held by an Alternative Investment Fund “AIF” rather than investing only in the fund's overall portfolio. They also simplify the co-investment process by allowing it to be carried out within the AIF structure itself without requiring a separate regulatory licence. However, foreign investors must remember that approval from the SEBI is only part of the compliance requirement. Once foreign capital is invested directly into an Indian company, the foreign exchange regulatory framework under the Reserve Bank of India “RBI”, primarily governed by the Foreign Exchange Management Act, 1999 “FEMA”, also applies. These exchange control requirements operate alongside SEBI regulations and cannot be avoided through investment structuring.

THE CO-INVESTMENT VEHICLE

Co-investment was technically possible before this. Since the December 2021 amendment to the SEBI (Portfolio Managers) Regulations, 2020 “PMS Regulations”, an AIF manager could offer it but only after taking a separate Co-investment Portfolio Manager “CPM” registration. Few managers bothered that the compliance was not worth the trouble and the route never really took off.

Regulation 17A removes this friction. A Category I or II AIF can now launch a CIV as a ring fenced scheme inside its own structure with separate bank and dematerialised “demat” accounts, one investee company per CIV and assets walled off from the main fund. SEBI has also let the CIV skip the ₹20 crore corpus floor, the sponsor’s continuing interest obligation and most of the placement memorandum machinery which is what makes it lighter than the old path.

Two guardrails do the real work. Access is restricted to Accredited Investors “AIs”. And no investor may commit more than three times its main fund contribution to any single company through CIVs a cap that does not bind sovereign wealth funds, development finance institutions or government controlled entities.

ACCREDITED INVESTOR FUNDS

The Third Amendment did something different in kind. It carved out a class of fund i.e. the AIOF in which every investor, bar the manager and sponsor is an AI and then dialled back the rules that exist to protect the ordinary investor. The pari-passu requirement in Regulation 20(22) which forces equal treatment of investors within a scheme no longer binds an AIOF, so managers can offer differential rights through side letters. AIs do not count toward the 1,000 investor ceiling. The manager can take on the trustee’s role. And the longer tenure extension once reserved for large value funds “LVFs” up to five years instead of two now runs to all AIOFs. The logic is plain enough: where the investor base is wholly accredited, SEBI is comfortable stepping back.

THE EXCHANGE CONTROL LAYER

This is where foreign investors need to be especially careful. When a foreign investor invests in units of an AIF, the investment is generally treated as an investment in the fund itself under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 "NDI Rules" and compliance with foreign investment limits is assessed at the fund level. As a result, the regulatory position is relatively straightforward. However, CIV changes this position because the foreign investor's money is invested directly into the portfolio company. Under the established principle of the FEMA, an investor cannot achieve indirectly what is prohibited directly. Therefore, such a co-investment is treated as Foreign Direct Investment "FDI" in the portfolio company itself. This means that all FDI related requirements, including sectoral caps, entry-route restrictions, pricing guidelines under the NDI Rules and reporting obligations to the RBI, must be complied with on a deal by deal basis.

Not all of these rules work against foreign LPs. Following the August 2024 amendment to the NDI Rules, whether an AIF is treated as a Foreign owned and controlled company depends mainly on who controls its manager and sponsor, rather than on the nationality of its investors. As a result, an Indian-managed AIF can continue to be treated as domestic even if a substantial portion of its capital comes from foreign LPs. In addition, NRI and OCI controlled vehicles investing on a non-repatriation basis are generally not treated as indirect foreign investment, giving them greater flexibility when structuring investments.

However, these advantages do not override restrictions on sectors where foreign investment is prohibited. If foreign investment is not permitted in a particular sector, a foreign LP cannot invest in a company operating in that sector simply because it qualifies as an accredited investor. Accordingly, managers with both domestic and foreign LPs must review each proposed co-investment for compliance with applicable sectoral restrictions, entry routes and investment caps before offering the opportunity to investors. This is important because any violation ultimately affects the investee company and not just the investor making the investment.

CONCLUSION

SEBI's 2025 reforms have made co-investment significantly more accessible by allowing AIFs to offer deal specific investment opportunities through CIVs without the need for a separate regulatory registration and by creating AIOFs with greater flexibility for sophisticated investors. These changes align India's private capital framework more closely with global market practices and provide investors with greater choice in how they deploy capital. However, for foreign LPs, regulatory compliance does not end with SEBI. Where a CIV results in direct investment into an Indian portfolio company, FEMA and the NDI Rules continue to apply, bringing with them the full set of FDI requirements, sectoral restrictions and reporting obligations. The reforms therefore simplify the investment pathway but do not eliminate the need to navigate India's exchange control regime, making careful regulatory diligence essential for both fund managers and investors.