Key Takeaways
- • SEBI introduced an "Inoperative Fund" framework allowing Alternative Investment Funds to retain liquidation proceeds beyond their statutory fund life to address pending litigation, tax demands, regulatory liabilities, and residual operational expenses—with investor approval requirements of 75% by value for anticipated liabilities.
- • AIFs designated as Inoperative Funds are prohibited from launching new schemes, making fresh investments, or charging management fees on existing schemes, but may invest retained proceeds in instruments permitted under AIF Regulations.
- • Retention periods are capped at three years from the end of permissible fund life for residual operational expenses, with mandatory disclosure of retained amounts and expected duration to investors.
- • SEBI granted broad regulatory exemptions for Inoperative Funds, including relief from quarterly and annual activity reports, compliance test reports, performance benchmarking disclosures, and certain audit and certification requirements, reducing administrative burden during wind-down.
- • The framework specifically defines litigation-related communications to include notices from tax authorities, regulators, law enforcement, courts, investors, and counterparties that could trigger tax, legal, or regulatory liabilities even if not yet crystallized.
Summary
On June 16, 2026, the Securities and Exchange Board of India (SEBI) issued detailed guidelines for Alternative Investment Fund wind-up procedures, introducing a new regulatory framework designed to streamline the closure process while protecting stakeholder interests. The core innovation is the "Inoperative Fund" status, which provides a structured pathway for AIFs that have liquidated investment portfolios but retain ongoing liabilities and obligations.
Under the new framework, AIFs may retain liquidation proceeds beyond their permissible fund life under three primary conditions: upon receipt of litigation notices or regulatory demands from tax authorities, regulators, law enforcement, courts, investors, or counterparties; upon securing 75% investor approval by value to retain funds against anticipated liabilities; or to cover residual operational expenses directly tied to winding-up activities. SEBI clarified that litigation-related communications are broadly defined to encompass any notice that could potentially trigger tax, legal, or regulatory liabilities, regardless of whether such liabilities have already materialized. This definition provides funds with clearer parameters for determining retention eligibility.
For funds retaining proceeds against anticipated liabilities, managers must provide investors with transparent disclosure of the proposed retention amount and expected duration before seeking approval. Where retention is limited to residual operational expenses, the maximum retention period cannot exceed three years following the end of the fund's permissible life. Once designated as an Inoperative Fund, the entity faces significant operational restrictions: it cannot launch new schemes, make fresh investments, or charge management fees on existing schemes. However, retained monies may be invested only in instruments explicitly permitted under the AIF Regulations, providing a defined investment scope for liquidity management.
To reduce compliance friction during the wind-down phase, SEBI granted Inoperative Funds exemptions from several reporting and audit requirements, including quarterly and annual activity reports, compliance test reports, performance benchmarking disclosures, audits of private placement memorandum terms, and certain certifications for key investment personnel. These exemptions acknowledge the non-operational status of such entities while maintaining adequate oversight through retained-proceeds investment restrictions. The framework represents a pragmatic regulatory response to the practical reality that fund closures often extend beyond statutory timelines due to unresolved legal, tax, and regulatory matters, providing both fund managers and investors with clearer governance structures during extended wind-up periods.
Under the new framework, AIFs may retain liquidation proceeds beyond their permissible fund life under three primary conditions: upon receipt of litigation notices or regulatory demands from tax authorities, regulators, law enforcement, courts, investors, or counterparties; upon securing 75% investor approval by value to retain funds against anticipated liabilities; or to cover residual operational expenses directly tied to winding-up activities. SEBI clarified that litigation-related communications are broadly defined to encompass any notice that could potentially trigger tax, legal, or regulatory liabilities, regardless of whether such liabilities have already materialized. This definition provides funds with clearer parameters for determining retention eligibility.
For funds retaining proceeds against anticipated liabilities, managers must provide investors with transparent disclosure of the proposed retention amount and expected duration before seeking approval. Where retention is limited to residual operational expenses, the maximum retention period cannot exceed three years following the end of the fund's permissible life. Once designated as an Inoperative Fund, the entity faces significant operational restrictions: it cannot launch new schemes, make fresh investments, or charge management fees on existing schemes. However, retained monies may be invested only in instruments explicitly permitted under the AIF Regulations, providing a defined investment scope for liquidity management.
To reduce compliance friction during the wind-down phase, SEBI granted Inoperative Funds exemptions from several reporting and audit requirements, including quarterly and annual activity reports, compliance test reports, performance benchmarking disclosures, audits of private placement memorandum terms, and certain certifications for key investment personnel. These exemptions acknowledge the non-operational status of such entities while maintaining adequate oversight through retained-proceeds investment restrictions. The framework represents a pragmatic regulatory response to the practical reality that fund closures often extend beyond statutory timelines due to unresolved legal, tax, and regulatory matters, providing both fund managers and investors with clearer governance structures during extended wind-up periods.
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