An alternative investment fund (“AIF”) is a fund established or incorporated in form a trust or a company or a limited liability partnership or a body corporate which is a privately pooled investment vehicle which collects funds from investors/limited partners (“LPs”) for investing in various companies.
When an AIF finds a promising deal, the AIF’s own capital is often not enough. The deal may be too large for the AIF’s concentration limits, or some investors/LPs may want more exposure than their commitment allows. The usual answer is co-investment wherein the manager offers selected investors the chance to put in additional money, alongside the AIF, in that one company.
For years this was handled informally in India. Post 2020 it has a formal home through SEBI (Portfolio Managers) Regulations, 2020 (“PMS Regulations”) and/or through PMS Regulations (“CPMS Route”) under the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”). This article explains what co-investment means, how it worked before, how the regulatory framework arrived, and the modes available today.
What co-investment means
In simple terms, co-investment is an investment made directly in a portfolio company, alongside the AIF, outside the AIF’s own pool of capital. The LPs get exposure to that single deal without increasing or adding on to the existing fund commitment.
Prior to the CPMS Route being introduced, there was no option for the investors/LPs to invest alongside the AIF. However, the AIF Regulations, pursuant to the introduction of PMS Regulations, permitted such co-investments only to Category I and Category II AIFs.
How it was before: the pre-framework era
The concentration limits applicable to Category I and Category II AIFs explain much of the demand. Under regulation 15(1)(c) of the AIF Regulations, Category I and II AIFs cannot invest more than 25% of their investable funds in a single investee company[1]. A larger cheque for a promising company, therefore, had to be sourced from outside the AIF itself. As the industry commonly understood it, managers found that capital in a few ways:
1. Special purpose vehicles: A special purpose vehicle (SPV) was set up for the single deal, pooling the co-investors’ money, with the manager typically providing the arrangements and
2. Side letters and special rights: Investors/LPs who wanted extra access negotiated it as a bundle of rights in their side letters.
The first formal step: the PMS route
The first formal route came through the SEBI (Portfolio Managers) Regulations, 2020, which created the role of a co-investment Portfolio Manager. Under this route, a SEBI-registered portfolio manager is appointed to handle co-investments by investors of Category I and II AIFs. LPs hold securities in their own names, under a portfolio management arrangement[2].
As per report released by SEBI in July 2025 (“Report”)[3], SEBI highlighted, inter alia, the following issues faced by the Investment Managers with the co-investment route under the PMS Regulations:
● the co-investment regime under PMS Regulations requires obtaining additional registration under PMS Regulations which is an additional cost to the Investment Manager in addition to conditionalities under the PMS Regulations;
● affected the competitiveness of the domestic Investment Managers as their competitors (global private equity funds scouting Indian deals) were not subject to such co-investment constraints and acquired larger stakes in Indian companies;
The Report further highlighted the issues faced by the LPs and the portfolio companies. Pursuant to the budget announcement in FY 2023-24, a working committee was constituted to review the compliance requirements under the AIF Regulations. This working committee proposed three models, including CIV Scheme (defined below) which was adopted in September, 2025.
The second channel: the co-investment scheme (CIV)
In September 2025[4], SEBI amended the AIF Regulations and introduced co-investment scheme, commonly called a CIV scheme, launched within the AIF structure.
CIV Scheme is defined as a scheme of a Category I or II AIF that facilitates co-investment to investors of a particular scheme of the AIF, in unlisted securities of an investee company where the AIF scheme is investing or has invested (“CIV Scheme”).
The regulation 17A of AIF Regulations governs it. Its main requirements are:
● Accredited investors only: Only accredited investors of the Category I or II AIF can invest in a co-investment scheme.
● Shelf placement memorandum: The manager files a shelf private placement memorandum in the prescribed format with SEBI through a merchant banker, with a fee of INR 1,00,000, before offering co-investment opportunities.
● One scheme, one deal: A separate co-investment scheme is launched for each co-investment, in line with the shelf private placement memorandum, and each scheme invests in only one investee company.
● No fund-of-funds structure: A co-investment scheme cannot invest in units of other
● Angel funds and Category III AIFs excluded: An angel fund and Category III AIF cannot launch a co-investment scheme.
● Parity of terms: Terms for managers, sponsors, co-investors or the co-investment scheme cannot be more favourable than the AIFs, and the timing of exit must be identical to the AIF’s
● Wind-up on exit: The scheme is wound up when the co-investment is
● Provisions inapplicable: Certain provisions that are generally applicable to Category I and Category II AIFs are not applicable to CIV Scheme like minimum corpus requirement, minimum capital commitment requirement, etc as these do not make sense for a single-deal
● Cap Limit: An investor’s co-investment in an investee company across CIV Schemes cannot exceed three times that investor’s contribution to the AIF scheme’s investment in that This cap does not apply to multilateral and bilateral development financial institutions, State Industrial Development Corporations, and government-owned or government-controlled entities, including central banks and sovereign wealth funds.
● Ring Fencing: Each CIV Scheme must have its own bank account and demat account, and its assets are ring-fenced from other schemes.
● No back door access: A CIV Scheme cannot make an investment that would give investors/LPs an interest they could not hold directly, would trigger additional regulatory disclosure if made directly, or where the company cannot take money from the investor directly.
● Shared expenses. Co-investment expenses are shared between the AIF scheme and the CIV Scheme in the ratio of their investments.
The modes of co-investment today
Putting the pieces together, there are three recognised modes.
1. Co-investment through a CIV Scheme: A separate single-deal scheme within the AIF structure. Accredited investors pool their money in the scheme, which holds the investment. This offers a regulated structure with the manager remaining accountable.
2. Co-investment through a Co-investment Portfolio Manager: A SEBI-registered portfolio manager runs the co-investment on behalf of AIF investors/LPs under the PMS Regulations.
3. Co-investment by the manager or sponsor. The definition of co-investment under AIF Regulations also covers investment by the manager or sponsor alongside the fund. This is subject to the same rule that its terms and exit must be no more favourable than the fund’s. It is separate from the sponsor’s/manager’s continuing interest requirement under AIF Regulations, which must be held in the AIF itself.
CIV scheme vs Co-investment through PMS Route
The CIV Scheme is better for managers and investee companies, it needs no registration, shares expenses pro rata with the AIF scheme, and gives the company one ring-fenced holder instead of many co-investors. The PMS route is better on reach and ticket size, since it is open to non-accredited investors and the documents reviewed note no cap, whereas the CIV Scheme is limited to accredited contributors and capped at three times their contribution.
Why the framework matters
The shift from informal practice to a defined framework does three things:
It brings co-investment under regulatory discipline: Parity of terms, identical exit timing and the bar on borrowing mean co-investors cannot get a better deal than the AIF’s investors.
It resolves the advisory question: AIF Regulations now permit advisory services only to CIV Scheme investors/LPs or to PMS co-investment clients, the grey zone of informal advice has closed[5].
It gives managers a repeatable structure: A manager files one shelf private placement memorandum[6] and launches deal-specific schemes under it, instead of designing a new SPV and side-letter package each time.
Conclusion
Co-investment began as a commercial answer to a structural problem i.e. great deals that did not fit within an AIF’s limits. For years it ran on side letters, SPVs and informal advice, with an uncertainty around who was responsible and whether all investors/LPs were treated fairly. The PMS Regulations route gave it a first regulated channel. The September 2025 amendment to AIF Regulations added a second route, the single-deal CIV Scheme, with clear conditions on eligibility, ring-fencing, leverage, expenses and parity.
For AIF managers and LPs, the practical points are to choose one route per investor/LP per company, keep co-investment terms and exits in line with the AIF, and document the arrangements in the shelf placement memorandum.
*Rohini Nair, Partner, ANB Legal
**Vinisha Shetty, Associate, ANB Legal
[1] Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 15 (1) (c)
[2] Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 17A
[3] Providing flexibility to AIFs to make co-investment within the AIF structure under SEBI (Alternative Investment Funds) Regulations, 2012, Securities Board of India (July, 2025), https://www.sebi.gov.in/sebi_data/meetingfiles/jul-2025/1751437676387_1.pdf
[4] Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 17A; Master Circular to Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (as amended on June, 2026), Chapter 6.
[5] Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 20(15)
[6] Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 17A (2)