SEBI Proposes Flexibility for AIFs During Winding Up

Consultation Paper Dated 05.01.2026

The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing measures to streamline the processes for winding up of Alternative Investment Fund (AIF) schemes and surrender of AIF registration.

The proposals seek to address practical challenges faced by AIFs that have completed their tenure but continue to exist for limited residual purposes.

1. Background and Regulatory Concerns

SEBI has observed that certain AIFs:

Continue to retain liquidation proceeds beyond the permissible fund life
Are unable to achieve a NIL bank balance, which is a prerequisite for surrender of registration

This situation commonly arises due to:

Pending litigation
Tax demands
Outstanding operational or statutory liabilities

As a result, such AIFs face regulatory uncertainty despite having otherwise completed their fund lifecycle.

2. Objective of the Proposals

The consultation paper aims to:

Provide regulatory clarity for AIFs that have completed their tenure
Enable an orderly winding-up process where funds continue to exist only for limited residual purposes
Address operational difficulties in surrendering registration due to unavoidable pending obligations

3. Key Proposals

3.1 Framework for AIFs Retaining Funds Beyond Permissible Life

SEBI has proposed a clearer regulatory framework for AIFs that:

Have completed their permissible fund life, but
Continue to retain funds solely to meet pending legal, tax, or operational requirements

This would help align regulatory expectations with practical realities.

3.2 ‘Inoperative’ Status for Certain AIFs

It has also been proposed that:

AIFs that have not retained any monies beyond the permissible fund life
May apply for an ‘inoperative’ status, instead of remaining fully operational or being compelled to surrender registration

This measure is intended to reduce unnecessary compliance burden on inactive funds.

4. Invitation for Public Comments

Considering the potential impact of these proposals on AIFs, fund managers, investors, and other market participants, SEBI has invited public comments and suggestions on the consultation paper.