If you invest in Alternative Investment Funds (AIFs), a recent move by the Securities and Exchange Board of India (SEBI) could make the fund closure process smoother and more transparent.
SEBI has introduced new guidelines that allow AIFs to retain a portion of investor proceeds for pending obligations while also creating a new category called “Inoperative Funds”.
The changes aim to address practical challenges that often arise when a fund reaches the end of its life.
Why was AIF Closure Process change needed?
When an AIF completes its investment cycle, it distributes the proceeds to investors and prepares to close down.
However, certain matters may still remain unresolved, such as:
- Tax assessments or disputes
- Regulatory proceedings
- Ongoing litigation
- Final operational expenses
Previously, these pending issues could delay the formal closure of a fund, even after most of the money had been returned to investors.
To address this challenge, SEBI has now provided a structured framework that allows funds to retain only the amount required for such obligations while distributing the remaining proceeds to investors.
What does this mean for you?
Faster distribution of your money
Instead of waiting on every loose end, you should see most of your proceeds distributed sooner. The fund retains only what it actually needs for pending obligations, not the entire balance, until those matters are sorted out.
Three ways a fund can justify holding back your money
This is the part worth paying closest attention to. SEBI hasn’t given fund managers a blanket right to sit on your money, they need to clear one of three specific bars:
- They’ve actually received a notice – a show-cause notice, a reassessment notice, a summons, or any official communication from a tax authority, regulator, court, or counterparty — pointing to a real tax, legal, or regulatory exposure. No investor vote needed here.
- At least 75% of investors by value agree to the retention, for cases where the liability is only anticipated or probable rather than already in motion. If a manager goes this route, they have to disclose upfront exactly how much they want to hold and roughly how long.
- They can substantiate, with invoices or past expense records, that the money is for genuine wind-down costs. Even then, this kind of retention can’t run longer than three years from the end of the fund’s permissible life.
So it comes down to an actual demand notice, your explicit consent, or a documented expense trail, not a manager’s general sense that it’s safer to keep a cushion.
Your money doesn’t just sit idle
Whatever gets retained has to be invested in safe, SEBI-approved instruments — liquid mutual funds, government securities, T-bills, or bank deposits — rather than held as cash.
Funds with retained money also have to file an annual status report, to both SEBI and to investors, within 30 days of each financial year-end, laying out how much is retained, how much has already been paid out, and when the rest is expected to follow.
Lower costs while you wait
This detail is easy to miss but matters: once a fund is tagged “Inoperative,” it can no longer charge management fees.
So if your money is parked while a tax dispute plays out, you’re at least not paying someone to manage that limbo.
Less paperwork for the fund, fewer reasons for delay
An Inoperative Fund is also exempt from a chunk of the routine compliance load that applies to active funds, things like quarterly and annual activity reports, the requirement to maintain a custodian, and NISM certification for the investment team.
None of that changes what you’re owed; it just means the fund isn’t spending time and money on paperwork for a portfolio that’s already effectively wound down.
What is an inoperative fund?
An Inoperative Fund is an AIF that has:
- Completed its investment activities
- Distributed proceeds to investors
- Retained a limited amount for unresolved obligations
- Stopped undertaking new investment activities
Such funds cannot launch new schemes and continue to remain under SEBI’s oversight until all pending matters are resolved.
The bigger picture
India’s AIF industry has grown significantly over the past few years, and an increasing number of funds are approaching maturity.
SEBI’s latest framework provides greater clarity on how these funds can be wound up while protecting investor interests.
For you as an AIF investor, the changes could lead to quicker access to distributed proceeds, improved transparency, and a more efficient closure process without compromising regulatory safeguards.
