Revisiting AIF Exit Governance: A Critical Analysis of SEBI’s Proposed Framework for Winding-Up and Registration Surrender

Alternative Investment Funds (AIFs) have emerged as an important source of capital formation within India’s financial ecosystem, facilitating investment into sectors such as infrastructure, private equity, venture capital and other areas that require long-term investment horizons. While the regulatory framework governing the establishment and operation of AIFs has undergone significant development since the introduction of the SEBI (Alternative Investment Funds) Regulations, 2012, the framework governing their closure and surrender of registration has remained comparatively underdeveloped. This regulatory gap has become increasingly evident as funds approaching the end of their tenure often continue to face unresolved obligations, including litigation, tax disputes and administrative liabilities, resulting in prolonged compliance burdens despite limited operational activity. This paper critically examines SEBI’s proposed framework governing the winding up of AIFs and surrender of registration. It analyses the proposal’s recognition of residual entities and its introduction of conditional flexibility permitting retention of funds beyond their prescribed tenure in limited circumstances. The paper argues that the proposal reflects a broader shift towards lifecycle-based regulation by distinguishing between actively operating funds and entities that continue solely for the purpose of resolving residual obligations. Such an approach has the potential to improve regulatory efficiency and better align supervision with the functional realities of fund closure. At the same time, the paper identifies several structural concerns within the proposed framework, including the absence of clearly defined retention thresholds, the possibility of prolonged residual entities, risks of regulatory arbitrage and practical challenges associated with investor coordination and regulatory oversight. Through a comparative examination of regulatory approaches adopted in the European Union, the United Kingdom, Singapore, Mauritius and the United States, the paper highlights the importance of combining flexibility with robust disclosure obligations and supervisory safeguards. It concludes that SEBI’s proposal represents a necessary and progressive reform.