Written by Sneha Sakshi

Over the years, advanced investors have been chasing the holy grail of private markets the possibility of a direct co-investment with large venture funds together with major Venture Capital (VC) and Private Equity (PE) funds. It is the opportunity to have a first-mover access to high-growth unlisted companies, which may have lower fees, and have more control than investing in a common fund. 

This has been a difficult goal in India, though, historically. The main channel of co-investing was lost in the complexity of operations and regulatory red tape, and the structure served as Portfolio Management Services (PMS) in which managers deal with such individual investor portfolios on an individual basis, adding much administrative overhead to it. 

This has changed the very nature of that landscape. To facilitate this process, the Securities and Exchange Board of India (SEBI) has introduced a brand new and dedicated structure termed Co-Investment Vehicle (CIV) aimed at making this a much easier process. However, this is not just a mere update to regulations, this is a substantial change and resolution of the past issues that generate new, conscious limitations. This post dissects the lingo to identifies the five most significant lessons of the new co-investment regime by SEBI. 

Why was a System with so much potential left abandoned? 

In the previous CIV structure, in case a fund manager believed in co-investment opportunities, he or she had to manoeuvre through the PMS pathway. This was not exactly an easy thing because this meant that the manager was required to get another license, subject him/herself to dual compliance to both AIF and PMS rules and deal with paperwork that was very cumbersome and might slow down deals or even kill them. The clutter in the operations was enormous. 

The statistics also clearly indicate the level of unpopularity of this system. SEBI Data as of August 31st 2025 indicated that it had only 589 co-investment clients in India. In that perspective, 1,99,055 discretionary PMS clients existed in the same period. The co-investment PMS market was a ghost town with the total Assets under management (AUM) crawling at only a Rs. 5,216 Crores. 

This comes as a surprise since although the theoretic advantages of co-investing were immense, the regulatory and working hindrances were so excruciatingly high they virtually suffocated the market leaving a potentially strong source of capital largely untouched. 

Simpler Rules, Tighter Leash: What’s the Real Trade-Off in the New CIV Framework? 

In a counter-intuitive twist, the new & supposedly easier framework has its own kind of constraints in its way of entering the market that was not previously present. SEBI has broken down the barriers in its operations, but has put new strategic fences that make trade-off between simplicity and flexibility. 

The initial significant obstacle is the eligibility. The new CIV route can be offered only to the so-called Accredited Investors (a particular category of advanced investors satisfying high net worth and investment knowledge criteria). This could cut out a number of High-Net-Worth Individuals (HNIs), family offices and smaller institutional investors who would have been able to participate in the past. 

The second obstacle is a fresh investment cap. According to the CIV framework, the amount that an investor can co-invest in one company cannot exceed by more than three times the amount that he or she invested in the main AIF scheme. On the other hand, there was no regulatory limit on the old PMS route and therefore it was free in terms of flexibility. 

This produces a two-track mechanism. The new CIV lane will become the default to the large compliance oriented institutional investors who prefer streamlined execution. Ironically, the former PMS path can continue to be the option of choice by advanced HNIs and family offices where flexibility is important, and the compliance expense of uncapped and concentrated bets is acceptable. 

Alignment at What Cost? The Masked Downside of Co-Terminus Exit Rule. 

One of the main regulations applicable to the old PMS model and the new CIV model is the need of a co-terminus exit. This implies that the co-investors must sell their interest in a firm at the same time the primary AIF. 

This is aimed at curbing conflicts of interest and ensuring that co-investors are not given special treatment compared to the other limited partners in the fund. Nevertheless, the compelling voice of reason is that such structure will compel the co-investors to conform their own investment horizon to this fixed fund life of the AIF. AIFs have recurring life cycles and also can be compelled to leave an investment based on their own funds schedules even when the business has potential to grow. A co-investor, who can be the capital and may wish to invest longer, cannot do this, and as such, he/she cannot realize the full potential of the co-investment model, and may leave a lot of value on the table. 

Why Startups Are the Understated Winners of SEBI Overhaul 

On the flipside, of the investor to the investee company, the new rules have a very important, though less noticeable, advantage. According to the previous system of PMS, there is the presence of Multiple co-investors on the cap table of the investee company. This resulted in a bloated table of the cap, which caused a lot of administrative complexity, shareholder vote-slicing, and compliance nightmares, which might bottleneck or postpone the deal closure process in a timely manner. 

This is gracefully addressed in the new CIV framework. It allows the aggregation of the funds of all the co-investors in one scheme so that only the Scheme is shown on the capital table. This radically makes the process of governance easier, decision-making simpler and the compliance burden on the portfolio company reduced and it makes perfect sense as to why this regulatory reform is an outright and uncontested winner. 

The Billion-Rupee Question: Can a Tax Ambiguity Kill the Whole Reform? 

Category I and II AIFs in India are granted a tax advantage called pass-through. This will avoid instances of taxation on the same income twice because it will not be taxed at the fund level but taxed at the hands of investors. 

Nevertheless, the new CIV framework has presented a major grey area: it is not known whether CIVs are to receive the same pass-through status. There is a high probability that a CIV and its parent AIF can be considered to be an association of persons by tax authorities. Should this occur, the whole structure would be taxed at fund level prior to any distribution being done, and then taxed again at investor level, which would amount to killing the pass-through benefits. 

It is not a minor question mark but the one and the most important unresolved threat that might bring down the whole of the reform. Lack of tax clarity will greatly expose the CIV framework to the risk of non-adoption since the high likelihood of taxing it twice may make it economically unfeasible to many investors. 

One Huge Leap, But the Journey isn’t Over yet 

The new CIV framework by SEBI is a historic reform. It has been able to break down most of the operation roadblocks that rendered the old PMS a nightmare, thus creating a more manageable and accessible co-investment ecosystem in India. 

But the most debatable part of this overhaul is that it has paid a price in terms of progress. New restrictions including accredited investor-only rule and strict investment caps have been introduced significantly. More to the point, critical ambiguities, most distinguishing themselves in terms of taxation still have not been addressed. This creates a very critical question in the market, will this new structure really open the flood gates to the most promising companies in India or is the remaining barrier and unresolved issues carrying the floodgates only half way open?