When may an AIF retain proceeds beyond its fund life?

On satisfying at least one of three conditions: demonstrable receipt of a litigation or demand notice from a tax, regulatory, law-enforcement, judicial, investor or counterparty source; consent of at least 75% of investors by value where the retention is for anticipated liabilities; or substantiation of amounts retained for residual winding-up operational expenses through invoices, supporting documents or comparable prior-year expenses.

How long may money be retained for operational expenses?

Not more than three years from the end of the permissible fund life. The Standard Setting Forum of AIFs is to formulate implementation standards, in consultation with SEBI, standardising the operational heads under which money may be retained.

How does an AIF apply for Inoperative Fund status?

By emailing an application in the Annexure A format to inoperativeaif@sebi.gov.in. An AIF that has retained no money but wants to keep its registration solely in anticipation of a favourable litigation outcome may also apply.

16 June 2026

SEBI defines the 'Inoperative Fund': no new schemes, no management fees, and an annual report on what is still being held

Q: Does this apply to old venture capital funds?

Yes. Both the retention facility and Inoperative Fund status extend to Venture Capital Funds registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996, on the same regulatory framework.

What is an Inoperative Fund under SEBI's AIF rules?

A status an AIF may apply for when it holds retained monies beyond its permissible fund life or is waiting on litigation, and intends to surrender its registration. SEBI specified it by circular on 16 June 2026. An Inoperative Fund may launch no new scheme and charge no management fee, and must file an annual status report on retained monies and outstanding liabilities.

What changed

SEBI issued a circular on 16 June 2026, reference HO/19/34/11(2)2026-AFD-POD1/I/13764/2026, addressed to all Alternative Investment Funds and to all Venture Capital Funds registered under the erstwhile 1996 regulations. Signed by Anshul Jagdish Goyal, Deputy General Manager, in force with immediate effect.

It is the substance behind two provisions that the AIF (Amendment) Regulations, 2026 had created empty in April: the conditions power in regulation 29(7), and the inoperative-fund tag in the new regulation 29(10A).

The problem it addresses

A fund reaches the end of its permissible life still holding money — because a tax notice is outstanding, because litigation is pending, or because there are residual bills to pay. Until this circular it had no clean way to hold that money and no way to stop being a fully-compliant AIF while it waited.

Retention: three conditions, any one of which suffices

A litigation or demand notice. Written communication from a tax authority, regulatory authority, law enforcement agency, court, investor or counterparty indicating a potential tax, regulatory or legal liability. The circular is deliberately broad here: show-cause notices, re-assessment notices and investigation summons count, and it is "not restricted to crystallised demand notices."
Investor consent. At least 75% of investors by value, where retention is for anticipated liabilities from possible or probable litigation or a tax demand. The manager must disclose the amount retained and the estimated period when seeking that consent.
Substantiated operational expenses. Invoices, supporting documents, or records of comparable expenses incurred in previous years.

Retention for operational expenses is capped at three years from the end of permissible fund life. Everything retained must be invested in accordance with regulation 15(1)(f).

What an Inoperative Fund may not do

From the date of the tag:

Retained monies invested only per regulation 15(1)(f)
No new scheme may be launched under the AIF
No management fee may be charged on any of its schemes

Annexure B lists the regulatory requirements that stop applying — the relief side of the bargain. In exchange, the fund files an annual status report on retained monies and outstanding liabilities, to SEBI and to investors, on the SEBI Intermediary Portal within 30 calendar days of each March year-end, in the Annexure C format.

Surrender of the registration certificate comes only after liabilities are satisfied and retained monies distributed across all schemes.

Who this reaches

Every AIF at or past the end of its liquidation period, every fund sitting on an unresolved tax or litigation exposure, and every erstwhile VCF in the same position. The no-management-fee condition is the sharpest term: a manager cannot take the tag and keep charging.

What is not settled

The implementation standards for operational-expense heads are to be formulated by the Standard Setting Forum of AIFs in consultation with SEBI, and were not part of this circular. Until they exist, paragraph 3.3's "substantiation" standard is what a fund has to argue against.

Sources

Guidelines for winding up of AIFs with respect to retention of proceeds and 'Inoperative Fund' status — HO/19/34/11(2)2026-AFD-POD1/I/13764/2026 — SEBI, 16 June 2026 · primary
Winding-up guidelines circular, full text with Annexures A to C, 14 pages — SEBI, 16 June 2026 · primary

Dated 16 June 2026, last checked against source 25 August 2026. The dateline is the date of the instrument this item reports, not the date the page was written. This page reports what a document says. It is information, not legal, tax or investment advice, and it is not a recommendation about any fund.

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