SEBI AIF Amendment 2026: Inoperative Fund Status, Retained Liquidation Proceeds and the Rs 1,000 Social Impact Minimum
The Securities and Exchange Board of India (SEBI) has amended the SEBI (Alternative Investment Funds) Regulations, 2012 through the SEBI (Alternative Investment Funds) (Amendment) Regulations, 2026, Notification No. SEBI/LAD-NRO/GN/2026/303. The amendment is short. It makes three changes: an AIF can now be tagged as an “inoperative fund“, the distribution of liquidation proceeds is made subject to conditions SEBI may specify, and the minimum ticket for an individual in certain social impact funds falls from Rs 2 lakh to Rs 1,000. SEBI has since specified the conditions for the first two changes in a circular dated 16 June 2026. This post explains what changed, which funds and investors it affects, and what managers and trustees need to do.
Key Takeaways
- Three changes, in force from 18 April 2026. SEBI’s consolidated text of the AIF Regulations records all three amendments as effective from 18 April 2026.
- Inoperative fund, Regulation 29(10A). An AIF “may be tagged as an inoperative fund, in such manner and subject to conditions as may be specified by the Board from time to time.” SEBI has specified the manner and conditions in Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026 dated 16 June 2026.
- Distribution of liquidation proceeds, Regulation 29(7). Distribution after satisfying all liabilities is now “subject to conditions as may be specified by the Board from time to time”. The same circular allows a scheme to keep proceeds beyond its permissible fund life only on one of three grounds: a litigation notice or demand, investor consent for an anticipated liability, or documented residual winding up expenses.
- An inoperative fund cannot launch a new scheme or charge management fees. Money it retains must be invested only as permitted by Regulation 15(1)(f). In return, ten listed reporting and operational requirements stop applying, and an annual retention status report takes their place.
- Social impact funds, Regulation 10(c). For a social impact fund that invests only in securities of not for profit organisations registered or listed on a social stock exchange, the minimum investment by an individual investor is now Rs 1,000 instead of Rs 2 lakh. No other minimum investment limit changed.
What the Amendment Regulations Change
The amendment was made by SEBI’s Board under the SEBI Act, 1992 and published in the Gazette of India, Extraordinary, Part III, Section 4. The notification is headed “Mumbai, the 16th April, 2026” and says the regulations come into force on the date of their publication in the Official Gazette. SEBI’s consolidated regulations record the changes as effective from 18 April 2026, and SEBI’s own circular of 16 June 2026 says the AIF Regulations were “amended and notified on April 18, 2026”.
| Provision | Before the amendment | After the amendment |
|---|---|---|
| Regulation 10(c), third proviso | Minimum investment by an individual investor in a social impact fund that invests only in securities of not for profit organisations registered or listed on a social stock exchange: Rs 2 lakh | The same minimum is now Rs 1,000 |
| Regulation 29(7) | Within the liquidation period, assets are liquidated and the proceeds are distributed to investors after satisfying all liabilities | The same, now “subject to conditions as may be specified by the Board from time to time” |
| Regulation 29(10A), new | No such provision | An AIF may be tagged as an inoperative fund, in the manner and subject to the conditions SEBI specifies |
SEBI amended the AIF Regulations again on 14 July 2026 through the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2026. SEBI’s consolidated text as amended up to 14 July 2026 carries Regulations 10(c), 29(7) and 29(10A) in the same words as above.
How SEBI Has Filled in the Detail: The Circular of 16 June 2026
Regulations 29(7) and 29(10A) leave the conditions to SEBI. SEBI set them out in Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026 dated 16 June 2026, “Guidelines for winding up of AIFs with respect to retention of proceeds and ‘Inoperative Fund’ status”. The circular came into force immediately. Its provisions now also sit in Chapter 25 of SEBI’s Master Circular for AIFs dated 3 June 2026 (last updated on 7 September 2026).
1. Keeping money back after the fund life ends (Regulation 29(7))
The circular uses the term “permissible fund life” for the end of the liquidation period or the dissolution period, as applicable. An AIF or its scheme may retain liquidation proceeds beyond that date only if it satisfies at least one of these conditions:
- A litigation notice or demand has actually been received. This covers any official written communication from a tax authority, regulator, law enforcement agency or court, or from an investor or counterparty in relation to litigation, that indicates a potential tax, regulatory or legal liability. The circular says this includes show cause notices, reassessment notices and investigation summons, and is not restricted to crystallised demand notices.
- Investors consent for an anticipated liability. Where money is kept for a possible or probable litigation or tax demand, at least 75% of investors by value of their investment in the scheme must consent. While seeking consent, the manager must disclose the amount to be retained and the estimated period of retention.
- Residual winding up expenses are substantiated. Amounts kept for residual operational expenses must be backed by invoices, supporting documents or records of comparable expenses in earlier years. This retention cannot exceed three years from the end of the permissible fund life. The circular says implementation standards for the expense heads are to be formulated by the Standard Setting Forum for AIFs in consultation with SEBI.
All retained money must be invested in accordance with Regulation 15(1)(f), which permits investment in “liquid mutual funds or bank deposits or other liquid assets of higher quality such as Treasury bills, Triparty Repo Dealing and Settlement, Commercial Papers, Certificates of Deposits, etc.” Once the liabilities are settled and the retained money is distributed, the scheme is wound up under Regulation 29.
2. Who can apply for Inoperative Fund status (Regulation 29(10A))
The tag is not automatic. An AIF applies for it, and it is tagged only when SEBI approves the application. Two kinds of AIF may apply:
- An AIF with one or more schemes that have retained money on one of the three grounds above, and which intends to surrender its registration.
- An AIF whose schemes have not retained any money beyond the permissible fund life, but which wants to keep its registration solely because it awaits a favourable outcome in a pending litigation.
The application is made in the format in Annexure A to the circular and emailed to [email protected]. It has four parts: details of the AIF, scheme level details (including fund life, extensions, dissolution period, liquidation proceeds distributed and retained, the ground for retention and the end date for resolving and distributing any retained amount), an undertaking by the manager, and an undertaking by the trustee, Board of Directors or designated partners that the application is bona fide. An inoperative fund may apply to surrender its certificate of registration only after its liabilities are satisfied and the retained money is distributed to investors in all its schemes.
3. What changes once a fund is tagged
From the date of the tag, an inoperative fund must invest retained money only under Regulation 15(1)(f), cannot launch any new scheme, and cannot charge management fees on any of its schemes. Annexure B to the circular lists the requirements that stop applying:
| Requirement that stops applying | From when |
|---|---|
| Limited Quarterly Activity Report | The quarter after the quarter in which the fund is tagged |
| Annual Activity Report | The financial year after the year in which the fund is tagged |
| Audit of terms of the PPM; intimation of changes in the PPM; Compliance Test Report; reporting of valuation and cash flow data to benchmarking agencies | The financial year after the year in which the fund is tagged |
| NISM certification for the key investment team (Regulation 4(g)(i)) | Date of the tag |
| Custodian for safekeeping of securities (Regulation 20(11)) | Date of the tag |
| Periodic disclosure to investors on fund investments (Regulation 22(a)) | Date of the tag |
| Annual reports (Category I and II) or quarterly reports (Category III) to investors (Regulation 22(g) and 22(h)) | The financial year or quarter after the one in which the fund is tagged |
| Valuation of investments (Regulation 23(2) and 23(3)) | Date of the tag. Valuation is instead given to investors in the annual retention status report, and the updated NAV of the units goes to the depositories within 30 calendar days from the end of March each year |
4. The annual retention status report
Two groups must file an annual status report on retained money and outstanding liabilities, in the format in Annexure C: AIFs with schemes that have retained money under the circular, and AIFs tagged as inoperative funds. The report goes to SEBI and to the investors of the relevant schemes, on the SEBI Intermediary portal, within 30 calendar days from the end of March of every financial year. It covers the reason the scheme was not wound up, the amount retained, the amount distributed out of it, the current status of the reason for retention, and the instruments in which the retained money is invested.
5. Venture Capital Funds
The circular applies the same facility, both retention of proceeds and Inoperative Fund status, to Venture Capital Funds registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996, on the same conditions as AIFs.
The Rs 1,000 Minimum for Certain Social Impact Funds
Regulation 10(c) says an AIF shall not accept an investment of less than Rs 1 crore from an investor. Employees and directors of the AIF or its manager have a Rs 25 lakh minimum, and the clause does not apply to an accredited investor. The third proviso deals with a social impact fund that invests only in securities of not for profit organisations registered or listed on a social stock exchange. For such a fund, the minimum investment by an individual investor was Rs 2 lakh. The amendment substitutes “one thousand” for “two lakh”, so the minimum is now Rs 1,000.
The change is narrow. It applies only to individual investors, and only in social impact funds that invest solely in securities of not for profit organisations on a social stock exchange. The Rs 1 crore and Rs 25 lakh limits are unchanged for every other AIF.
Who Is Affected and How
| Who | What changes for them | First step |
|---|---|---|
| Managers of AIF schemes at or past the end of their liquidation or dissolution period | Proceeds can be kept back only on one of the three grounds in the 16 June 2026 circular, and must be invested under Regulation 15(1)(f) | List every scheme with money still held, the ground for holding it and the evidence on file |
| AIFs that want to surrender registration but still hold money | Can apply for Inoperative Fund status; once tagged, no new scheme and no management fees | Prepare the Annexure A application and the manager and trustee undertakings |
| Trustees, Boards of Directors and designated partners | Must give an undertaking that the application is bona fide and that retained amounts are held only on the stated grounds | Review the manager’s grounds and documents before signing Part D |
| Investors in schemes that are winding up | May be asked to consent (75% by value) to retention for an anticipated liability, with the amount and period disclosed; receive the annual retention status report | Check that any consent request states the amount and the estimated retention period |
| Managers of social impact funds investing only in not for profit securities on a social stock exchange | Can accept individual investments from Rs 1,000 | Align the PPM and onboarding documents with the new minimum |
| Venture Capital Funds under the 1996 Regulations | Same retention and Inoperative Fund framework as AIFs | Apply the same checklist below |
Action Checklist for AIF Managers and Trustees
- Map fund life dates. For each scheme, record the end of the liquidation period or dissolution period, as applicable. That date is the “permissible fund life” under the circular.
- Test every amount still held against the three grounds. Keep the notice or demand, the investor consent record, or the invoices and past expense records, as the case may be.
- Watch the three year limit. Money held only for residual operational expenses cannot be retained for more than three years after the end of the permissible fund life.
- Check where the retained money sits. It must be invested only as Regulation 15(1)(f) permits.
- Diarise the annual retention status report. It is due within 30 calendar days from the end of March every financial year, to SEBI on the Intermediary portal and to the investors of the relevant schemes. The first end of March after the circular took effect is 31 March 2027.
- Decide whether to apply for Inoperative Fund status. Weigh the relief in Annexure B against the conditions: no new scheme and no management fees from the date of the tag.
- If applying, prepare Annexure A in full, including the manager’s undertaking and the trustee, Board or designated partner undertaking, and email it to [email protected].
- Social impact funds: if your fund invests only in securities of not for profit organisations registered or listed on a social stock exchange and you plan to accept individual tickets below Rs 2 lakh, update the PPM and investor documents first.
Frequently Asked Questions
When did the SEBI (AIF) (Amendment) Regulations, 2026 take effect?
The regulations say they come into force on the date of their publication in the Official Gazette. SEBI’s consolidated AIF Regulations record the three changes as effective from 18 April 2026. The notification itself is headed “Mumbai, the 16th April, 2026”.
What is an inoperative fund?
Regulation 29(10A) does not define the term; it leaves the manner and conditions to SEBI. Under SEBI’s circular of 16 June 2026, it is an AIF that SEBI has tagged as an “Inoperative Fund” on its application. Only two kinds of AIF can apply: one with schemes holding retained money on a permitted ground that intends to surrender registration, and one with no retained money that keeps its registration solely in anticipation of a favourable outcome in a pending litigation.
Can an AIF keep money after its fund life ends?
Only on at least one of three grounds: a litigation notice or demand actually received, consent of at least 75% of investors by value for an anticipated liability, or substantiated residual winding up expenses. Money kept for expenses cannot be held for more than three years after the end of the permissible fund life. All retained money must be invested as Regulation 15(1)(f) permits.
Does an inoperative fund still charge management fees?
No. From the date of the tag, no management fees can be charged in respect of any of its schemes, and no new scheme can be launched. The manager’s undertaking in the application repeats both conditions.
Which reports does an inoperative fund stop filing, and which does it still file?
Annexure B to the circular lists ten requirements that stop applying, including the Limited Quarterly and Annual Activity Reports, the Compliance Test Report, the audit of PPM terms, custodian and NISM certification requirements, and periodic reports and valuation under Regulations 22 and 23. The fund must instead file the annual retention status report in Annexure C within 30 calendar days from the end of March each financial year, and report the updated NAV of its units to depositories within the same period.
Can a fund that has intimated its winding up make new investments while it waits?
No. Regulation 29(6) provides: “On and from the date of intimation under sub-regulation (5) of regulation 29, no further investments shall be made on behalf of the Alternative Investment Fund so wound up.” Retained money can be placed only in the liquid instruments that Regulation 15(1)(f) permits.
Who can invest Rs 1,000 in a social impact fund?
An individual investor, in a social impact fund that invests only in securities of not for profit organisations registered or listed on a social stock exchange. For any other AIF, the Rs 1 crore general minimum and the Rs 25 lakh minimum for employees and directors continue.
Where can I read the official texts?
On sebi.gov.in: the SEBI (Alternative Investment Funds) (Amendment) Regulations, 2026 (Notification No. SEBI/LAD-NRO/GN/2026/303) under Legal, Regulations; Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026 dated 16 June 2026 under Legal, Circulars; and the Master Circular for AIFs dated 3 June 2026 under Legal, Master Circulars.
Practical Takeaway
The amendment created the power; the 16 June 2026 circular sets the rules. If a scheme is past its liquidation or dissolution period and still holds money, that money now needs a documented ground under the circular, must sit in Regulation 15(1)(f) instruments, and must be covered in a status report filed every year within 30 calendar days of the end of March. For funds that only remain registered to settle a liability or await a court outcome, Inoperative Fund status switches off the ten requirements listed in Annexure B, at the price of no new schemes and no management fees.
Related Reading on TaxUpdate.in
- Startup India Fund of Funds 2.0 Explained: DPIIT Gazette Notification April 13, 2026 and What AIFs and Founders Must Do Next
- RBI Merges VRR into General Route: New FPI Debt Investment Limits for FY 2026-27 Explained
- CBDT Shields Pre-2017 Investments from GAAR: What Notifications 54 and 55 of 2026 Mean for Foreign Investors
Need Help Preparing Your AIF for the 2026 Amendment?
If your AIF or fund platform is preparing a PPM addendum, a trustee briefing, or a lifecycle assessment under the 2026 Amendment, the team at TaxUpdate.in can help. Schedule a strategy session with CA Adityavikram Banka to discuss how to operationalise the inoperative-fund framework and the revised distribution regulation across your portfolio of funds.
Disclaimer: This post is an educational advisory based on the SEBI (Alternative Investment Funds) (Amendment) Regulations, 2026 notified in the Gazette of India and SEBI Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026 dated 16 June 2026. It does not constitute legal or investment advice for any specific fund or fact pattern. Readers should consult SEBI counsel and a qualified tax professional before taking any action. TaxUpdate.in is an initiative of A S Banka Advisors Private Limited.