SEBI, on Tuesday, allowed Alternative Investment Funds (AIFs) to retain liquidation proceeds beyond their permissible fund life under specified conditions and introduced an 'Inoperative Fund' framework for schemes that have wound up investments but continue to have residual obligations.

Under the new framework, AIFs can retain liquidation proceeds if they have received litigation notices or regulatory demands, secured approval from at least 75 per cent of investors by value to retain funds against anticipated liabilities, or need to meet residual operational expenses related to winding up.

SEBI clarified that litigation-related communications include notices from tax authorities, regulators, law enforcement agencies, courts, investors or counterparties that could lead to tax, legal or regulatory liabilities, even if such liabilities have not yet crystallised.

Where funds are retained against anticipated liabilities, managers must disclose the amount proposed to be retained and the expected duration while seeking investor approval. If the retention is for residual operational expenses, the period cannot exceed three years from the end of the permissible fund life.

Pending litigation

The regulator has also introduced an 'Inoperative Fund' status for AIFs that have liquidated all investments but continue to hold retained proceeds or remain registered due to pending litigation. Such funds will not be allowed to make fresh investments, launch new schemes or charge management fees. Retained monies may be invested only in instruments permitted under the AIF Regulations.

To ease compliance for such entities, SEBI has exempted Inoperative Funds from several regulatory requirements, including quarterly and annual activity reports, compliance test reports, performance benchmarking disclosures, audit of private placement memorandum terms and certain certifications for key investment personnel.

Implementation norms

The Standard Setting Forum for AIFs (SFA) will frame implementation standards for eligible operational expense heads in consultation with SEBI.

AIFs retaining funds, as well as Inoperative Funds, will be required to submit an annual report on retained monies and outstanding liabilities to SEBI and investors within 30 days of the end of each financial year.

The circular, effective immediately, also extends the framework to Venture Capital Funds registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996.

Published on June 16, 2026