India's Sebi allows Alternative Investment Funds to retain proceeds beyond fund life

These conditions include the presence of litigation notices or regulatory demands, obtaining consent from at least 75 per cent of investors by value for retaining funds against anticipated liabilities, or the necessity to cover residual winding-up related operational expenses. Litigation-related communications can encompass notices from tax authorities, regulators, law enforcement agencies, courts, investors, or counterparties that suggest potential tax, legal, or regulatory liabilities.

When seeking investor approval for retaining money against anticipated liabilities, fund managers must disclose the amount to be retained and the estimated duration. If funds are retained for residual operational expenses, this period cannot exceed three years from the end of the fund's permissible life. The Standard Setting Forum for AIFs (SFA) will consult with Sebi to establish implementation standards for eligible operational expense categories.

Sebi has also established an 'Inoperative Fund' status for AIFs that have completed investment liquidation but still hold retained proceeds or are registered pending litigation outcomes. Funds granted this status are prohibited from making new investments, launching new schemes, or charging management fees. Any retained monies must be invested in instruments permitted by the AIF Regulations. Several compliance requirements, such as quarterly and annual activity reports and performance benchmarking disclosures, are waived for Inoperative Funds.

Both AIFs retaining funds and those classified as Inoperative Funds must submit annual reports on retained money and outstanding liabilities to Sebi and investors within 30 days of the financial year-end. The framework, effective immediately, also extends to Venture Capital Funds registered under the previous Sebi (Venture Capital Funds) Regulations, 1996.