SEBI Circular on Guidelines for winding up of AIFs with respect to retention of proceeds and ‘Inoperative Fund’ status

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Date of Issue: 10-06-2026

Highlights of  the Circular :

SEBI has provided flexibility to AIFs and legacy Venture Capital Funds (VCFs) that have completed their investment lifecycle but need to retain some money beyond the permissible fund life to meet pending liabilities or litigation-related contingencies.

1. When can liquidation proceeds be retained beyond fund life?

An AIF/scheme may retain proceeds after the liquidation/dissolution period if at least one of the following conditions is met:

1. Pending or potential litigation/regulatory/tax matter 
   • Receipt of litigation notices, tax notices, regulatory communications, investigation summons, show-cause notices, etc.
2. Anticipated liabilities
   • Approval from 75% of investors by value if proceeds are retained for possible future litigation or tax demands.
3. Residual winding-up expenses
   • Retention supported by invoices or evidence of comparable expenses.

2. Additional requirements For anticipated liabilities

The manager must disclose:

• Amount proposed to be retained.
• Expected retention period.
  before seeking investor consent.

For operational expenses

• Retention period cannot exceed 3 years from the end of the permissible fund life.

Investment of retained monies

• Retained funds must be invested only in instruments permitted under Regulation 15(1)(f) of the AIF Regulations.

Final distribution

• Once liabilities are settled, retained money must be distributed and the scheme wound up.

3. Introduction of "Inoperative Fund" status

An AIF can apply for Inoperative Fund status if:

• It has retained monies under the above conditions and wishes to surrender registration; or
• It has no retained monies but wants to keep registration solely because of an ongoing litigation whose outcome may be favorable.

Application is to be made to SEBI in the prescribed format (Annexure A)

4. Conditions applicable to an Inoperative Fund

Once tagged as an Inoperative Fund:

• Retained monies must continue to be invested as per Regulation 15(1)(f).
• No new schemes can be launched.
• No management fees can be charged.

The AIF may surrender its registration only after all liabilities are resolved and retained monies distributed.

5. Annual reporting requirement

AIFs retaining monies and all Inoperative Funds must submit an Annual Retention Status Report to:

• SEBI, and
• Investors,

within 30 days from the end of March every financial year.

The report includes:

• Amount retained,
• Amount distributed,
• Outstanding liabilities,
• Resolution status and timeline,
• Investments made with retained funds.

6. Regulatory relief for Inoperative Funds

SEBI has exempted Inoperative Funds from several ongoing compliance requirements, including:

• Quarterly and annual activity reports.
• PPM audit requirements.
• Compliance Test Reports (CTR).
• Benchmarking and valuation reporting requirements.
• NISM certification requirement for key investment team.
• Custodian requirement.
• Certain periodic investor reporting requirements.

These exemptions generally become effective from the date of obtaining Inoperative Fund status or from the subsequent reporting period, depending on the specific requirement.

7. Applicability to legacy VCFs

The same framework applies to Venture Capital Funds registered under the erstwhile SEBI VCF Regulations, 1996.