AIF Fund Setup Guide for First-Time Fund Managers: From Idea to SEBI Registration

Launching your first alternative investment fund is not the same as launching a startup. There is no MVP to test first in the market. The structure you pick, the documents you write, and the filings you make have to last ten years or more, often with institutional money hanging on every clause.

This guide to setting up an AIF fund walks first-time fund managers through the whole journey from choosing a category to filing with SEBI to opening the fund for your first close. Here’s why each step is important and what typically happens when it’s skipped.

What Is an AIF, and Who Needs One

An AIF is a privately pooled vehicle that collects money from investors and invests it according to a specified investment strategy. It is outside the mutual fund framework and regulated by SEBI (Alternative Investment Funds) Regulations, 2012. If you are going to raise money from several investors to put into startups, private companies, real estate, listed securities or complicated trading strategies, you need an AIF structure rather than an informal pooling structure.

These are established by fund managers as trusts, companies, LLPs or bodies corporate, but the trust structure with a sponsor, trustee and investment manager is by far the most common choice in the Indian market in practice.

Step 1: Choose Your AIF Category

SEBI divides AIFs into three categories, and your choice here determines almost everything that follows, including your regulatory compliance and the investors you can approach.

• Category I includes funds investing in startups, early-stage companies, SMEs, social enterprises and infrastructure. These funds are granted some regulatory concessions, as their activity is considered to be economically or socially useful. Here is where venture capital funds and angel funds sit.
• Category II is the catch-all bucket. Here you’ll find private equity funds, debt funds and fund-of-funds that are not Category I or III. This is the largest category by number of funds registered in India.
• Category III includes funds with complex or diverse trading strategies that may involve leverage and exposure to derivatives. Hedge funds and funds trading in derivatives or listed securities are generally registered under this category and are subject to tighter borrowing limits than the other two.

The category you select will depend on your investment strategy, your target returns, and the type of investor you want to attract. If you get this wrong at the beginning, you may find yourself refiling the whole application later.

Step 2: Meet the Minimum Corpus and Eligibility Requirements

Check whether you meet the basic eligibility criteria set by SEBI before you start writing a single document. These apply across all three categories with a few category-specific exceptions.

• Minimum fund corpus: Each scheme of an AIF should have a minimum fund corpus of Rs 20 crore. Angel funds have a Rs 5 crore lower threshold.
• Minimum investor commitment: The minimum commitment for an investor is Rs 1 crore. Though the employees or directors of the manager can invest as low as Rs 25 lakh.
• Manager or sponsor continuing interest: The manager or sponsor should have continuing interest of not less than 2.5 per cent of the corpus or Rs. 5 crore, whichever is less.
• Investor cap: Schemes must not have more than 1,000 investors, and angel funds are capped at 200.
• Fit and proper criteria: The sponsor, manager and key investment team should satisfy SEBI’s fit and proper person criteria, including financial soundness, track record and past regulatory action.

If your fund is unable to clear these hurdles today, it’s worth revisiting your fundraising target before you start fund structuring.

Step 3: Design the Fund Structure

This is where most first-time managers underestimate the amount of work involved. Design of structure is not just choosing a category. It contains:

• Choosing the legal form (trust, LLP or company) and appointing the sponsor, trustee and investment manager entities
• Management fees, carried interest and hurdle rates. The structure of fees
• Constructing the distribution waterfall that determines the distribution of returns between the manager and investors
• The decision to grant co-investment rights to anchor or strategic investors
• Expect foreign LPs? Plan for cross-border elements, as this will bring in FEMA compliance and tax treaty considerations into the picture.

A generic template structure tends to break down as soon as a real dispute or a difficult capital call arises. The governance provisions that sound good on paper are often too discretionary to the manager, or the investor protections are vague enough to cause friction down the road.

Step 4: Draft the Core Fund Documents

Once you have your structure, the documentation phase begins. Almost all AIFs are based on five documents:

• Private Placement Memorandum (PPM): The main disclosure document outlining the strategy, risk factors, fees, and governance. For institutional LPs, this is often the first document they read closely, and a template-based PPM shows a lack of institutional readiness before an investor even meets you.
• Trust deed: Defines the structure of the fund in legal terms and includes governance provisions that balance manager flexibility with investor protection.
• Contribution agreement: Explains how and when investors fund their commitments, e.g., capital call mechanics.
• Investment management contract: It sets out the manager’s authority, duties and entitlements to fees.
• Side letters: Custom terms for anchor investors, often including fee discounts, enhanced reporting or co-investment rights.

Test all the clauses in these documents against real-life scenarios. What if an investor defaults on a capital call? What if the manager and a majority of investors disagree on an exit? These are the questions that arise in a dispute, not in drafting, so it is worth trying to resolve them early.

Step 5: File the SEBI Application

After your structure and documents are in place, the registration process itself follows a sequence:

• Incorporate the fund vehicle
• Finalise the PPM and constitutional documents
• File Form A with the SEBI Intermediary Portal under the SEBI AIF Regulations
• Respond to any SEBI observations
• Obtain your registration certificate

The cause of delay most often encountered is the incomplete application. Typically, it takes SEBI a few months to process a complete filing, but this depends quite a bit on the cleanliness of the initial submission and how quickly queries are addressed. Anticipating the questions SEBI is likely to ask, around fee structures, governance provisions or investor protections, and preempting them in the application tends to reduce the back-and-forth significantly.

Step 6: Prepare for First Close and Ongoing Compliance

Registration is not the end goal. Once you have your certificate, you’ll then proceed through investor onboarding, AML and KYC checks, subscription execution and your first capital drawdown. Thereafter, the ongoing obligations kick in – periodic reporting to SEBI, NAV computation and review, appointment of a custodian in case of funds with a corpus of over Rs. 500 crore, and continuous disclosure to investors.

The trouble for funds that treat these as one-off set-up tasks rather than ongoing operational commitments usually comes at their first SEBI inspection or their first investor dispute.

Common Mistakes First-Time Fund Managers Make

New fund managers show up with a few repeated patterns:

• Using a template to draft the PPM instead of drafting around the fund’s actual strategy and risk profile
• Underestimating governance design; too much discretion to the manager; too much vagueness for the investors
• Incomplete SEBI application filing, which adds months to the approval process
• Avoiding cross-border complexity if there is no foreign LP interest, instead of designing for it from the start

How The Startup Gig Supports First-Time Fund Managers

At The Startup Gig, the AIF Setup & Fund Structuring practice the entire life cycle as described in this guide – category selection and fee structuring, drafting of PPM and trust deed, and the SEBI application itself, including responding to any regulatory queries. It’s not a documentation exercise; it’s fund architecture. Each clause is tested against how the fund is really going to work when capital is in motion.

For the first-time fund manager, the benefit is that one team sees the structure, the documents and the registration as inter-related parts of the same design, which tends to avoid the sort of gaps that only appear once investors are on board.

Final Thoughts

Setting up an AIF is not something you do once and get over with. It’s an architecture on which your fund will run for the next decade, how investors will trust your governance, and how well you survive an SEBI inspection or a tough capital call. “Getting the category right, meeting the eligibility thresholds, building documents that anticipate real scenarios and filing a clean SEBI application all compound into a fund that is built to last, not just built to launch.”

Frequently Asked Questions