Chapter III · Investment Conditions and Restrictions
Regulation 18
Conditions for Category III Alternative Investment Funds
Chapter III · Investment Conditions and Restrictions
SEBI (Alternative Investment Funds) Regulations, 2012
In plain English
In plain English
Category III funds can invest in listed or unlisted securities, derivatives, units of other AIFs and complex or structured products. They may use leverage or borrow, but only with investors' consent and within the maximum limit SEBI specifies, and they must disclose the overall level of leverage.
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 7
Leverage of a Category III AIF is total exposure (longs plus shorts, after permitted offsetting) divided by NAV, and must not exceed 2 times NAV. On a NAV of ₹100 crore, exposure is capped at ₹200 crore.
- MC Ch 7
A Category III AIF can measure its listed-equity concentration limit on investable funds or on NAV. If it uses NAV, it takes the NAV of the previous business day, excluding borrowed funds.
Where this sits
Regulation 18 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.
Provided that such funds shall disclose information regarding the overall level of leverage employed, the level of leverage arising from borrowing of cash, the level of leverage arising from position held in derivatives or in any complex product and the main source of leverage in their fund to the investors and to the Board periodically, as may be specified by the Board.
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
The text of this regulation does not refer to other numbered regulations.
Related Master Circular chapters (by subject)
Chapter
Check yourself
6 practice questions on Regulation 18, each with an explanation for every option.
- On what basis may a Category III AIF use leverage?
- A Category III AIF has NAV of ₹150 crore. What is the maximum exposure (longs plus shorts, after permitted offsetting)?
- A Category III AIF wants to use leverage, but its investors have not consented. Can it go ahead?
- Which can a Category III AIF invest in?
- Which TWO conditions does Reg 18(c) put on leverage by a Category III AIF?
The regulation
18. The following investment conditions shall apply to Category III Alternative Investment Funds:- [(a) Category III Alternative Investment Funds may invest in securities of listed or unlisted investee companies, derivatives, units of other Alternative Investment Funds or complex or structured products;] [(aa) Category III Alternative Investment Funds may deal in goods received in delivery against physical settlement of commodity derivatives;] [(ab) Category III 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.] (b)[***]
(c) Category III Alternative Investment Funds may engage in leverage or borrow subject to consent from the investors in the fund and subject to a maximum limit, as may be specified by the Board:
Provided that such funds shall disclose information regarding the overall level of leverage employed, the level of leverage arising from borrowing of cash, the level of leverage arising from position held in derivatives or in any complex product and the main source of leverage in their fund to the investors and to the Board periodically, as may be specified by the Board.
(d) Category III Alternative Investment Funds shall be regulated through issuance of directions regarding areas such as operational standards, conduct of business rules, prudential requirements, restrictions on redemption and conflict of interest as may be specified by the Board.
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 18
- 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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