SEBI’s Consultation Paper proposes a new framework for co-investments and permits investment managers to offer advisory services in listed securities

The Securities and Exchange Board of India (“SEBI”) has released a consultation paper dated May 9, 2025 (“Consultation Paper”), proposing a new framework through which alternative investment funds (AIFs) can offer co-investment opportunities in unlisted securities. The Consultation Paper also proposes to remove the current prohibition on investment managers of AIFs to provide advisory services in listed securities.

The Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“SEBI AIF Regs”) and the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020 (“SEBI PMS Regs”) were amended in December 2021 to facilitate co-investments. The 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.

Under the SEBI PMS Regs, discretionary Portfolio Managers cannot invest funds of their clients in unlisted securities and the Portfolio Managers offering non-discretionary or advisory services can invest or advise investment in unlisted securities only up to 25% of the assets under management of the clients. Since co-investment is usually done in unlisted securities, the portfolio management route earlier followed by investment managers became restrictive for such co-investment. Further, as per SEBI PMS Regs, clients have the option for early termination of the portfolio management contract/agreement as well as for the early withdrawal of funds and securities, thereby allowing the investor to exit from an investment before the expiry of the tenure of the contract. The investment manager offering co-investment is expected to align the interests of co-investors with those of the AIF so that the interests of investors of the AIF are not adversely affected by the co-investment. If the co-investor makes an early exit/divestment from the investment, such decision may not align the interests of the investors of the AIF with that of the co-investor. This may adversely affect the interests of investors of the AIF.

Apart from the portfolio management route, an investment manager may facilitate co-investment through investment advisory route. However, the same does not enable the investment manager of an AIF to maintain alignment of interests of the investors of the AIF with that of the co-investor, since the co-investor has the discretion to take investment management decisions, including exit from investment and the investment manager only provides advice to the co-investor.

A SEBI working group found that seeking an additional SEBI registration as Portfolio Manager is not only an added cost to the investment manager but also poses hindrance in offering co-investment rights to the investors due to the restrictions contained under the PMS Regulations. It also affects competitiveness of the domestic investment managers as their global competitors are not subject to any constraints on co-investments and can thus easily acquire large stakes in Indian companies or participate in large ticket size deals. When co-investment is made directly into a portfolio company, it enlarges the cap table, which portfolio companies do not like. Also, investment transactions get more complicated since portfolio companies have to deal with multiple investors.

The following are the salient features of SEBI’s proposals with respect to Co-Investment:

• Category I or Category II AIFs shall be allowed to create a separate Co-Investment Vehicle (“CIV”) tagged to the AIF to enable co-investments. The CIV shall be registered in the same category as the main AIF. A shelf PPM of the CIV has to be annexed to the PPM of the main AIF at the time the main AIF applies to SEBI for registration. Existing AIFs intending to offer Co-Investment opportunities to their investors may also file the shelf PPM with SEBI.
• The shelf PPM of the CIV should set out details of the principles and parameters on the basis of which the investors of the main AIF will be offered co-investment rights. The basis could be the quantum of the investor’s capital commitment in the main AIF. The co-investment policy of the investment manager has be made available to prospective investors prior to their on-boarding in the main AIF.
• Only Accredited Investors will be offered co-investment opportunities through the CIV.
• The investment manager shall seek registration of the CIV at the time of the first co-investment deal by filing the shelf PPM with SEBI. The application for registration of the CIV shall be deemed approved if SEBI does not raise any query within 30 days of such filing.
• The CIV shall be given a separate registration number so that a separate PAN can be obtained for tax purposes.
• The tenure of CIV shall be co-terminus with the main AIF and the minimum tenure of 3 (three) years to not be applicable to a CIV.
• A number of requirements under the AIF Regulations shall not apply to CIVs, such as the requirement to not invest more than 25% of the fund in a single investee company. CICs would not require any sponsor commitment.
• The Consultation Paper states that the investment manager should set up a single CIV for all co-investments in relation to the main AIF, but also says that if SEBI is of the view that this will impede severely the pro rata construct inserted in the SEBI AIF Regs vide the Securities and Exchange Board of India (Alternative Investment Funds) (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.

Regulation 20(15) of AIF Regulations, states that “the manager shall not provide advisory services to any investor other than the clients of co-investment portfolio manager as specified in PMS Regulations, for investment in securities of investee companies where the AIF managed by it makes investment.” The phrase “for investment in securities of investee companies where the AIF managed by it makes investment” does not differentiate between listed or unlisted securities. Therefore, currently the investment manager of AIFs cannot provide advisory services to investors other than co-investors on listed securities where the AIF managed by it has made investment.

The Consultation Paper has proposed that “Accordingly, it is viewed that in respect of investment in listed securities of investee companies, manager of AIF may provide advisory to any investors, irrespective of whether the AIFs managed by it has made investment in such listed securities or not.”. We interpret this sentence to mean that the investment manager of an AIF may offer advisory services to investors in the AIF with respect to any listed security even if the AIF has not invested in such listed security.

• SEBI has not explored the possibility of permitting persons who have not invested in the AIF co-investing in its portfolio companies alongside investors in the AIF. 
• The replacement of the Co-Investment PMS Licence with a CIV model should be welcomed. However, the CIV model will not allow co-investors to remain invested in the portfolio company for a period longer than the term of the AIF. Just as many AIFs struggle to windup their investments at the time of expiry of their terms, if the Consultation Papers proposals are implemented, AIFs may also struggle to provide an exit for their co-investments. 
• The Consultation Paper is unclear if, in the event an AIF opts for a dissolution period, the CIV’s tenure can also be extended to till expiry of the dissolution period. 
• The Consultation Paper requires the investment manager to seek registration of the CIV at the time of the first co-investment deal by filing the shelf PPM with SEBI. It many cases, the requirement for co-investment may not arise until the AIF makes a few portfolio investments. If this proposal is implemented, all AIFs shall end up filing a shelf PPM at the time of the original application to SEBI. 
• SEBI’s preference for each AIF to have a single CIV for all its co-investments seems inexplicable since each co-investment would have varying degrees of participation from its investors and each CIV would have a common pool. It remains to be seen if SEBI permits CIVs to have sub-pools for each co-investment. 
• It is unclear if any registration fee will be payable to SEBI when the investment manager seeks registration of the CIV at the time of the first co-investment deal by filing the shelf PPM with SEBI.

SEBI’s Consultation Paper can be found here.