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ARTICLE · 09 JULY 2026

SEBI Introduces Framework For Retention Of Liquidation Proceeds And ‘Inoperative Fund’ Status For AIFs

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The Securities and Exchange Board of India (“SEBI”), through its circular dated 16.06.2026 (“AIF Circular”), has introduced a framework permitting Alternative Investment Funds (“AIFs”) and their schemes to retain liquidation proceeds beyond the end of their permissible fund life in specified circumstances.

IndiaFinance and Banking
Sagus Legal LLP
Sagus Legal LLP

The Securities and Exchange Board of India (“SEBI”), through its circular dated 16.06.2026 (“AIF Circular”)1 , has introduced a framework permitting Alternative Investment Funds (“AIFs”) and their schemes to retain liquidation proceeds beyond the end of their permissible fund life in specified circumstances.

The salient features of the AIF Circular are as follows:

(i) Retention of liquidation proceeds: An AIF or its scheme may retain liquidation proceeds beyond the end of its permissible fund life if any one of the following conditions are satisfied:

(a) where the AIF or scheme has received a litigation, tax, regulatory or similar notice indicating a potential liability.

(b) where at least 75% of the investors by value consent to retention on account of anticipated litigation or tax liabilities. In such cases the manager of AIF shall disclose the amount being retained and estimated time period for which it is proposed to be retained to the investors of the fund while seeking their

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