SEBI floats plan to cut red tape for AIFs stuck in disputes, seeks public feedback

The Securities and Exchange Board of India (SEBI) has proposed a more flexible framework for Alternative Investment Funds (AIFs) looking to wind up their schemes or surrender registrations, particularly when funds remain locked due to unresolved tax or legal matters. The market regulator released a consultation paper on February 5, 2026, inviting public comments on the proposed changes by February 26. 

Under the current rules, AIFs are required to liquidate assets and distribute proceeds within a specified "permissible fund life" after settling all liabilities. However, SEBI noted that several AIFs continue to retain funds beyond this period due to pending litigation, anticipated tax demands, or operational expenses—making it difficult for them to comply with the existing surrender process. 

To address this, SEBI has suggested allowing AIFs to: 

• Retain funds beyond permissible fund life in cases of demonstrable receipt of litigation or tax notices from regulatory authorities. 
• Retain amounts for anticipated liabilities if 75% of investors (by value) consent to such retention. 
• Retain funds for operational expenses, provided they are backed by valid documentation, capped at a maximum of three years. 

AIFs meeting these criteria may be categorised as "inoperative funds," and will be subject to reduced compliance requirements. These include discontinuation of certain regulatory filings, prohibition on launching new schemes, and a ban on charging management fees. Surrender applications from such AIFs will be processed only once a NIL bank balance is achieved after settling all liabilities. 

SEBI's proposals also outline amendments to Regulation 29(7) of the AIF Regulations, 2012, allowing for flexibility in fund distribution terms “as may be specified by the Board from time to time”. 

The move comes in response to repeated requests from industry stakeholders who flagged the regulatory challenges faced by funds nearing closure, particularly when inactive but entangled in prolonged disputes. SEBI's Alternative Investment Policy Advisory Committee (AIPAC) has reviewed and recommended the proposals. 

Public comments can be submitted via SEBI’s website, and two dedicated emails have been provided for technical queries.