[Suryansh Singh Chauhan is a 5th year B.A., LL.B. (Hons.) student at the West Bengal National University of Juridical Sciences, Kolkata]
India’s alternative investment fund (AIF) regime caps single-investee concentration. Under regulation 15(1)(c) of the SEBI (Alternative Investment Funds) Regulations 2012 (AIF Regulations), Category I and II AIFs cannot invest more than 25% of their investable funds in any one investee company, directly or through other AIFs. Large Value Funds for accredited investors are the exception, at 50%. Regulation 15(1)(a) of the AIF Regulations carries a parallel 25% ceiling on overseas investments.
Both limits are tested against investable funds, which regulation 2(1)(p) defines as the scheme’s corpus net of administration and management expenditure estimated for the fund’s tenure. The denominator is thus a forward-looking estimate and not the cash actually raised. As such, a scheme that is investment-compliant when created can turn non-compliant merely because the estimate was revised, though exposure has not moved. Whether SEBI treats this like an active overshoot is what will be examined here.
An Unintended Breach
Consider a fund with a corpus of INR 500 crore and estimated tenure expenses of INR 40 crore, giving investable funds of INR 460 crore. It invests INR 115 crore into one company, i.e., exactly 25%. Three years on, the permitted expense estimate stated in the private placement memorandum (PPM) is revised to INR 60 crore after a true-up against actual costs. Investable funds fall to INR 440 crore, and the same holding now stands at 26.1%. The fund has not deployed a rupee more, yet regulation 15(1)(c) stands breached on paper.
Nor is the scenario theoretical. SEBI’s quarterly AIF reporting format requires every AIF to recompute investable funds each quarter, and its note allows that for unexpected additional expenses, “the amount may be appropriately revised in the subsequent report(s).” SEBI’s own reporting architecture therefore assumes that the denominator will move.
Two Readings of Regulation 15
Regulation 15 of the AIF Regulations can be read in two ways. The first, apparently SEBI’s default, treats it as a continuing state of affairs. So if the ratio, as currently computed, exceeds 25%, the fund is in breach, regardless of the reason. The second treats it as a restriction on investment decisions, so that a later recalculation, whilst it may call for disclosure, is no violation in itself.
SEBI’s Record: India Realty, SREI and Exfinity
SEBI’s informal guidance of February 2014 in relation to India Realty Excellence Fund II LLP (India Realty) held that the 25% limit “must be complied with throughout the life cycle of the Fund or the scheme”, rejecting a one-time test at final close. It also computed investable funds on the sponsor’s commitment “as on the date of computation”, so the base is recomputed and not fixed at inception. India Realty thus establishes a continuing obligation, but does not address a moving base.
That question arose three years later in SEBI’s November 2017 adjudication order against SREI Multiple Asset Investment Trust (SREI), a case that appears to have escaped the passive breach literature. The scheme had advanced INR 299 crore and INR 222 crore to two investees against an investable corpus of INR 1,260 crore, i.e. 23.7% and 17.6% respectively. An INR 505 crore distribution eleven days later cut investable funds to INR 790.49 crore, taking the untouched investments to roughly 38% and 28% respectively. The fund argued that the limit “was not breached at the time of making fresh investment.” SEBI was unmoved: operational difficulty could not override the statutory requirement, given the primacy of investor protection, and a penalty of INR 10 lakh followed.
SREI cuts against the fund-favourable reading, but its weight is limited in three respects. The matter settled in July 2018, before the Securities Appellate Tribunal could rule, leaving the reasoning untested. The denominator event was a distribution – a voluntary decision of the manager, no different in kind from a fresh investment. Finally, SREI says nothing about a base that shrinks because a PPM-anchored expense estimate was revised in quarterly reporting.
That last scenario may be closest to the facts in SEBI’s June 2026 adjudication order against Exfinity Technology Fund, where overseas investments under regulation 15(1)(a) sat at 25.62% of investable funds until a July 2023 divestment cured a six-year breach. No denominator argument appears on the public record, so Exfinity is best read as an uncontested overshoot, and no authority either way. Notably, a margin of only 0.62 percentage points is consistent with a moving base.
A Tool SEBI Already Has
SEBI has already separated deviations driven by value from those driven by decision. A 2021 Board Memorandum on Category III AIFs recognised that a market fall alone could push a holding over a NAV-tested concentration limit and “result into passive breach of concentration norm.” The AIF Master Circular provides 30 days to rectify a passive breach of the regulation 15(1)(d) limit, confined to liquid positions as illiquid holdings cannot be sold down in a fixed period. SEBI has built a near-identical carve-out for mutual funds, covering deviations caused by redemptions or price falls, not reallocation.
Neither carve-out extends to regulation 15(1)(a) or (c), but as SEBI has never been asked, this looks more like an omission rather than a deliberate policy.
How Other Regimes Draw the Line
The position in the United States (US) is the clearest. Under the US Investment Company Act of 1940, 15 U.S.C. §80a-5(c) provides that a fund which qualified as “diversified” keeps that status despite a later discrepancy, unless it was “wholly or partly the result of” the acquisition. Under the Internal Revenue Code §851(d)(1), a regulated investment company’s discrepancy caused purely by market movement is not a violation, whilst an acquisition-caused one gets 30 days to cure. Both treat cause, and not merely existence, as the operative fact, which is what the fund-favourable reading asks of SEBI.
The European and English positions are more modest. Article 57(2) of the UCITS Directive requires a fund exceeding a diversification limit “for reasons beyond the control of” the fund to make remedying the position a priority objective. The FCA Handbook implements this in COLL 6.6.14R, allowing six months to restore compliance.
UCITS protects retail investors, whereas the EU’s AIFMD framework for professional-investor funds generally imposes no EU-wide numeric concentration cap. The AIF Regulations apply a UCITS-style hard ceiling to vehicles with a minimum ticket of INR 1 crore, a population far closer to AIFMD’s professional base. Yet even UCITS builds in a safety valve for deviations beyond the fund’s control. India has adopted the stringency without it.
The Case for a Denominator Exception
The material supports a fund-favourable reading of regulation 15 where the shift is expense-driven, for four reasons. SEBI’s reporting format treats the expense estimate as a routine projection the regulator itself requires to be kept current. India Realty computes investable funds “as on the date of computation”, which sits uneasily with treating the movement as suspect. The Category III and mutual fund carve-outs show that the passive-active distinction is administrable. And the US and UCITS/FCA frameworks test compliance at acquisition or decision, not on every recalculation.
Compliance should thus be tested against the figure validly reported when the investment was made, and last confirmed compliant. Where a later PPM-consistent revision alone produces a reading above 25%, it should not be a fresh breach requiring divestment. It should trigger disclosure in the quarterly report of the mechanism behind the revision, followed by a monitoring period modelled on the Category III 30-day window. In that period the fund would either show natural correction (through capital calls, expense correction or ordinary distributions) or take the step a genuine overshoot would require.
SEBI’s Likely Objection
SEBI would point to India Realty’s “throughout the life cycle” standard and SREI’s rejection of operational difficulty, neither of which looks at cause, and say that a carve-out invites managers to adjust expense estimates opportunistically, to create headroom or excuse an overshoot.
There are three answers. SREI is distinguishable in kind, not merely old and unappealed: a distribution is a manager’s choice, treated like an investment decision, whereas an expense revision under regulation 2(1)(p) of the AIF Regulations is a mandatory exercise which the reporting format compels every quarter. Next, the “throughout the life cycle” standard protects investors from a real increase in concentration risk, not from a change in a ratio that expresses an unchanged rupee exposure. Where the amount invested has not moved, the risk regulation 15 polices has not moved either. Finally, the manipulation concern calls for guardrails and not a blanket refusal. Revisions can be required to track PPM-disclosed cost items and be reported quarterly, as SEBI’s own Category III carve-out, confined to liquid positions, shows.
A denominator shift is not the SREI scenario, and treating it as one stretches the continuing-obligation standard beyond its investor protection rationale. SEBI already has the machinery to recognise the difference: a named passive breach category and a time-boxed cure window. Until it is asked to extend it to regulation 15, a fund facing a purely actuarial denominator shift should treat divestment as the safe course. The case for something less drastic is, however, stronger than SEBI’s adjudication record alone would suggest.
– Suryansh Singh Chauhan
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