Chapter III · Investment Conditions and Restrictions
Regulation 16
Conditions for Category I Alternative Investment Funds
Chapter III · Investment Conditions and Restrictions
SEBI (Alternative Investment Funds) Regulations, 2012
In plain English
In plain English
These are the investment conditions for Category I AIFs. They invest in investee companies, venture capital undertakings, SPVs, LLPs, units of other Category I AIFs of the same sub-category and, as specified, units of Category II AIFs. They may hedge, including through credit default swaps, on the conditions SEBI specifies. They cannot borrow or use leverage, except to meet temporary funding and day-to-day operational needs: for not more than thirty days, not more than four times a year and not more than ten per cent of investable funds.
What the Master Circular adds
From SEBI's Master Circular for AIFs (updated 16 June 2026). The Regulation sets the rule; the Master Circular sets how it works in practice.
- MC Ch 14
Category I and II AIFs may also borrow to cover a temporary shortfall in a drawdown, but only if the PPM discloses it, only as a last resort when the investment would otherwise be lost, and up to twenty per cent of the investment being made. The regulation's 30-day, four-times-a-year and 10% limits still apply.
Where this sits
Regulation 16 is in Chapter III — Investment Conditions and Restrictions of the SEBI (Alternative Investment Funds) Regulations, 2012.
Key numbers
Provisos, explanations and conditions
Quoted from the regulation text. These qualify or carve out exceptions to the main rule.
Provided that Category I Alternative Investment Funds may create encumbrance on equity of investee company, which is in the business of development, operation or management of projects in any of the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure issued by the Central Government, only for the purpose of borrowing by such investee company and subject to such conditions as may be specified by the Board from time to time.]
Provided that the investment conditions specified in clause (a) shall be achieved by the fund by the end of its life cycle.] (b)[***]
Provided that an existing social impact fund may invest the remaining investable funds in securities of not for profit organizations registered or listed on a social stock exchange with the prior consent of atleast 75% of the investors by value of their investment;]
Provided further that no profits or gains shall accrue to the provider of such grants.] [(ba) Notwithstanding the provisions of clauses (a) and (b), a social impact fund or schemes of a social impact fund launched exclusively for a not for profit organization registered or listed on a social stock exchange, shall be permitted to deploy or invest hundred percent of the investable funds in the securities of not for profit organizations registered or listed on a social stock exchange.]
What changed
No change to this regulation by the 2026 amendments (No. 303 of 16 April 2026 and No. 313 of 10 July 2026).
Words in square brackets in the official text mark earlier amendments made before 2026. Their earlier wording is not shown because it has not been verified here.
Where it connects
Provisions this regulation refers to
Related Master Circular chapters (by subject)
Chapter
Check yourself
11 practice questions on Regulation 16, each with an explanation for every option.
- On what terms may a Category I or II AIF borrow?
- Which borrowing is permitted for a Category I AIF?
- A Category I AIF borrows to cover a delayed drawdown. What is the cap on that borrowing?
- What is the smallest grant a social impact fund may accept from a person who is not an accredited investor?
- At least what share of a venture capital fund's investable funds must go into unlisted equity of venture capital undertakings or SME-exchange companies?
The regulation
16. (1) The following investment conditions shall apply to all Category I Alternative Investment Funds:93 [(a) Category I Alternative Investment Fund shall invest in investee companies, venture capital undertakings, special purpose vehicles, limited liability partnerships[,] in units of other Category I Alternative Investment Funds of the same sub category[, or in units of Category II Alternative Investment Funds as specified in this regulation]]; [(aa) Category I Alternative Investment Funds may engage in hedging, including credit default swaps in terms of the conditions as may be specified by the Board from time to time.] (b)[***] [(c) Category I Alternative Investment Funds shall not borrow funds directly or indirectly or engage in any leverage for the purpose of making investments or otherwise, except for borrowing funds to meet temporary funding requirements and day-to-day operational requirements for not more than thirty days, on not more than four occasions in a year and not more than ten percent of the investable funds and subject to such conditions as may be specified by the Board from time to time:
Provided that Category I Alternative Investment Funds may create encumbrance on equity of investee company, which is in the business of development, operation or management of projects in any of the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure issued by the Central Government, only for the purpose of borrowing by such investee company and subject to such conditions as may be specified by the Board from time to time.]
(2) The following investment conditions shall apply to venture capital funds in addition to conditions laid down in sub-regulation (1):99 [(a) at least seventy-five percent of the investable funds shall be invested in unlisted equity shares or equity linked instruments of a venture capital undertaking or in companies listed or proposed to be listed on a SME exchange or SME segment of an exchange:
Provided that the investment conditions specified in clause (a) shall be achieved by the fund by the end of its life cycle.] (b)[***]
(c) such funds may enter into an agreement with merchant banker to subscribe to the unsubscribed portion of the issue or to receive or deliver securities in the process of market making under[Chapter IX of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 and the provisions of clause (a) of sub- regulation (2)] shall not apply in case of acquisition or sale of securities pursuant to such subscription or market making. [(d) such funds shall be exempt from sub-regulations (1) and (2) of regulation 3 and sub-regulation (1) of regulation 4 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 in respect of investment in companies listed on the SME exchange or SME segment of an exchange pursuant to due diligence of such companies subject to the following conditions:
(i) the fund shall disclose any trading in securities pursuant to such duediligence, within two trading days of such trading, to the stock exchanges where the investee company is listed;
(ii) such investment shall be locked in for a period of one year from the date of investment.]
(3) The following conditions shall apply to SME Funds in addition to conditions laid down in sub-regulation (1):(a) atleast seventy five percent of the[investable funds] shall be invested in unlisted securities or partnership interest of venture capital undertakings or investee companies which are SMEs or in companies listed or proposed to be listed on SME exchange or SME segment of an exchange[or in units of Category II Alternative Investment Funds which invest primarily in such venture capital undertakings or investee companies];
(b) such funds may enter into an agreement with merchant banker to subscribe to the unsubscribed portion of the issue or to receive or deliver securities in the process of market making under[Chapter IX of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018]; [(c) such funds shall be exempt from sub-regulations (1) and (2) of regulation 3 and sub-regulation (1) of regulation 4 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 in respect of investment in companies listed on the SME exchange or SME segment of an exchange pursuant to due diligence of such companies subject to the following conditions:
(i) the fund shall disclose any trading in securities pursuant to such due-diligence, within two trading days of such trading, to the stock exchanges where the investee company is listed;
(ii) such investment shall be locked in for a period of one year from the date of investment.]
(4) The following conditions shall apply to social[impact] funds in addition to the conditions laid down in sub-regulation (1):(a)[at least seventy-five percent of the investable funds shall be invested in unlisted securities or partnership interest of social ventures or in units of social ventures or in securities of social enterprises:
Provided that an existing social impact fund may invest the remaining investable funds in securities of not for profit organizations registered or listed on a social stock exchange with the prior consent of atleast 75% of the investors by value of their investment;]
(b) such funds may accept grants, provided that such utilization of such grants shall be restricted to clause (a)[:][Provided that the amount of grant that may be accepted by the fund from any person shall not be less than[ten lakh rupees]: [Provided further that the minimum amount of grant shall not apply to accredited investors:]
Provided further that no profits or gains shall accrue to the provider of such grants.] [(ba) Notwithstanding the provisions of clauses (a) and (b), a social impact fund or schemes of a social impact fund launched exclusively for a not for profit organization registered or listed on a social stock exchange, shall be permitted to deploy or invest hundred percent of the investable funds in the securities of not for profit organizations registered or listed on a social stock exchange.]
(c) such funds may give grants to social ventures[or social enterprises], provided that appropriate disclosure is made in the placement memorandum. (d)[***]
(5) The following conditions shall apply to Infrastructure Funds in addition to conditions laid down in sub-regulation (1):(a) atleast seventy five percent of the[investable funds] shall be invested in unlisted securities or units or partnership interest of venture capital undertaking or investee companies or special purpose vehicles, which are engaged in or formed for the purpose of operating, developing or holding infrastructure projects[or in units of Category II Alternative Investment Funds which invest primarily in such venture capital undertakings or investee companies or special purpose vehicles];
(b) notwithstanding clause (a) of sub-regulation (5), such funds may also invest in listed securitized debt instruments or listed debt securities of investee companies or special purpose vehicles, which are engaged in or formed for the purpose of operating, developing or holding infrastructure projects.
Text from the consolidated Regulations. Square brackets and [***] mark earlier amendments and omissions, as in the official text. Check the official Gazette text before relying on it.
Last checked against source on 10 October 2026: consolidated Regulations to 19 November 2025, read with Amendment Regulations No. 303 (16 April 2026) and No. 313 (10 July 2026).
Source and verification
- Instrument
- SEBI (Alternative Investment Funds) Regulations, 2012 — Regulation 16
- Text used
- Consolidated Regulations as amended up to 19 November 2025, read with the 2026 amendments (no change to this regulation)
- Last checked
- 10 October 2026
- Official source
- www.sebi.gov.in → Legal → Regulations. The Gazette text prevails.
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