Securities and Exchange Board of India (“SEBI”), vide its notification dated September 8, 2025, has notified the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025 (“AIF Amended Regulations”), thereby amending the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”). The AIF Amended Regulations define and establish a framework for co-investment schemes by adding Regulation 17A which lays down the conditions for co-investment by category I and II Alternative Investment Funds (“AIFs”). A significant overhaul has also been made to the treatment of angel funds, which are now classified under category I AIFs. The angel funds are now permitted to raise capital exclusively from accredited investors.

In this regard, SEBI, vide its circular dated September 9, 2025 (“Co-investment Circular”), has laid down the framework for AIFs to make co-investment within the AIF structure under the AIF Regulations. This is in addition to the co-investment currently being facilitated to investors of AIFs through co-investment Portfolio Managers under the SEBI (Portfolio Managers) Regulations, 2020 (“PMS route”), with an aim to provide: (a) ease of doing business for AIFs; and (b) to permit category I and category II AIFs to offer co-investment facility to accredited investors by launching a separate co-investment scheme (“CIV scheme”).

Additionally, SEBI, vide its circular dated September 10, 2025 (“Revised Angel Fund Circular”), introduces comprehensive overhaul in the regulatory treatment of angel funds, with the objective of: (a) improving ease of doing business; (b) enhancing risk reduction; and (c) providing operational clarity to angel funds.

The AIF Amended Regulation read with the Co-investment Circular and Revised Angel Fund Circular lays down the following framework:

Conditions for co-investment by category I and II AIFs:

The AIF Amended Regulations have introduced a revised definition of ‘co-investment’, replacing the earlier “co-investment means investment made by a Manager or Sponsor or investor of a Category I or II Alternative Investment Fund in unlisted securities of investee companies where such a Category I or Category II Alternative Investment Fund makes investment.”

• Co-investments by investors of category I or II AIFs are allowed only through 2 routes: either via a CIV scheme registered under the AIF Regulations or through a PMS route.
• Prior to offering any co-investment opportunity, the AIF manager shall file a shelf placement memorandum with SEBI by paying a filing fee of INR 1 lakh through a merchant banker, in the format prescribed in the Annexure of the Co-investment Circular. This memorandum shall include the principal terms of the co-investment, governance structure and applicable regulatory framework.
• For each co-investment opportunity, a separate CIV scheme shall be launched. Each CIV scheme is required to invest in only 1 investee company, cannot invest in units of other AIFs, and shall maintain distinct bank and demat accounts. Additionally, the assets of each CIV scheme shall be ring-fenced to ensure clear separation from other schemes.
• Only accredited investors of category I or II AIFs are eligible to invest in a CIV scheme. An investor who is excused, excluded, or has defaulted in contributing to an AIF scheme’s investment in an investee company shall not be allowed to co-invest in that investee company.
• Investors in CIV schemes are subject to a limit where their total co-investment in an investee company across all CIV schemes cannot exceed 3 times their commitment in the AIF scheme’s investment in that company. However, this limit does not apply to certain exempted investors including multilateral or bilateral development financial institutions, state industrial development corporations, and government-owned or controlled entities such as sovereign wealth funds and central banks.
• Investors in a CIV scheme shall have pro-rata rights to both the investments made and the distribution of proceeds based on their contributions. However, a portion of the returns, such as carried interest or additional returns, may be allocated to the sponsor or manager of the AIF, or employees or directors, or partners of the manager of the AIF as an exception.
• The timing of exit from the co-investment in an investee company shall be identical to the exit of the AIF scheme from the investment in the investee company.
• The terms of co-investment in an investee company by the manager or sponsor, or co-investor or CIV scheme shall not be more favourable than the terms of investment by the AIF.
• The manager shall ensure that the CIV scheme does not make any investment that would: (A) result in its investors indirectly acquiring or holding an interest or exposure in an investee company that they are not permitted to acquire or hold directly; (B) trigger additional regulatory disclosure requirements had the investors invested directly, or (C) where the investee company is not eligible to receive investments directly from such investors.
• CIV schemes are prohibited from borrowing funds or engaging in any kind of leverage, either directly or indirectly.
• Expenses related to the co-investment shall be shared proportionately between the AIF scheme and the CIV scheme in line with their respective investment ratios.

Revised regulatory framework for angel funds:

• All existing angel funds shall be considered to be registered as category I AIF – Angel Funds, instead of being a sub-category under category I AIF – Venture Capital Funds.
• Angel funds are permitted to raise capital exclusively from accredited investors through the issuance of units, without any minimum investment requirement, in the manner as may be specified by SEBI from time to time.
• Angel funds are required to invest directly in the investee companies and are not permitted to launch co-investment schemes or any other schemes aimed at soliciting investments. Their investment focus shall remain on startups that are not promoted or sponsored by corporate groups with a turnover exceeding INR 300 crores. Each investment made by an angel fund shall include participation from at least 2 accredited investors. The primary focus of an angel funds is on startups, but they may make additional or follow-on investments in non-startup entities, provided they meet conditions specified by SEBI. The total investment by an angel fund in a single investee company shall not be less than INR 10 lakh and shall not exceed INR 25 crores.
• Follow-on investments by angel funds are permitted only under specific conditions. These are allowed only if the post-issue shareholding of the fund in the investee company does not exceed its pre-issue shareholding. The total investment in an investee company including follow-on investments, shall not exceed INR 25 crores. Contributions towards follow-on investments can be accepted only from the original contributors on a pro-rata basis. If any portion of the rights remains unused, it may be offered to the remaining existing investors within the fund.
• Angel fund investments are generally subject to a standard lock-in period of 1 year. However, this lock-in is reduced to 6 months in cases where the investment is sold to a third party, excluding transactions such as buy-backs or promoter buyouts. The applicability and enforcement of the lock-in period are also subject to the provisions in the articles of association of the investee company.
• Angel fund investors are entitled to pro-rata rights in both investments and returns. However, exceptions to this principle are permitted in cases where there are carried interest or profit-sharing arrangements agreed upon between an investor and the fund manager or sponsor.
• Angel funds are permitted to make overseas investments, provided they comply with applicable guidelines issued by the Reserve Bank of India (“RBI”) and SEBI. The limit for overseas investments is capped at 25% of the fund’s total investments, calculated at cost, as on the date of the application seeking approval for such investment.
• Sponsors and managers of angel funds are required to maintain a continuing interest in the fund amounting to at least 0.5% of the amount invested or INR 50,000, whichever is higher. All investment opportunities shall be transparently disclosed to all investors in the fund, and investments can only be made from those investors who explicitly approve each deal. Additionally, any investments involving related parties or existing portfolio companies shall be fully disclosed to investors at the time of seeking their approval.
• Filing of the term sheet with SEBI is no longer mandatory for angel funds; however, the fund shall be required to maintain the term sheet internally. Additionally, for each investment made, the fund shall include and maintain a detailed list of investors along with their respective contributions.

To read the AIF Amended Regulations click here, to read the Co-investment Circular click here & to read the Revised Angel Fund Circular click here.

For any clarification, please write to:

Mr. Yatin Narang
Partner
[email protected]