The Securities and Exchange Board of India (SEBI) has unveiled the Green-Channel: AIF Rollout Upon Document Acknowledgement (GARUDA) framework, designed to significantly accelerate the launch of Alternative Investment Fund (AIF) schemes. This new regulation allows eligible funds to commence operations within 10 working days of filing their Private Placement Memorandum (PPM), provided SEBI raises no objections, marking a substantial shift from previous, often lengthier, approval processes.
The GARUDA framework aims to streamline operations for fund managers while maintaining robust disclosure and due diligence requirements. This development brings renewed focus to AIFs, a vital component of India's investment landscape offering exposure to diverse asset classes beyond traditional instruments like mutual funds.
Understanding SEBI's AIF Categories
SEBI categorizes Alternative Investment Funds (AIFs) into three broad types, each with distinct investment strategies, leverage rules, taxation, and regulatory compliance:
Category I AIFs
- Focus: Invest in sectors deemed to have positive economic or social impact.
- Examples: Venture Capital Funds (VCFs), SME Funds, Social Venture Funds, Infrastructure Funds, and Angel Funds.
- Investment Scope: Primarily target startups, small businesses, infrastructure projects, and socially driven enterprises.
- Leverage: Generally not permitted at the portfolio level, though limited operational borrowing is allowed.
- Taxation: Enjoy pass-through taxation under Section 115UB, meaning income is taxed at the investor level.
- Regulatory Concessions: Eligible for investments from institutions like pension and gratuity funds.
Category II AIFs
- Focus: Broadest and most widely utilized category.
- Investment Scope: Invest in private equity, structured credit, real estate, and other alternative assets, with some limits on listed equities.
- Leverage: Similar to Category I, leverage is restricted beyond operational needs.
- Taxation: Also benefit from pass-through tax treatment.
- Flexibility: Preferred by many private equity, venture debt, and credit fund managers due to their flexible investment mandates.
Category III AIFs
- Focus: Cater to sophisticated investment strategies involving leverage and active trading.
- Investment Scope: May invest across various asset classes, engage in derivatives trading, and employ hedge fund-like strategies.
- Leverage: Permitted and frequently utilized, leading to higher risk profiles.
- Taxation: Taxed at the fund level at the maximum marginal rate for individuals, unlike Category I and II.
- Regulatory Oversight: Subject to stricter regulatory scrutiny due to their complex strategies and use of leverage.
Key Changes Under the GARUDA Framework
The new GARUDA framework, applicable to all AIF scheme PPMs filed after the notification of the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2026, introduces several significant changes:
- Faster Scheme Launch: Regular AIF schemes can now begin operations 10 working days after filing their PPM via SEBI's Intermediary (SI) Portal, a significant reduction from previous timelines that required SEBI's prior review.
- Merchant Banker Role: While the approval process is expedited, Merchant Bankers retain a critical role. They must independently verify the accuracy and compliance of all disclosures in the PPM and submit a due diligence certificate. They must also be independent of the AIF, its sponsor, manager, or trustee.
- Relaxed Norms for Specific Funds: Accredited Investor-only (AI-only) Funds, Large Value Funds (LVFs), and Angel Funds benefit from further easing of norms. These funds are no longer required to route their PPMs through a Merchant Banker or await SEBI's observations, allowing immediate scheme launch upon PPM filing, provided the AIF is already registered.
- New Naming Conventions: Schemes exclusively for accredited investors must now include "AI Only Fund" or "AIOF" in their names, while Large Value Funds must use "LVF."
These reforms underscore SEBI's commitment to fostering a more efficient and dynamic alternative investment ecosystem in India, balancing rapid growth with essential regulatory oversight.