Setting up an Alternative Investment Fund in India follows a structured path, but the details trip up first-time managers more than you would expect. The process runs through SEBI registration, trust formation, service provider appointments, investor onboarding, and first close — and each stage has specific documentation and timing requirements that can stall a launch if you are not prepared. A realistic timeline from initial filing to first drawdown is four to eight months, depending on how clean your application is and how quickly you can close investor commitments [19].
I work with managers going through this process, and the pattern I see is consistent: managers who try to handle operations internally during the setup phase create compliance gaps that cost them later. The better approach is to bring in a fund administrator from inception and let the manager focus on strategy and fundraising. Here is how each step works.
Picking the right AIF category
This is the first decision, and it is not reversible after registration. SEBI defines three categories, and the choice determines your investment constraints, tax treatment, leverage limits, and investor economics [4]. We covered the details in our category selection guide, but the short version is:
- Category I covers venture capital, SME funds, social ventures, and infrastructure. Two-thirds of corpus must go into unlisted securities. Tax pass-through at the investor level. No leverage for investment purposes [15].
- Category II is the default for PE, debt, and real estate funds. Same tax pass-through as Category I. Borrowing allowed only for temporary operational needs — up to 2x NAV, for no more than 30 days, no more than four times per year [2].
- Category III covers hedge funds and trading strategies. Fund-level taxation at the highest marginal rate. Leverage up to 2x NAV for actual investment deployment [15].
Most emerging managers launching a VC or PE fund go with Category I or II. The tax pass-through alone makes the economics work better for domestic LPs. We help managers map their investment thesis to the right category before filing.
Forming the trust and appointing key roles
About 97% of Indian AIFs are structured as trusts [14]. The trust deed, governed by the Indian Trusts Act of 1882, establishes three roles: the sponsor (who conceives the fund and contributes mandatory skin-in-the-game capital), the trustee (who provides governance oversight), and the investment manager (who makes the investment decisions) [13].
The sponsor must maintain a continuing interest in the fund — the lesser of 2.5% of total corpus or INR 5 crore for Category I and II, or 5% / INR 10 crore for Category III [4]. This is a direct capital commitment, not a fee waiver. The trustee must be domiciled in India and is typically a professional trustee company rather than an individual [5]. At least one key person in the investment manager must hold the NISM-Series-XIX-C certification, and at least one must have a professional qualification in finance, economics, or a CFA charter [1].
SEBI registration: timeline and process
Registration starts with an online application through the SEBI Intermediary Portal (siportal.sebi.gov.in), followed by physical submission of the full package to SEBI headquarters in Mumbai [1]. The non-refundable application fee is INR 1,00,000 plus 18% GST — and the payment system rejects amounts that differ by even a paisa from the exact figure [1]. For a deeper walkthrough of the documentation, see our registration process article.
The application includes your placement memorandum, which must be filed through a SEBI-registered merchant banker who provides an independent due diligence certificate [24]. The merchant banker cannot be affiliated with the fund, sponsor, or manager. SEBI uses this as a pre-screening mechanism — the merchant banker verifies internal consistency across PPM sections, confirms key personnel are actual employees, and checks that distribution waterfalls include the mandatory five-scenario illustrations [24].
Clean applications with no deficiencies take 60 to 90 days. In practice, most first-time filings get at least one deficiency letter from SEBI, pushing the timeline to 120 to 180 days [19]. Common query areas: inconsistencies between strategy descriptions, inadequate conflict-of-interest disclosure, missing detail on key personnel qualifications, and unclear fee calculations [24]. We prepare the application package to minimise deficiency rounds.
Appointing service providers
Once SEBI approves registration, you need to appoint a custodian, fund administrator, independent valuer, and auditor before making your first investment.
The custodian must be SEBI-registered with a minimum net worth of INR 75 crore and holds securities on behalf of investors in segregated accounts [7]. The fund administrator manages the operational layer: investor onboarding, capital call processing, portfolio accounting, NAV calculations, SEBI portal submissions, and investor statements [8]. The independent valuer must have no association with the manager, sponsor, or trustee, and must hold at least three years of experience valuing unlisted securities plus one of several credential standards (IBBI registration, CFA charter, or affiliation with a SEBI-registered credit rating agency) [32].
For emerging managers, the administrator relationship matters most. A good administrator provides templated workflows for capital calls, automated reconciliation, regulatory change monitoring, and investor communications that you cannot replicate internally at launch [8]. We recommend engaging an administrator before first close, not after.
The placement memorandum
The PPM is the primary offering document. SEBI prescribes templates for Category I/II (Annexure 1) and Category III (Annexure 2) [6]. The mandatory content includes: investment strategy and asset class focus, minimum commitment amounts (INR 1 crore standard, INR 25 lakh for angel funds, lower for accredited investors), fee structures with five-scenario distribution waterfall illustrations, conflict-of-interest policies, side letter disclosures, and valuation methodologies [6].
SEBI's recent guidance requires that side letters be disclosed in the PPM and cannot create terms that are prejudicial to other investors [6]. The PPM also needs detailed risk disclosures — illiquidity risk, total loss probability, absence of assured returns. We draft the PPM in coordination with the merchant banker to ensure it passes the due diligence certification on the first round.
Investor onboarding and KYC
KYC in India runs under the Prevention of Money Laundering Act 2002. PAN is the primary identification requirement, with PAN-Aadhaar seeding now mandatory for most domestic investors [10]. The process has two parts: Part I (standardised identity details) and Part II (intermediary-specific requirements including suitability confirmation and minimum investment threshold verification) [10].
Digital KYC has improved the process significantly. The Central KYC Records Registry (CKYCR) generates a unique KYC Identification Number per investor, which eliminates duplicate documentation when the investor engages other intermediaries [10]. We integrate with CKYCR and use digital verification workflows — Aadhaar biometric, DigiLocker document retrieval, and automated database checks — to cut onboarding time while maintaining compliance.
For accredited investors (individuals with annual income above INR 2 crore or net worth above INR 7.5 crore; corporates with net worth above INR 100 crore), reduced minimum investment thresholds apply and the manager gets more operational flexibility [39]. Accreditation certificates come from SEBI-recognised agencies, typically subsidiaries of exchanges with at least 20 years of market presence [39].
First close and capital calls
You have 12 months from SEBI taking the PPM on record to declare first close [42]. By that point, you need to meet minimum corpus: INR 20 crore for Category I/II, INR 100 crore for Category III, INR 10 crore for angel funds [4]. Missing this deadline can lead to registration cancellation.
Capital calls in India follow a commitment-based model. Investors commit capital upfront but transfer funds only when the manager issues a capital call notice specifying the amount, bank account, settlement deadline (typically 5 to 12 business days), and consequences of non-payment [12]. For Category I and II close-ended AIFs, SEBI requires strict pro-rata drawdowns — every investor is called proportionally, no exceptions [12]. The subscription agreement must align perfectly with the PPM terms; SEBI does not allow introduction of additional provisions at the subscription stage [21].
Ongoing compliance and reporting
After first close, the reporting cycle starts immediately. Category I and II AIFs file quarterly reports through the SEBI Intermediary Portal covering investor composition, deployment status, valuations, borrowing, and compliance attestations [17]. The compliance officer prepares an annual Compliance Test Report, which goes to the trustee for review; the manager then responds to any trustee observations, creating a three-layer governance trail [1].
Valuations follow SEBI-mandated standards: annual minimum for Category I/II (semi-annual with 75% investor consent), quarterly for close-ended Category III, monthly for open-ended Category III [32]. The independent valuer must use methodologies endorsed by industry associations representing at least 33% of registered AIFs. Any valuation change exceeding 20% from the prior period requires disclosure [32]. NAV data must be uploaded to depository systems within 30 days of valuation completion [33].
Annual audited financial statements are due to SEBI after each financial year close. The fund administrator compiles the quarterly data, coordinates with the independent valuer, manages SEBI portal submissions, and prepares investor statements. We handle all of this.
What we handle at Infra One
We manage the full operational process for Indian AIF launches. That includes: structuring advice on category selection and trust formation, preparing the SEBI application and PPM in coordination with the merchant banker, running investor onboarding with digital KYC and CKYCR integration, processing capital calls with pro-rata drawdown compliance, maintaining portfolio accounting and investor registers, coordinating independent valuations, filing quarterly SEBI reports and compliance attestations, and preparing annual audit packages.
The manager keeps control of investment decisions, investor relationships, and strategy. The operations, compliance, and reporting run through our fund platform. If you are planning an AIF launch in India and want to understand what the process and timeline look like, reach out to us.
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