Co-investment schemes in AIFs: meaning, how it works in India

A co-investment scheme is a side scheme that backs exactly one company. The fund manager runs the main fund, finds a deal, and then offers some of the fund's investors the chance to put in more money into that same company, on top of what the main fund has invested.

Think of a venture fund that invests in a fast-growing startup but wants to write a larger cheque than its own corpus allows. Instead of turning away the extra demand, the manager invites a few investors to join that single deal. Those investors pay no attention to the rest of the portfolio. They hold units only in the scheme that owns the stake in that one company.

Before 2025 this was done in India through informal side arrangements, or through a portfolio manager registered with SEBI. The 2025 change gives AIFs an official structure inside their own regulations.

According to law-firm summaries, SEBI's board approved the idea in June 2025 after a consultation paper in May 2025. SEBI then notified an amendment to the AIF Regulations on 8 September 2025 and issued an operating circular on 9 September 2025. The new rules sit in a fresh regulation numbered 17A.

As of November 2026, the structure is open to Category I and II AIFs, the categories that cover venture capital funds, angel funds, infrastructure funds and private equity style funds. Category III funds, which trade and use leverage, are left out. One summary notes that angel funds registered on or after 8 September 2025 are excluded from the new route.

The manager first sets up a shelf placement memorandum, a standing document that describes how co-investment schemes will work. It is filed with SEBI through a merchant banker. After that, each deal gets its own scheme under the shelf document.

Each scheme is ring-fenced. The assets and liabilities of one co-investment scheme are kept apart from the others and from the main fund, so a loss in one company does not spill into another.

• The main scheme decides to invest in a company.
• The manager offers eligible investors a co-investment slot in a new scheme for that company.
• Investors commit money to the new scheme, which buys the stake alongside the main scheme.
• Returns from that company go back to the scheme's investors, pro rata to their contributions.
• When the stake is sold, the scheme distributes the proceeds and is wound up.

Only accredited investors of the Category I or II AIF can join a co-investment scheme under this route. An accredited investor is a person or entity that meets income, net worth or institutional tests set in the SEBI regulations, and it is explained in the guide on accredited investors in India.

Investors who are not accredited can still co-invest, but only through the older portfolio manager route. The law-firm notes also say a manager must choose one route per investor, either the portfolio manager route or the CIV scheme, for the same deal.

The rules are built to protect the main fund's investors. Co-investors should not get better terms than the main scheme, and they must exit at the same time as the main scheme. Law-firm summaries list the points below as of November 2026, and the exact text should be checked before relying on any of them.

These limits explain why the route is described as a convenience and not a loophole. The main fund's investors are not squeezed out, because the co-investors share the deal on the same footing and leave at the same time. A manager still owes duties to every investor, and conflicts of interest, such as which investors get an offer first, have to be handled under the fund's own policy.

• Terms: co-investment terms cannot be more favourable than those of the main scheme.
• Exit: the co-investment must be sold at the same time as the main scheme's stake.
• Cap: a co-investor's amount in one company cannot exceed three times its contribution to the main scheme's investment in that company, with exemptions for some development banks and government-controlled entities.
• Leverage: the scheme cannot borrow money or use leverage.
• Fund units: the scheme cannot invest in units of other AIFs.
• Defaulters: investors excused, excluded or in default in the main scheme cannot co-invest in that company.
• Wind-up: the scheme closes once the stake is sold.

Fund managers often see rounds larger than their fund can fill. A co-investment slot lets a fund join a big round without breaking its own concentration limits, and it helps the manager keep the relationship with the founder.

Large investors also like it. A family office or institution that already backs a fund may want more exposure to a company it knows well. Co-investing gives that exposure, usually with lower or no management fee on the extra money, though the fee terms depend on the fund's documents, not on SEBI.

For startups, the effect is more cheque-writing capacity at the same table. A founder raising a Series B or C may find one lead fund bringing a pool of co-investors, so the round closes faster.

The older route used a Co-investment Portfolio Manager (CPMS), a portfolio manager registered under SEBI's portfolio manager rules. It required separate registration, which many fund managers found costly and slow, and it was tied to a particular investor profile.

The CIV route runs under the AIF regulations the manager already follows. It avoids a second registration and comes with lower regulatory fees, according to law-firm commentary. The portfolio manager route remains available, including for investors who are not accredited. The two are alternatives, not a replacement.

When a news story says a fund has raised a co-investment pool or a CIV for a company, look for three things: whether the money is added to the main fund's round or separate from it, whether the stated amount is the combined figure, and whether the investors are named or described as limited partners of the fund.

A headline that adds co-investment money to a fund's own cheque is describing a larger round, not a larger fund. Fund size and round size are different numbers. This guide is general information, not legal or tax advice, so check with a professional before using any structure.