Key Takeaways
Broad-Based Requirement for AMC-Managed AIFs
- Where an AMC, or its subsidiary, manages or advises an AIF, the relevant AIF structure must satisfy the broad-based fund condition under the SEBI (Mutual Funds) Regulations, 2026.
- A fund qualifies as broad-based only if it has at least 20 investors and no investor holds more than 25% of its corpus.
- The requirement is to be tested scheme-wise, not only at the umbrella AIF level. Every scheme must satisfy the conditions independently.
- In master-feeder arrangements, the master fund and the feeder fund are both required to meet the broad-based test separately.
FPI Exemption: Domestic Regulated Entities Not Covered
- Domestic regulated entities such as banks, insurance companies and provident fund trusts cannot claim the FPI exemption available under the SEBI Master Circular for Mutual Funds.
I. Background: Where Two Regulatory Worlds Collide
India’s fund management industry has long been structured around two separate regulatory tracks. Mutual funds operate as retail pooled investment products under SEBI’s mutual fund framework. AIFs are governed under the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) as privately pooled vehicles meant for sophisticated investors.
At the product level, the line is clear. An AIF is not a mutual fund. It is created, offered, managed and regulated under a distinct regime. The policy focus is also different. The mutual fund framework is centred on retail investor protection, while the AIF framework is built around private capital formation, contractual flexibility and participation by informed investors.
The real issue does not arise from the product. It arises from the manager.
Several mutual fund groups now manage alternative investment funds (“AIFs”) through their asset management companies (“AMCs”) or through subsidiaries of such AMCs. In these structures, the AIF continues to be governed by the AIF Regulations. The manager or adviser, however, may still sit within the regulatory perimeter of the SEBI (Mutual Funds) Regulations, 2026 (“MF Regulations”), where that manager or adviser is an AMC or its subsidiary.
Regulation 21(b) of the MF Regulations, corresponding to erstwhile Regulation 24(b) of the SEBI (Mutual Funds) Regulations, 1996, restricts the business activities that an AMC may undertake. It permits an AMC to provide management and advisory services only to specified pooled assets, including offshore funds, insurance funds, pension funds, provident funds and such categories of foreign portfolio investors as may be specified by SEBI.
The MF Regulations also recognise the concept of a “broad-based fund”, being a fund with at least 20 investors and where no single investor holds more than 25% of the fund corpus.
Separately, the SEBI Master Circular for Mutual Funds permits AMCs to provide management or advisory services to specified categories of foreign portfolio investors (“FPIs”). That was the exemption referred to in UAPL’s fourth query. The issue was whether domestic regulated entities such as Indian banks, insurance companies and provident fund trusts could be treated similarly, on a look-through basis, because they are also regulated institutional entities. SEBI clarified that they cannot. The exemption is linked to specified FPI categories and does not extend to domestic regulated entities merely because they are regulated under separate Indian laws.
This brought two related issues into focus. First, when an AMC or its subsidiary manages or advises an AIF, should the AIF also satisfy the broad-based fund test under the mutual fund framework, or is compliance with the AIF Regulations sufficient? Second, where the mutual fund framework permits exemptions for specified FPI categories, can similar treatment be extended to domestic regulated entities such as banks, insurance companies and provident fund trusts on a look-through basis?
These issues were placed before SEBI through the informal guidance request submitted by UTI Alternatives Private Limited (“UAPL”), a wholly owned subsidiary of UTI Asset Management Company Limited and the investment manager to three Category II AIFs. UAPL sought SEBI’s views on the application of the broad-based fund requirement to its AIF management operations, including whether the test applies at the fund or scheme level, how it operates in master-feeder structures, and whether the FPI exemption can be extended to domestic regulated entities. SEBI’s Informal Guidance (Issue No. I/9052/2026, April 9, 2026) addresses these questions and is therefore significant for AMC-backed AIF managers. The key clarifications emerging from the informal guidance are set out below:
| Query | SEBI’s Answer | Reasoning | Practical Effect |
|---|---|---|---|
| Q1. Does the broad-based requirement apply to AIFs managed by AMCs? | Yes. The broad-based requirement applies to management/advisory services rendered by AMCs or their subsidiaries to AIFs and their schemes. | SEBI noted that an AIF is a privately pooled investment vehicle under Regulation 2(b) of the AIF Regulations. Since the MF Regulations apply the broad-based requirement to pooled assets managed/advised by AMCs, AIFs fall within scope. | AMC-managed AIFs cannot rely only on AIF Regulations. They must also satisfy the MF broad-based fund test where AMC or its subsidiary is involved in management/advisory services. |
| Q2. Is the test applicable at the fund level or the scheme level? | Scheme level. Each scheme must independently satisfy the broad-based criteria. | SEBI relied on Regulation 10 of the AIF Regulations, which treats each AIF scheme as a distinct investment vehicle for investor limits, corpus requirements and compliance obligations. | Compliance cannot be tested only at the umbrella AIF level. Each scheme must have at least 20 investors, and no single investor may hold more than 25% of the scheme corpus. |
| Q3. In a master-feeder structure, whether it is sufficient if only the master fund satisfies the broad-based fund test? | No. Each fund, whether master or feeder, must independently comply. | SEBI rejected the position that feeder funds need not comply merely because active management occurs at the master level. It referred to Regulation 15 of the AIF Regulations and the distinct treatment of each fund/scheme. | Feeder vehicles cannot avoid the broad-based fund test merely because they do not make standalone investment decisions. Both master and feeder funds must be tested separately. |
| Q4. Does the FPI exemption extend to domestic regulated entities on a look-through basis? | No. Domestic regulated entities do not qualify for the FPI exemption under the Mutual Fund Master Circular. | Paragraph 22.2 of the Master Circular for Mutual Funds permits AMC to provide management/advisory services to specified FPI categories. SEBI clarified that this exemption is category specific. Domestic banks, insurance companies and provident fund trusts are governed by separate domestic regulatory frameworks and are not FPIs. | Domestic regulated investors cannot be treated as exempt FPIs by analogy or on a look-through basis. Their participation must be assessed under the ordinary broad-based requirement. |
II. Reading the Guidance: A Practical Structuring Signal
SEBI’s informal guidance adopts a strict reading of the MF Regulations. The guidance does not suggest that an AIF becomes a mutual fund, or that the mutual fund framework applies wholly to AIFs. The point is narrower: where an AMC or its subsidiary manages or advises a pooled vehicle irrespective of its regulatory framework, the restrictions applicable to the AMC under the MF Regulations becomes relevant.
On that basis, SEBI has treated an AIF as a pooled asset for purposes of Regulation 21(b) of the MF Regulations. Since an AIF is, by definition, a privately pooled investment vehicle, SEBI’s view is that an AIF or its scheme receiving management or advisory services from an AMC, or its subsidiary, must satisfy the broad-based fund requirement.
The possible regulatory intent appears to be to ensure that AMCs do not manage concentrated pooled vehicles outside the mutual fund framework without meeting the investor-spread discipline applicable to pooled assets under the MF Regulations. In substance, SEBI is not changing the regulatory character of an AIF but is ensuring that the AMC’s permitted activity framework is not diluted merely because the pooled vehicle is structured as an AIF.
This settles an important interpretive issue for AIFs managed by an AMC. A possible industry argument can be that AIFs are already separately regulated under the AIF Regulations and should not be subject to an additional MF Regulations condition merely because its manager or adviser is an AMC or its subsidiary. SEBI has not accepted that position. Instead, it applied the broad-based requirement by focusing on the pooled nature of the AIF and the AMC’s regulatory perimeter.
The scheme-level application of the test is the most commercially significant aspect of the guidance. Many Category II AIFs are structured around a concentrated pool of sophisticated, high-ticket investors. A requirement of at least 20 investors, with no single investor holding more than 25% of the corpus, can materially affect fund formation, first-close strategy, anchor investor participation, warehousing arrangements, co-investment structures and bespoke institutional mandates.
The master-feeder clarification reinforces the same approach. SEBI has made it clear that a feeder vehicle cannot avoid the broad-based requirement merely because investment decisions are taken at the master fund level. Where an AMC or its subsidiary provides management or advisory services, each relevant vehicle must be tested independently.
The practical takeaway is straightforward: AMC-backed AIF managers must address the broad-based requirement at the structuring stage itself, but the issue is not limited to new launches. Existing AIF schemes managed or advised by AMCs or their subsidiaries should also be reviewed for scheme-level compliance with the investor count and concentration thresholds. This cannot be treated as a post-closing compliance formality. At launch and on an ongoing basis, managers should assess whether each relevant AIF scheme has the required investor spread, whether any investor breaches the 25% concentration threshold, and whether any master-feeder arrangement creates a separate compliance issue.
While the guidance is fact-specific and does not constitute a binding decision of the SEBI, it is a clear indication of SEBI’s regulatory posture. For AMCs building or scaling pooled investment vehicles, the compliance analysis can no longer stop at the AIF Regulations.
