SEBI’s Proposes New Rules to Enhance Flexibility in the Winding Up of AIF Schemes

SEBI has issued a consultation paper dated February 5, 2026 (“Consultation Paper”) seeking public comments on proposals aimed at streamlining the processes pertaining to the winding up of AIF schemes and the surrender of AIF registrations.

Regulation 29 (7) of the SEBI (Alternative Investment Fund) Regulations, 2012 (‘AIF Regulations’) prescribes that after an AIF scheme’s term expires, the assets of the scheme should be liquidated within the liquidation period and the proceeds distributed to investors in the AIF scheme after satisfying all liabilities of the scheme. Regulation 2(1) (pb) of the AIF Regulations defines Liquidation Period as a period of one year following the expiry of tenure of the scheme. Regulation 29(11) of the AIF Regulations provides that upon winding up of the AIF, its certificate of registration shall be surrendered to the Board. An AIF filing for surrender of registration is required to submit various documents /declarations including the AIF’s bank account statement evidencing NIL balance, to SEBI.

SEBI has observed that certain AIFs or schemes of AIFs continue to retain proceeds of liquidated assets beyond the liquidation period or dissolution period (“permissible fund life”), for reasons such as the need to meet potential claims arising out of pending litigation or anticipated tax demands or to meet operational liabilities.

SEBI proposes to allow AIF schemes to retain funds beyond the permissible fund life instead of mandatorily distributing all proceeds within the liquidation period, but only in defined circumstances, such as:

• Where there is demonstrable receipt of a litigation or demand notice from tax authorities or any regulatory / law enforcement agency.
• For anticipated litigation/tax liabilities if consent is obtained from at least 75% of investors by value.
• For operational expenses, where amounts are substantiated through invoices, supporting documents, or by reference to comparable past expenses.

All such retained monies must be invested only in liquid, high‑quality instruments in line with Regulation 15(f) until final distribution.

Pursuant to the proposal to allow the retention of funds to meet operational expenses, the Consultation Paper also proposes that SEBI should prescribe specific heads of operational expenses for which retention of monies beyond the permissible fund life will be allowed.

SEBI proposes that AIFs which intend to surrender registration and have one or more schemes retaining funds under Proposal 1 may be tagged as “inoperative”.  Such inoperative AIFs can complete litigation, tax, or operational matters with reduced ongoing compliance, instead of being fully active funds.  However, they can apply for final surrender of registration only after all liabilities are settled and the fund’s bank balance is NIL.  During this inoperative phase, retained monies remain subject to investment restrictions under Regulation 15(f).

SEBI proposes that AIFs which have not retained any monies beyond the permissible fund life, but still exist only for contingent reasons (e.g. possible future inflows from favourable litigation), may also apply for inoperative status. These are funds with no active fund management and no money retained, yet they remain subject to the full compliance regime.   The proposal allows such AIFs to be tagged inoperative to align their regulatory burden with their limited residual activities.  They would then be governed by the same inoperative framework as other inoperative funds (rationalised filings, no new schemes, etc.).

SEBI proposes a specific, lighter compliance framework for all inoperative AIFs. First, such AIFs would no longer need to submit PPM audit reports, CTR reports or quarterly filings to SEBI.   Second, they must instead submit an annual status report of retained money to SEBI and investors, with all retained monies invested strictly in line with Regulation 15(f).  Third, inoperative funds would be barred from launching new schemes and from charging management fees.  Fourth, amounts retained specifically for operational expenses may be held only for a maximum of three years, after which final settlement and surrender must occur.

The Consultation Paper can be found here.

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Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com