The Securities and Exchange Board of India (SEBI) released a consultation paper last month that could streamline co-investment strategies within the country’s private equity and venture capital (PE/VC) sector, unlocking new avenues for investment and advisory services. Made public on May 9, the paper has proposed two critical reforms.

First, it aims to replace the current co-investment framework, which is routed through PMS (portfolio management services) entities, requiring a separate licence and leading to numerous operational and compliance complexities. Instead, co-investments will be made via Co-Investment Vehicles (CIVs) within the framework of Alternative Investment Funds (specifically, categories I and II PE/VC funds).

Second, SEBI suggests removing the restriction that prevents AIF managers from offering advisory services in listed securities. If it goes through, these managers can offer guidance on public stocks, provided they comply with the rules. Both initiatives signal a transformative shift in India’s investment regulatory system.

The proposed CIV model will be structured as an independent scheme under the AIF, providing a formal and regulated framework for co-investments. In fact, a new CIV scheme must be created for every co-investment deal in an unlisted or private company under the main fund. Only investors already in the AIF space and acknowledged by SEBI as ‘accredited’ will be allowed to participate.

The core concept is all about better operations and greater efficiency. The proposed structure allows investors to contribute additional capital alongside the primary fund when supporting a particular startup. And CIVs will act as separate mini-funds under the main fund, dedicated to co-investments.

Moreover, instead of putting all co-investments into a single vehicle, AIFs can create a bespoke scheme for each co-investment, thereby aligning more closely with an individual investor’s expectations. This added flexibility can enhance deal structuring and help manage the unique risks inherent in private companies and projects.

The capital market regulator’s reinforced focus on PE/VC funding is not surprising. After two years of contraction due to geopolitical conflicts and global headwinds, PE/VC investments in India rose 9% YoY to reach $43 Bn in 2024, according to a Bain & Company-IVCA report. The recovery was driven primarily by venture capital and growth funding, while private equity dealmaking remained steady throughout the period.

Most stakeholders have lauded SEBI’s latest initiative, as this will reduce compliance overheads, increase operational flexibility for fund managers and enhance transparency for investors.

Nonetheless, the proposal has also sparked a debate across the industry, with people questioning its long-term impact on market dynamics and regulatory balance.

Concerns surrounding the proposed CIV framework are many, including restrictions on co-investors, tax issues and exit timelines for CIVs. According to some fund managers, CIV exits can lead to potential conflicts of interest if co-investors prefer a shorter or prolonged holding period to match their investment goals. As of now, CIV exits must align with those of the original AIFs. Moreover, the strict eligibility criteria outlined by SEBI will likely prevent a new class of investors from participating.

Many believe there could be a risk of double taxation if AIF-CIV investments lose their usual pass-through tax benefits, which allow income to be taxed only at the investor level. AIFs and CIVs are typically structured so that the income they generate is passed directly to investors, who then pay tax on it,........

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