IFSCA Issues a Framework to facilitate Co-investment by Venture Capital Schemes and Restricted Schemes

Regulations 29(1) and 41(1) of the International Financial Services Centres Authority (Fund Management) Regulations, 2025 (“FM Regulations”) enable a venture capital scheme (“VCS”) and a restricted scheme (“Restricted Scheme”) respectively to co-invest in permissible investments either through the following:

• Special Scheme: a special purpose vehicle (“Special Scheme”) and for such Special Scheme to undertake leverage as disclosed in the private placement memorandum (“PPM”) of the relevant AIF, in accordance with a framework to be specified by the International Financial Services Centres Authority (“IFSCA”);or
• Segregated Portfolio: through a segregated portfolio by issuing a separate class of units.

IFSCA has on May 21, 2025, issued a circular bearing number F. No. IFSCA-AIF/6/2025-Capital Markets (“IFSCA Co-Investment Circular”) for the purpose of providing the mechanism and manner for facilitating co-investments by VCSs and Restricted Schemes through a Special Scheme and for such Special Scheme to undertake leverage.

The key features of the Special Scheme, as provided by the IFSCA Co-Investment Circular, are as follows:

• Any FME registered with IFSCA, having either an operational VCS or a Restricted Scheme or both, shall be eligible to launch a Special Scheme, in accordance with the terms and conditions of the relevant PPM of such VCS or Restricted Scheme. The Special Scheme shall have the same classification (Category I, II, or III AIF) as the AIF which launches the Special Scheme.
• A Special Scheme may be constituted as Company or LLP or Trust.
• The AIF which launches the Existing Scheme (“Existing Scheme”) shall, at all times, hold a minimum of at least 25% of the equity share capital, interest, or capital contribution in the Special Scheme.
• The tenure of the Special Scheme shall be co-terminus with the tenure of the Existing Scheme, unless liquidated earlier. In the event of the liquidation of the Existing Scheme, the Special Scheme shall also be liquidated.

• Special Schemes shall be used only for making Co-investments (with or without leverage) in the portfolio companies of Existing Schemes.
• A Special Scheme shall be permitted to invest only in a single portfolio company. However, a Special Scheme shall be permitted to hold securities of more than one entity if such securities are issued as a result of one or more corporate actions or restructurings at the portfolio company level, including but not limited to amalgamation, demerger, slump.

• Any person shall be eligible to co-invest in the Special Scheme, subject to the minimum contribution requirements as mentioned in the FM Regulations.
• The FME, in its sole discretion, may choose to contribute in the Special Scheme

Within 45 days from the date making a co-investment, the Special Scheme should file with IFSCA a Term Sheet as per the format given in Annexure A of the IFSCA Co-Investment Circular, containing specified disclosures,. Banking Units in IFSC shall treat such Term Sheet as the Special Scheme’s constitutional document.

The leverage undertaken by the Special Scheme shall be within the overall leverage limits specified in the PPM of the Existing Scheme. The Existing Scheme and investors of the Special Scheme shall be permitted to create encumbrance, over their ownership interests in the Special Scheme, in favour of a lender to the Special Scheme.

The Special Scheme structure issued by the IFSCA allows a VCS or a Restricted Scheme set up under the FM Regulations to co-invest via an SPV. The SPV can raise funds not only from existing investors, but also from any person eligible to invest in the VCS or Restricted Scheme which has launched the SPV. IFSCA’s position on co-investments contrasts with SEBI’s regime for co-investments in the following manner:

• The Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“SEBI AIF Regs”) define co-investment to mean an investment made by the investment manager or sponsor or investor of a Category I or II AIF in investee companies where such Category I or Category II AIF makes an investment. In other words, SEBI’s definition of “co-investment” would not apply to an investment in an investee company by a person who has not invested in the relevant AIF. Category III AIFs registered with SEBI cannot offer co-investments to their investors.
• A Category I and II AIF registered with SEBI can offer co-investments to its investors only if it has a Co-Investment PMS Licence under the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020 (“SEBI PMS Regs”).
• On May 9, 2025, SEBI issued a consultation paper proposing a new co-investment vehicle (“CIV”) structure for co-investments. This consultation paper proposes to do away with the requirement to obtain a Co-Investment PMS Licence, but applies only to unlisted securities. So, if a Category II AIF registered with SEBI has invested in listed securities, it can use the CIV structure only for co-investing its unlisted portfolio companies.

IFSCA’s framework does not allow a Special Scheme to invest in more than one portfolio company. This is in contrast to the consultation paper issued by SEBI on May 9, 2025, which proposes that the investment manager of an AIF should set up a single CIV for all co-investments in relation to the main AIF. However, if SEBI is of the view that this will impede severely the pro rata construct inserted in the SEBI AIF Regs vide the SEBI (AIF) (Fifth Amendment) Regulations, 2024 which came into effect on November 18, 2024, then SEBI may consider allowing one CIV per co-investment with no restrictions as to the number of CIVs that could co-invest alongside the main AIF.

You can find the IFSCA Co-Investment Circular here.