SEBI Introduces Inoperative Fund Status for AIFs

Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026, Dated 16.06.2026

SEBI has issued a circular permitting Alternative Investment Funds (AIFs) and erstwhile Venture Capital Funds (VCFs) to retain winding-up proceeds beyond the permissible fund life in specified circumstances. The circular also introduces a new ‘Inoperative Fund’ status for eligible funds intending to surrender their registration while retaining monies to meet outstanding obligations.

The circular comes into force with immediate effect.

1. Retention of Winding-Up Proceeds Permitted in Specified Cases

Under the revised framework, AIFs and VCFs may retain monies after the expiry of the permissible fund life in situations such as:

• Pending or anticipated litigation;
• Regulatory demands or proceedings;
• Outstanding liabilities; and
• Residual operational and administrative expenses.

The relaxation is intended to facilitate orderly closure of funds where certain obligations remain unresolved at the time of winding up.

2. Introduction of ‘Inoperative Fund’ Status

SEBI has introduced an ‘Inoperative Fund’ status for eligible funds that intend to surrender their registration but need to retain monies for meeting pending liabilities or obligations.

The new status provides a regulatory mechanism for funds that have substantially completed their operations but cannot immediately surrender their registration due to unresolved matters.

3. Eligibility for Inoperative Fund Status

An AIF may apply for Inoperative Fund status where:

• Its scheme(s) have not retained any monies beyond the permissible fund life; but
• The fund wishes to continue holding registration solely in anticipation of a favourable outcome of pending litigation.

This enables funds to maintain their registration pending the resolution of legal proceedings that may result in future recoveries or distributions.

4. Surrender of Registration

An Inoperative Fund shall be required to apply to SEBI for surrender of its certificate of registration only after:

• All outstanding liabilities have been discharged; and
• All retained monies have been distributed to investors across all schemes.

Accordingly, the surrender process can be completed only after the fund’s affairs have been fully settled.

5. Objective of the Circular

The framework seeks to:

• Facilitate orderly winding up of AIFs and VCFs;
• Address practical challenges arising from pending litigation and liabilities;
• Protect investor interests by enabling retention of funds where necessary;
• Provide regulatory clarity on post-winding-up obligations; and
• Streamline the registration surrender process.

6. Expected Impact

The introduction of the Inoperative Fund framework provides greater flexibility to AIFs and VCFs in managing residual obligations after the expiry of their fund life. The measure is expected to improve regulatory certainty, facilitate efficient closure of investment funds and ensure that investor monies are appropriately managed until all liabilities and disputes are resolved.

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