SEBI Proposes Clarifications on Maintaining Pro-Rata Rights of Investors of AIFs

The Securities and Exchange Board of India (SEBI) vide the Securities and Exchange Board of India (Alternative Investment Funds) (Fifth Amendment) Regulations, 2024 (Amendment Regulations) notified on November 18, 2024, amended Regulation 20 of the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations). The Amendment Regulations provided that rights of the investors of a scheme of an alternative investment fund (AIF) shall be pro-rata to their commitment to the scheme, in each investment of the scheme and in distribution of proceeds of such investment. Following the Amendment Regulations, SEBI issued a circular dated December 13, 2024 (2024 Circular), prescribing specific exemptions with respect to maintaining pro-rata rights of investors investing in AIFs (which can be accessed here). 

In response to industry feedback and representations from the AIF industry seeking flexibility and clarity regarding the requirement for maintaining pro-rata rights, SEBI has released a draft circular on November 8, 2025, proposing detailed clarifications and specific modalities for maintaining pro-rata rights of investors in AIFs (Draft Circular). The Draft Circular is open for public comments until November 28, 2025.

Key highlights of the proposals in the Draft Circular are outlined below:

1. Drawdown methodology and definition of ‘commitment’:

1. 1. The term ‘commitment’ referred to in Regulation 20(21) of AIF Regulations shall be construed as either ‘commitment; or ‘undrawn commitment’, for the purpose of drawing down capital from investors of a scheme of an AIF on a pro-rata basis for making investments and for distribution of proceeds from such investments. This flexibility allows AIFs to adopt either methodology based on their operational requirements and investor preferences.

1. 2. SEBI has clarified that investors of an AIF scheme shall have rights in distribution of proceeds of an investment, (I) pro-rata to their contribution to such investment; or (II) pro-rata to their contribution to such investment on a time weighted pro-rata basis, as clearly disclosed upfront to investors in the private placement memorandum (PPM) of the scheme.

1. 3. The term ‘undrawn commitment’ is defined to mean the commitment made by the investor to the scheme, net of funds already drawn down by the AIF for making investments or otherwise.

1. 4. Close‑ended schemes issuing or redeeming at net asset value (NAV) must still satisfy the pro‑rata condition at the time of drawdown.

2. Conditions and disclosures for chosen methodology: 

1. 1. The basis for calculating pro rata rights (commitment vs undrawn commitment) must be disclosed upfront in the PPM and cannot be changed during the scheme’s tenure.

1. 2. Where a scheme uses a commitment-based methodology and an investor is excused/excluded from a particular deal, the unutilised portion of that investor’s commitment cannot be used for subsequent investments, and this consequence must be pre-disclosed to investors.

1. 3. The chosen drawdown methodology must not result in any investor holding a disproportionate stake in an investee company through the AIF i.e. the ratio of contribution to an investee company vis-à-vis the commitment to the scheme must remain within the concentration limits prescribed under Regulation 15(c) of AIF Regulations.

3. Transition for existing AIF schemes:

1. 1. Schemes already following one of the two permitted drawdown methodologies may continue with their existing approach until the end of their tenure.

1. 2. Schemes using any other drawdown/acceptance methodology must align future drawdowns (i.e., those undertaken post issuance of the Draft Circular) with one of the prescribed methodologies, and such alignment must be explicitly disclosed in the PPM.

1. 3. Investors shall have the choice to continue contributing to such AIF schemes post the issuance of the Draft Circular. Investors in such schemes may choose whether to continue contributing to new investments post‑alignment, and any resulting breach of minimum investment or corpus‑based limits as a result of investors choosing not to invest in existing AIF schemes, will not be treated as non‑compliance.

4. Drawdown methodology for Category III AIFs:

1. 1. Open-ended Category III AIFs, given investors can subscribe at any time, such AIFs are not required to obtain pro-rata drawdowns. However, schemes of such AIFs are expected to issue or redeem units at NAV with other proceeds being distributed pro-rata to units held.

1. 2. If schemes of such AIFs invest primarily in unlisted securities, they must comply with the drawdown‑related conditions outlined for close‑ended schemes.

5. Legacy investments and priority distribution models: 

1. 1. Rights of investors not being pro-rata to their financial commitment in an AIF scheme and not exempted by SEBI shall be dealt with in the manner specified by SEBI.

1. 2. For investments made on or before December 13, 2024, distributions may continue as per existing waterfalls and disclosures made in the fund documentation, even where rights are not pro‑rata, subject to earlier directions on priority distribution models.

1. 3. Existing AIFs or schemes of AIFs following the priority distribution model and not falling under the exemptions stipulated under the 2024 Circular have been directed to refrain from making any fresh commitment or investing (directly or indirectly) in a new investee company.

6. Carried interest and currency of commitment: 

1. 1. Carried interest or profit-sharing between investors and fund managers is not included in the pro rata calculation.  SEBI has clarified that the requirement of pro‑rata distribution does not apply to the portion of returns shared by an investor (whether resident or non-resident) with the manager/sponsor or employees/directors/partners of the manager of the AIF as carried interest/additional return, where such sharing is documented in contribution agreements.

1. 2. All investor (whether resident or non-resident) commitments must be recorded in Indian Rupees (INR) in the contribution agreement for the purpose of calculation of the corpus of the scheme and for determining pro‑rata rights based on commitment or undrawn commitment.

Managers and key managerial personnel of AIFs are responsible for maintaining necessary    records demonstrating how pro‑rata rights are maintained in compliance with AIF Regulations and directions.

Conclusion:

The Draft Circular reflects SEBI’s ongoing effort to balance regulatory certainty with operational flexibility for AIFs. By permitting multiple drawdown methodologies, grandfathering investments made prior to December 13, 2024, and specifically addressing industry concerns around carried interest and open‑ended Category III AIFs, SEBI is seeking to create a pragmatic framework that maintains investor protection while accommodating diverse fund structures and investment strategies.