SEBI’s Game-Changing Move: Streamlining Co-Investments in Unlisted Securities

Introduction

The SEBI¹, during its 210th Board meeting, on June 18, 2025, charted a new course for India’s financial landscape. With a decisive stroke, SEBI approved a groundbreaking framework for AIF² to offer co-investment opportunities in unlisted securities. This pivotal decision, following a consultation paper released on May 9, 2025, is set to revolutionize how wealthy investors participate in India’s private markets, fostering greater capital formation for unlisted companies.

A Shift from Complex Routes to Simplified Access

Until now, fund managers seeking to allow high-net-worth individuals and institutions to co-invest alongside their main funds faced a labyrinth of regulatory hurdles. The prevalent method often involved leveraging PMS³ regulations, necessitating double-registration and navigating extensive red tape. SEBI’s new rules dramatically simplify this process, transforming co-investments from a “legal obstacle course” into a more seamless “one-click option.”

The core of this reform introduces the “Co-investment scheme,” a dedicated vehicle under Category I or Category II AIFs designed exclusively for accredited investors. A distinct CIV⁴ scheme will be launched for each co-investment in an investee company, ensuring transparency while operating with relaxed regulatory requirements compared to other AIF schemes. Importantly, the existing PMS route for co-investment will continue to exist, providing a dual option for investors.

The Evolution of Co-investments: Past Practices vs. New Framework

Feature	Old Framework	New Framework
Regulatory Framework	Convoluted, often required separate PMS entity/ registration.	Integrated within Category I & II AIF framework via “Co-investment scheme”.
Compliance Burden	Higher, involved double-registration (AIF + PMS) and extra red tape.	Lighter compliance burden for CIV schemes (e.g., relaxed diversification/ tenure norms).
Structure per Deal	Less streamlined; often involved complex arrangements.	Separate CIV “sub-fund” for each co-investment opportunity, with its own PAN/accounts.
Accessibility for AIFs	Required managing two distinct regulatory frameworks.	Fund managers won’t need a second license for each co-investment.
Investor Eligibility	Varied, but often complex and tied to PMS regulations.	Exclusively for Accredited Investors meeting specific criteria.
Ease of Execution	More cumbersome, slower dealmaking.	Streamlined, quicker deal execution.

Who Benefits from This Transformative Change?

This regulatory overhaul creates a win-win scenario for several key stakeholders in the Indian financial ecosystem:

• Fund Managers (AIFs): Private Equity and Venture Capital funds, operating as Category I or II AIFs, will find it significantly easier to tap their networks of high-net-worth investors. The simplified process means they can raise additional capital for deals without burdensome extra compliance, allowing for increased investment flexibility and quicker deployment of funds.
• Accredited Investors: Sophisticated investors, including high-net-worth individuals, family trusts, body corporates, and partnership firms meeting specific financial criteria (e.g., annual income of at least ₹2 crore or net worth of at least ₹7.5 crore for individuals), gain a new, regulated avenue to participate in private equity-style deals. This offers additional investment opportunities, diversification for portfolios, and the potential for higher returns by co-investing directly in high-growth unlisted companies.
• Unlisted Companies and Startups: Perhaps the most significant beneficiary, this framework is designed to unlock fresh capital for India’s burgeoning startup and unlisted company ecosystem. With more investment flexibility for wealthy investors, these companies can more easily attract additional funding, fueling innovation, expansion, and ultimately, job creation. SEBI explicitly states the aim is to “support capital formation in unlisted companies.”
• Indian Financial Markets and the Economy: By making co-investments more streamlined, SEBI anticipates larger capital flows into high-potential companies. This move deepens the Indian financial markets, promotes innovation, and broadens the “investment track,” contributing to overall economic growth and wealth creation for participants.

Conclusion

SEBI’s decision aligns perfectly with India’s broader ambition for robust financial markets and “ease of doing business.” By integrating co-investments within the AIF umbrella, the regulator is opening a new, structured wealth-creation channel. It’s a bold reform that empowers fund managers to pitch bigger deals and allows accredited investors to participate more directly in the growth stories of unlisted Indian firms. While higher rewards inherently come with higher risks, SEBI’s mandate for transparency and dedicated CIVs for each co-investment helps manage some of these exposures. Co-investors will still need to perform their due diligence, recognizing the inherent volatility of private markets. Nevertheless, this significant regulatory adjustment broadens the landscape of investment opportunities, ensuring that Indian financial regulations continue to bend towards greater innovation and a more robust flow of capital for sustained growth. The message is clear: the Indian private market space is becoming increasingly dynamic and accessible for those with the appetite and means to participate.

Citations

1. Securities and Exchange Board of India
2. Alternative Investment Funds 
3. Portfolio Management Services
4. Co-investment Vehicle 

Expositor(s):  Adv. Archana Shukla