Chapter III · Investment Conditions and Restrictions
Regulation 17
Conditions for Category II 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 II AIFs. They invest in investee companies or units of Category I or other Category II AIFs, as disclosed in the placement memorandum, and mainly in unlisted securities and/or listed debt securities rated 'A' or below. The borrowing restriction is the same as for Category I: only for temporary funding and day-to-day operational needs, for up to thirty days, up to four times a year and up to 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
The same drawdown-shortfall borrowing flexibility applies to Category II: disclosed in the PPM, as a last resort, and up to twenty per cent of the proposed investment, within the regulation's limits.
Where this sits
Regulation 17 is in Chapter III — Investment Conditions and Restrictions of the SEBI (Alternative Investment Funds) Regulations, 2012.
Provisos, explanations and conditions
Quoted from the regulation text. These qualify or carve out exceptions to the main rule.
Explanation - Category II Alternative Investment Fund shall invest primarily in unlisted securities and/or listed debt securities (including securitised debt instruments) which are rated ‘A’ or below by a credit rating agency registered with the Board, directly or through investment in units of other Alternative Investment Funds, in the manner as may be specified by the Board; ] (b)[***] [(c) Category II 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 II 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.]
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
4 practice questions on Regulation 17, each with an explanation for every option.
- A Category II AIF invests primarily in:
- A Category II AIF with ₹60 crore of investable funds wants to borrow ₹5 crore for 40 days to meet a day-to-day need. Is that allowed?
- Under the Explanation to Reg 17(a), a Category II AIF invests primarily in…
- True or false: a Category II AIF may borrow to buy investments, as long as investors agree.
The regulation
17. The following investment conditions shall apply to Category II Alternative Investment Funds:118 [(a) Category II Alternative Investment Funds shall invest in investee companies or in the units of Category I or other Category II Alternative Investment Funds as may be disclosed in the Placement Memorandum;
Explanation - Category II Alternative Investment Fund shall invest primarily in unlisted securities and/or listed debt securities (including securitised debt instruments) which are rated ‘A’ or below by a credit rating agency registered with the Board, directly or through investment in units of other Alternative Investment Funds, in the manner as may be specified by the Board; ] (b)[***] [(c) Category II 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 II 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.]
(d) Notwithstanding clause (c), Category II Alternative Investment Funds may engage in hedging, subject to guidelines as specified by the Board from time to time; [(da) Category II Alternative Investment Funds may buy or sell credit default swaps in terms of the conditions as may be specified by the Board from time to time.]
(e) Category II Alternative Investment 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]. [(f) Category II Alternative Investment 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.]
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 17
- 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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