SEBI registration marks an important stage for any Alternative Investment Fund (“AIF”), but it also begins the more sustained phase of compliance. Once the fund is operational, attention turns to the way regulatory obligations are carried into day-to-day decision-making. Under the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”), detailed policies and procedures are required as part of the framework governing fund decisions.
This article considers the role of policies in fund governance, the key policies an AIF should have, and the risks that arise when those policies are absent or not followed.
Why Policies Matter Once an AIF Is Registered?
The AIF Regulations call for detailed policies and procedures at the AIF level so that fund decisions remain aligned with applicable law and the fund documents. Joint approval by the investment manager and the relevant governing body is required for these policies and procedures, which must be reviewed regularly, including where business developments warrant reconsideration.1 They therefore form part of the AIF’s regulatory governance framework, rather than operating as optional internal documents. They should not be treated as templates that can simply be copied and adopted. As part of the fund’s internal control framework, each policy should go through a proper process of drafting, approval and adoption and be uniquely tailored to the fund’s strategy, structure and risk profile.
In practice, these policies perform three core governance functions:
- They set a defined framework for fund decisions and the standard operating procedures that the fund team is expected to follow.
- They create standards against which investors and other stakeholders can assess the conduct of the investment manager.
- For SEBI and the relevant governance and compliance functions, they provide a documented benchmark against which the fund’s conduct and compliance can be assessed.
The annual Compliance Test Report (“CTR”) adds a further layer of oversight. The investment manager prepares it in the prescribed format to assess compliance with the AIF regulatory framework, including the applicable provisions of the Master Circular.2 The CTR should correspond with the fund’s actual compliance position for the relevant financial year, including where that position depends on how applicable policies and procedures were implemented.
Core Policies and Governance Frameworks
The table below identifies the main policies and frameworks that support governance and compliance for an AIF and pairs them with the regulatory provisions from which they arise. Some provisions expressly call for a written policy, while others impose substantive obligations that are ordinarily carried into effect through documented internal policies and procedures. The list is therefore indicative rather than exhaustive. Additional policies or procedures may be required or appropriate depending on the AIF’s category and structure, investment strategy, asset class, use of leverage, investor profile, governance arrangements and other operational features.
| S. No. | Policy / Framework | Purpose and Operation |
| 1 | Code of Conduct3 | Schedule IV of the AIF Regulations imposes standards of integrity, due diligence, independent professional judgment and acting in the interests of investors on the AIF, the Manager, key management personnel, members of the investment committee, the trustee and other governing persons. The AIF is also required to act for the benefit of its investors and in accordance with its investment objectives and fund documents. The Code brings together the applicable standards on disclosure, risk management, conflicts and decision-making. A written code translates those standards into practical rules for day-to-day conduct.4 |
| 2 | Risk Management5 | It provides a framework for identifying, assessing, monitoring and managing risks arising from the fund’s activities. It should align the fund’s investment and operational processes with appropriate internal controls and escalation mechanisms, considering the nature and complexity of the fund.6 A documented framework helps ensure that material risks are identified consistently and addressed before they affect the fund or its investors. |
| 3 | Conflict of Interest7 | It sets out how actual or potential conflicts are identified, assessed, escalated, mitigated and disclosed to investors, and who is responsible for dealing with them. The PPM also contains disclosures on conflicts of interest and the procedures for identifying and addressing such situations, and the policy should operate consistently with those disclosed processes. SEBI has examined adherence to such policies, as discussed in the next section. |
| 4 | Investor Grievance Redressal8 | It sets a clear route for complaints. The manager must redress grievances promptly, within 21 days of receipt, and the fund must also work with SEBI’s SCORES and dispute resolution systems.9 The Investor Charter and complaint data must be disclosed in the placement memorandum. |
| 5 | Cybersecurity and Cyber Resilience10 | It depends on the CSCRF category applicable to the Manager. For AIFs, categorisation is determined at the Manager level, considering the cumulative corpus of the AIF schemes managed by it. Depending on the applicable threshold, the Manager may fall within the small-size, mid-size, self-certification or qualified category.11 The cybersecurity framework and controls should accordingly be aligned with the requirements applicable to the relevant category. |
| 6 | AML / CFT12 | It sets out the framework for preventing the fund from being used for money laundering or terrorist financing. It covers client acceptance, customer due diligence and KYC, ongoing monitoring of transactions, maintenance of records and identification and reporting of suspicious transactions.13 |
| 7 | Privacy14 | It governs how personal information is collected, used, disclosed and protected. Rule 4 of the SPDI Rules requires an applicable body corporate handling personal information to provide and publish a privacy policy covering its data practices, purposes of collection, disclosure and security practices. |
| 8 | Stewardship15 | It sets out how an AIF monitors its investee companies and exercises its rights in relation to those investments. It guides the fund’s approach to monitoring performance and governance, engaging with management, exercising voting rights and managing conflicts of interest. By establishing a framework for such oversight and engagement, the policy helps ensure that stewardship decisions are taken in the interests of the fund’s investors and promotes accountability in the exercise of those rights.16 |
When Policy and Practice Diverge?
Policies are effective only when they are reflected in the fund’s actual decision-making and compliance processes. A policy must therefore be implementable: it should assign responsibility, set out approval and escalation steps, and require records that can be produced on inspection. A failure at this stage can create risks at multiple levels.
The first risk is to governance: Without clear policies, decisions become inconsistent and hard to defend. Investors may question decisions taken outside a defined process. Complaints then move to SEBI’s platforms instead of being settled by the manager.
The second risk is inconsistency between policy, conduct and reporting: A policy may require a particular approval, review or escalation, but if the transaction record does not show that the process was followed, the fund may be unable to demonstrate compliance. The same inconsistency can then flow into the CTR, trustee reporting or investor disclosures, creating a separate compliance concern even where the underlying commercial decision may otherwise have been defensible.
The third risk is enforcement and monetary penalty: A failure to comply with the AIF Regulations or directions issued by SEBI may attract enforcement action. Section 15EA of the Securities and Exchange Board of India Act, 1992 grants SEBI the power to levy a penalty of not less than ₹1 lakh, which may extend to ₹1 lakh for each day during which the failure continues, subject to ₹1 crore or three times the gains made from such failure, whichever is higher. 17
Recent SEBI proceedings show that policy-related risk does not arise only from the absence of a written policy, but also from failures in its implementation. SEBI has examined cases involving failure to follow prescribed conflict-management processes, absence of documented procedures, inconsistencies between actual conduct and compliance reporting, and disclosures made only after the relevant issue had arisen.18
Conclusion
Registration is only the starting point of an AIF’s regulatory journey. While the investment manager’s core function is to manage the capital pooled from investors in accordance with the fund’s investment strategy, that function must operate within a sound governance framework. This requires the AIF Regulations, SEBI circulars and fund documents to be translated into policies and processes that are appropriately designed, consistently followed and kept up to date.
Some policies arise from express regulatory requirements, while others help implement broader obligations relating to risk management, investor grievances, cybersecurity, data protection and stewardship. Their purpose is not merely to create a compliance record, but to ensure that regulatory obligations are reflected in the fund’s day-to-day decision-making.
Ultimately, having policies on paper is not enough. The real test for a investment manager is simpler: if SEBI examines a fund decision tomorrow, can the fund demonstrate that the applicable policy was current, followed and properly documented? That is the difference between regulatory documentation and effective fund governance.
Disclaimer: The policies discussed in this article are indicative and not exhaustive. The policies applicable to an AIF may vary depending on its category, structure, strategy and operations. This article is for general informational purposes only and does not constitute legal advice.
Footnotes and Endnotes
- Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 20(3).
- SEBI Master Circular for Alternative Investment Funds dated June 3, 2026, para 21.2 and Annexure 14 (Compliance Test Report).
- Regulation 20(1) read with Schedule IV, AIF Regulations
- Regulation 20(1) and the Fourth Schedule (Code of Conduct), SEBI (Alternative Investment Funds) Regulations, 2012.
- Regulation 20(3) read with Schedule IV, Part 1, clause (e), AIF Regulations
- Fourth Schedule, clause 1(e), SEBI (Alternative Investment Funds) Regulations, 2012.
- Regulation 21(2) read with Regulation 20(3), Schedule IV, Part 1, clause (f), and Regulation 24(d), AIF Regulations
- Regulation 24(a) and Regulation 24A (1), AIF Regulations
- Regulations 24 and 24A, SEBI (Alternative Investment Funds) Regulations, 2012; SEBI Master Circular for Alternative Investment Funds dated June 3, 2026, Annexure 4 (Investor Charter).
- SEBI Circular dated August 20, 2024, read with SEBI Circular dated April 30,2025
- SEBI Circular No. SEBI/HO/ITD-1/ITD_CSC_EXT/P/CIR/2024/113 dated August 20, 2024 on the Cybersecurity and Cyber Resilience Framework, read with SEBI’s clarifications, including those of April 30, 2025.
- Regulation 20(3) read with Schedule IV, Part 1, clause (h), AIF Regulations; PMLA, 2002 and PML Rules, 2005.
- Fourth Schedule, clause 1(h), SEBI (Alternative Investment Funds) Regulations, 2012; Prevention of Money Laundering Act, 2002; SEBI Master Circular on AML/CFT obligations of securities market intermediaries.
- Section 43A, Information Technology Act, 2000 read with Rule 4, Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011(“SPDI Rules”); transitioning to Digital Personal Data Protection Act, 2023 from May 13, 2027.
- SEBI Circular dated December 24, 2019 read with Annexure 13 of SEBI AIF Master Circular dated June 3, 2026
- SEBI Circular No. CIR/CFD/CMD1/168/2019 dated December 24, 2019 (Stewardship Code); SEBI Master Circular for Alternative Investment Funds dated June 3, 2026, Annexure 13.
- Section 15EA, Securities and Exchange Board of India Act, 1992.
- SEBI Settlement Order in the matter of HDFC Capital Affordable Real Estate Fund – I, Order No. SO/PSD/2024-25/8176-8177 dated May 6, 2025; SEBI Settlement Order in the matter of Examination of SCORES complaints against Edelweiss Stressed and Troubled Assets Revival Fund Trust, Settlement Order No. SO/SM/RG/2025-26/8086-8087 dated September 30, 2025; SEBI Settlement Order in the matter of Motilal Oswal Alternative Investment Trust, Order No. SO/PSD/2025-26/8334-35 dated April 20, 2026; SEBI Adjudication Order in the matter of Trinity Alternative Investment Managers Limited, Order No. Order/GG/VV/2023-24/28720-28727.
