SEBI AIF categories: how Indian funds are registered

By Abha Lohia · Startup Decoded

In India, venture capital, private equity and similar funds register with SEBI as Alternative Investment Funds (AIFs), in one of three categories. Category I covers funds with social or economic benefits such as startups, Category II covers most private equity and debt funds, and Category III covers funds that use complex trading strategies.

What is an AIF?

An Alternative Investment Fund is a privately pooled investment vehicle that is not a mutual fund or a regular stock market scheme. It collects money from investors and invests it according to a stated plan. AIFs are governed by the SEBI (Alternative Investment Funds) Regulations, 2012.

Almost every venture fund that invests in Indian startups sits inside an AIF. It is set up as a trust, a company or a limited liability partnership. SEBI registers the fund, and the manager must follow rules on disclosure, valuation, conflicts of interest and reporting.

The manager applies to SEBI with details of the sponsor and manager, the investment strategy, the track record of the team and the structure of the fund. After registration, each scheme is launched with a private placement memorandum, or PPM, which describes the strategy, fees, risks and terms. A PPM is a private document and is not offered to the general public.

SEBI does not approve any one company a fund picks. It checks that the fund follows the rules. Funds must report to SEBI on a regular basis, get audited, and value their holdings using standard methods.

Category I: funds that SEBI wants to encourage

Category I AIFs invest in startups, early-stage companies, small and medium enterprises, social ventures, infrastructure and other sectors that the government or regulators see as socially or economically useful. Venture capital funds, angel funds, SME funds, social venture funds and infrastructure funds belong here.

These funds generally cannot borrow, except for short periods to meet day-to-day needs. They may get concessions from the government or regulators. Many of the better-known Indian venture firms run Category I funds for their startup investments.

Category II: private equity, debt and fund of funds

Category II AIFs are those that do not fit Category I or III. This includes most private equity funds, private credit and debt funds, and funds of funds that invest in other AIFs. They also cannot borrow beyond short-term day-to-day needs.

Some firms run both: a Category I fund for early-stage deals and a Category II fund for later-stage or growth investments.

Category III: complex and trading strategies

Category III AIFs use diverse or complex strategies, including trading in listed securities and derivatives, and may use leverage within limits SEBI sets. Hedge funds and long-short equity funds are examples. They are rarely the funds behind a startup round, though some invest in listed companies and in late-stage deals before an IPO.

Many venture funds also set up a feeder, a fund that collects money from foreign investors and puts it into the Indian AIF. Others set up funds in GIFT City, the international financial centre in Gujarat, where rules and taxes for funds that bring in foreign money differ. Some global firms run offshore funds that invest in India through special structures.

A co-investment vehicle lets certain investors put more money into a single deal alongside the fund. SEBI introduced a framework for these in 2025, and they are open to accredited investors of Category I and II funds.

Fund managers also compare the economics of choosing a category. A Category I fund can access government support and a lighter reputation for risk, but it must stick to its stated areas. A Category II fund has more freedom in whom it can back, within its own limits.

Who can invest, and how much?

Under the 2012 rules, an AIF scheme needs a minimum corpus of ₹20 crore, and each investor must normally commit at least ₹1 crore. Angel investors and employees of the manager can meet a lower minimum. A scheme can have up to 1,000 investors. These headline numbers have been amended over the years, so check the current text.

In 2025 SEBI introduced a category of accredited investors, who meet income or net worth tests and are verified by an approved agency. Funds and schemes can be set up for accredited investors only, with lighter rules. Large value funds, for investors committing much bigger amounts, were also given more relaxed rules. Exact thresholds are set in SEBI circulars and should be checked against the latest text.

In practice, founders will mostly meet accredited investors when they raise from angel funds. A founder does not need to verify this, but should ask the fund manager to confirm that the fund is registered and able to invest the amount offered.

What changed for angel funds in 2025?

As of October 2026, angel funds are a Category I AIF in their own right rather than a sub-category of venture capital funds. They can raise money only from accredited investors, and the earlier minimum fund size and the minimum angel commitment were removed.

Each investment in a startup is meant to be between ₹10 lakh and ₹25 crore, with at least two accredited investors in a deal. Startups backed by large corporate groups, above a turnover limit, are excluded. Existing angel funds had until September 2026 to move to the new rules. Because details are still being clarified in practice, founders and fund managers should confirm them with a lawyer.

Because the framework is still being refined, funds and founders should treat any summary, including this one, as a starting point and read the latest SEBI circulars or take professional advice.

What limits do AIFs follow?

Category I and II AIFs generally cannot put more than 25 per cent of investable funds into a single company. Category III has a lower cap. There are also rules on how long a fund must run, how often it values its holdings, how it handles conflicts and how it reports to SEBI and investors.

Tax treatment differs too. Category I and II funds are generally taxed on a pass-through basis, meaning the investor is taxed on the income, while Category III is taxed at the fund level in most cases. Tax rules change, so seek professional advice.

The rules decide who can invest in funds, and so how much domestic money flows to startups. When SEBI lowers the barrier for accredited investors or simplifies approvals, fund managers can raise money faster. When it tightens disclosure, funds spend more on compliance.

Another route to money is the government's Fund of Funds for Startups, run by SIDBI, which commits to SEBI-registered AIFs. That is one reason many funds register in Category I.

Why does this matter for founders and readers?

When a funding story says a round was led by a Category I AIF, it simply names the legal wrapper of a venture fund. Founders can also check a fund's SEBI registration on the regulator's website before taking money. And because the rules decide who can invest in funds, they shape how much domestic money reaches startups.

This guide is general information, not legal, tax or investment advice. Check with a qualified professional before acting on it.

Readers often confuse AIFs with mutual funds. A mutual fund is open to the public, invests mostly in listed securities and is bought in small amounts. An AIF is private, usually needs a large minimum, and invests in assets that can be hard to sell. That difference is why the rules treat the two so differently, and why AIFs focus on investors who can bear more risk.

Recent examples on StopDown

Vivriti targets first close of ₹2,500 Cr credit fund 9 October 2026
NABVENTURES marks ₹450 Cr first close of fund 8 October 2026
Recur Club announces ₹500 crore fund for D2C brands 7 October 2026
Navya Naveli Nanda launches Naveli Ventures 6 October 2026
Peak XV names 18 startups for Surge 12 29 September 2026
WEH Ventures reaches first close of ₹250 crore Fund III 29 September 2026

Questions people ask

What are the three categories of AIF?

Category I covers startups, SMEs, social ventures and infrastructure, Category II covers private equity, debt and fund of funds, and Category III covers funds with complex or trading strategies and permitted leverage.

Is a venture capital fund a Category I or II AIF?

Venture capital funds are Category I AIFs. Private equity funds are mostly Category II. A large firm may run funds in both categories.

What is the minimum investment in an AIF?

Under the 2012 rules it is ₹1 crore per investor, with a lower amount for angels and employees of the manager, and the scheme needs a corpus of at least ₹20 crore. Rules for accredited-investor-only funds differ, so check current SEBI circulars.

What is an accredited investor?

A person or entity that meets income or net worth tests set by SEBI and is certified by an accreditation agency. Accredited investors can invest in schemes with lighter rules, including angel funds.

How can I check if a fund is registered?

SEBI publishes a list of registered AIFs on its website, with registration numbers. Founders should check this before taking money from a fund.