[Ayushi Singh is a 3rd Year B.B.A. LL.B. (Hons.) student at Gujarat National Law University, Gandhinagar]
India’s alternative investment fund (AIF) industry has enjoyed considerable success. Total AIF commitments reached ₹15.74 trillion by December 2025, growing at nearly 30% each year over the past five years. More than 1,700 AIFs are now registered with the Securities and Exchange Board of India (SEBI). Capital has flowed into private equity, real estate, private credit, and various alternative strategies. The SEBI AIF Regulations, 2012 (AIF Regulations), and the 14 rounds of amendments that followed, have built a well-structured system.
However, this system has encountered a major issue. At the IVCA Conclave 2026, the SEBI Chairman provided a clear assessment: despite commitments nearing ₹16 trillion, only about ₹205 billion of AIF capital has reached startups. The issue is not only about where the capital goes, but also if it can move at all once it is committed.
The AIF framework relies on a closed-ended model. In the US and Europe, investors tolerate illiquidity because a secondary market offers an exit if needed. In India, investors accept this lock-up without an exit option. Fund managers capture the illiquidity premium through carried interest, while investors bear the cost without any mechanism for relief. SEBI has made real progress in transparency and end-of-life liquidity. Dematerialisation of AIF units, NAV reporting to depositories under the February 2026 mandate, and the Dissolution Period framework introduced in 2024 have all contributed to this progress. Yet, none of these create mid-life liquidity. The regulatory gap lies not in disclosure but in infrastructure. This post highlights that gap, questions why SEBI has overlooked it, and suggests a framework to address it, using global comparisons.
The Structural Design of Illiquidity
According to the AIF Regulations, all Category I and Category II AIFs must be closed-ended, with a minimum tenure of three years. In practice, private equity and venture capital funds often run for seven to ten years, with no investor-initiated exit mechanism beyond the fund’s own portfolio realisations.
While transferring AIF units is legally possible, it faces numerous restrictions. Fund documents require manager consent, existing limited partners (LPs) have rights of first refusal, and the transferee must satisfy the ₹1 crore minimum commitment threshold. This creates a bilateral, consent-dependent market lacking a price discovery mechanism. Regulation 14 of the AIF Regulations allows for the listing of closed-ended AIF units on stock exchanges, but these exchanges have no market-making obligation, resulting in negligible volumes. AIF portfolios mainly consist of unlisted assets with subjective net asset values (NAVs). The 2026 NAV upload mandate improves transparency but does not address the issue of valuation subjectivity. Without an exit strategy, fund managers capture the illiquidity premium while investors bear the entire cost.
What SEBI Has Done, and What It Has Deliberately Not Done
It would be misleading to describe SEBI’s recent reforms as mere window-dressing. Dematerialisation of AIF units is essential for any secondary market. The February 2026 NAV upload mandate standardises valuation reporting and provides data access to potential transferees. The Dissolution Period framework from April 2024, which includes a mandatory bid mechanism to protect dissenting investors, addresses end-of-life liquidity.
SEBI has not been inattentive; it has been cautious. Two main concerns have influenced this caution: valuation subjectivity, which increases the risk of mis-selling, and investor sophistication, as secondary buyers may be less knowledgeable than original LPs about fund strategy and portfolio quality. These concerns are valid, but SEBI has chosen to avoid regulatory action instead of implementing solutions. Both issues can be resolved with careful planning. SEBI has established the necessary transparency infrastructure: demat units, NAV reporting, standardised disclosures, and classification of accredited investors. The missing element is a regulated transaction framework that allows for practical transfers between accredited investors.
The Global Secondaries Architecture: What India Can Learn
The US secondary market, which includes LP interest sales and General Partner (GP) led transactions, has surpassed USD 150 billion in annual volume. The regulatory framework includes the Investment Advisers Act, SEC Rule 144A, and Regulation D exemptions, which restrict transactions to qualified institutional buyers and accredited investors. Private platforms like Setter Capital and Nasdaq Private Market operate with oversight but without the typical obligations that exchanges have. The key takeaway is that the US keeps the bilateral, accredited-investor-only platform separate from the public exchange. India’s regulation 14 combines the two by directing secondary liquidity through stock exchanges.
Singapore requires pre-transfer NAV certification by an independent valuer, a measure India can adopt via a SEBI circular utilising the existing 2026 NAV upload infrastructure. The Cayman Islands model suggests requiring pre-agreed transfer terms in AIF fund documents, detailing consent thresholds, pricing methods, and criteria for eligible transferees as standardised clauses in the private placement memorandum (PPM).
All three jurisdictions limit secondary transactions to sophisticated investors, require independent valuation at transfer, and apply regulatory oversight to intermediaries. India already meets two out of three necessary conditions. The missing piece is the transaction framework itself.
The Proposed Regulatory Framework
The Regulated Bilateral Transfer Platform
SEBI should create a dedicated AIF Secondary Market Platform (ASMP), modelled after US private secondary platforms and separate from stock exchanges under the Securities Contracts (Regulation) Act 1956 (SCRA). This platform would not have market-making obligations or continuous trading, but it would provide a regulated space for sellers to list AIF interests and for accredited buyers to complete transactions. A new sub-regulation under regulation 14 of the AIF Regulations should allow ASMP transfers under three conditions: (i) both transferor and transferee must be Accredited Investors; (ii) a pre-transfer NAV certification must be obtained; and (iii) the transferring LP must meet SEBI-mandated disclosure obligations. Section 11 of the SEBI Act, 1992 grants SEBI broad authority to regulate intermediaries without needing exchange registration. The ASMP should be considered a market infrastructure institution, akin to depositories or clearing corporations.
The Pre-Transfer NAV Certification Requirement
Before any ASMP transaction, the AIF manager or a SEBI-registered valuer must confirm the fund’s latest NAV within 30 days prior to the transfer. The 2026 NAV upload circular already includes this requirement, enabling the ASMP to directly retrieve data from the depository. Parties can negotiate a discount or premium. Any deviation must be noted in the transaction record, addressing valuation subjectivity without needing independent assessments for each transaction.
Standardised Disclosure Obligations on the Transferring LP
SEBI should require any transferring LP to provide the transferee with the following before the transaction: (i) the fund’s latest audited financial statements; (ii) the most recent PPM and any amendments; (iii) the latest Fund Performance Report submitted to SEBI’s benchmarking agencies; and (iv) any significant adverse events reported since the last annual report. All necessary materials already exist under the AIF Regulations; this proposal simply standardises the delivery of existing information to a new audience without adding new obligations.
GP-Led Secondary Transactions and Continuation Fund Vehicles
In addition to LP interest transfers, SEBI should explicitly allow GP-led secondary transactions, where the fund manager sells the entire portfolio to a new continuation vehicle. GP-led transactions account for approximately 41% of global secondary volume, yet India’s current framework lacks any mechanism for mid-life liquidity. The necessary conditions include: 75% LP consent by value; an independent valuation by a SEBI-registered Category I Merchant Banker; and exit rights for dissenting LPs at independent valuation. The continuation fund should register through an expedited process of 15 working days, compared to the standard 30 to 75 days. This change would eliminate the practical deterrent of regulatory delays without compromising oversight.
What Does Not Need Amendment
The ₹1 crore minimum commitment threshold should remain as the main guardrail for investor protection. The manager’s consent requirement can remain in fund documents but should be considered granted for transfers facilitated through ASMP among Accredited Investors. This change would remove the veto power that currently makes secondary transfers unworkable, while still preserving the consent framework that fund managers have relied on.
Conclusion
SEBI has spent 14 years building the infrastructure necessary for a secondary market: demat units, standardised NAV reporting, accredited investor classification, and a benchmarking system. The barriers that once made regulating the secondary market difficult have been largely removed between 2021 and 2026. What remains is a regulatory choice.
The illiquidity trap is not an accident of design. It results from caution that no longer has a valid reason. An amendment to regulation 14 allowing ASMP-facilitated transfers among Accredited Investors, a SEBI circular requiring pre-transfer NAV certification, standardised LP disclosure obligations, and a clear framework for continuation funds represent the logical next steps in the regulatory evolution SEBI has been pursuing. The SEBI Chairman’s remark at the IVCA Conclave 2026 went beyond startup funding. A secondary market would increase the pool of investors willing to invest in AIFs since the perceived cost of illiquidity decreases with an exit option. This growth directs more capital to startups, infrastructure, and growth companies. A secondary market is not just an additional benefit; it is the key element that makes the entire framework work as intended.
– Ayushi Singh
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