Alternative Investment Funds (AIFs) are urging the Securities and Exchange Board of India (Sebi) to roll back rules requiring investors to be treated strictly on a pro-rata basis, arguing that the framework undermines fee arrangements negotiated by investors, complicates fund operations and could deter large investors critical to private-market fundraising. According to reports from The Economic Times, several industry representations have been submitted to Sebi seeking a reversal of the rules introduced nearly two years ago. As reported by industry sources, one person familiar with the matter stated that "It's an impossible ask because Sebi's prescription goes against how an AIF works."
At the heart of the industry's objection is how the rules affect fee arrangements negotiated by large investors. According to reports from The Economic Times, historically, investors received returns based on their investable surplus—the capital available for deployment after management fees were deducted. Under Sebi's framework, however, allocations and distributions are tied to committed capital. Consider an AIF where Investor A commits ₹90 crore and negotiates a 1% annual management fee, while Investor B commits ₹10 crore and pays 2.5%. After one year, Investor A would have contributed ₹89.1 crore and Investor B ₹9.75 crore, giving A roughly 90.2% of the fund's deployable capital. Under Sebi's proposed framework, however, returns would continue to be allocated according to commitments, giving Investor A 90% and Investor B 10%. Fund managers argue that this approach erodes the economic benefit negotiated by larger investors in exchange for sizeable commitments.
Industry executives also argue that the rules reduce flexibility in how capital is called from investors. As reported by The Economic Times, a drawdown is the process through which an AIF calls committed capital from investors. Industry executives say the framework effectively requires investors to remain at comparable levels of participation. If Investor A has contributed 25% of its commitment, it becomes difficult for that investor to contribute further unless other investors have reached similar levels. Fund managers argue that this limits their ability to draw additional capital from investors willing and able to fund opportunities more quickly. Jinal Gandhi, director-finance and head of investor relations at Alteria Capital, noted that "having differential drawdowns provides flexibility to both fund managers and investors, particularly where larger investors have the capacity and willingness to contribute capital more quickly when opportunities arise."
The industry says the pro-rata framework is also increasing the use of compensatory contributions, particularly for large investors when new entrants join a fund after initial investments have been made. According to The Economic Times, some investors are reluctant to share profits with older investors, specifically hurting retail investors who usually enter funds at later stages after viewing its performance. The debate comes as India's AIF industry continues to expand, with total commitments standing at ₹15.75 trillion as of December 2025, according to Sebi data, while funds raised amounted to ₹7 trillion. Category II AIFs accounted for the largest share of commitments at ₹11.64 trillion. AIFs are classified into three categories: Category I funds invest in sectors considered socially or economically beneficial, including startups, infrastructure and social enterprises, while Category II funds include private equity, debt and real-estate vehicles that do not employ leverage beyond operational needs.
