By Ayanti Bera & Nesil Staney
The venture capital fund (VCF) migration framework, announced by the Securities and Exchange Board of India (SEBI) in August, will end the long-standing legal ambiguity for legacy VC funds, bringing further regulatory clarity and investor protection to the alternative investment ecosystem.
For over a decade, dozens of VC funds, whose liquidation period has not expired or certain assets remain unliquidated despite expiry of the liquidation period, have operated in a regulatory “no man’s land”. It is unclear exactly how many VC funds find themselves in this ambiguity.
After the introduction of the alternative investment fund (AIF) regime in 2012, these legacy funds were left without a clear legal standing — neither governed by the repealed VCF rules, nor fully compliant with new AIF regulations.
“This is like holding an expired passport — these funds were established with a regulatory approval, but over time lost their active regulatory identity,” said Rahul Shah, executive vice president of the Indian Venture Capital Association.
The migration framework now gives such funds a one-time option to either formally wind up or migrate to the AIF regime as migrated venture capital funds (MVCFs) under Category I. Applications for this migration need to be filed with SEBI by July 19.
The move is expected to bring significant benefits. Once migrated, funds will have stronger compliance, including quarterly reporting, audits and investor communications. “SEBI’s steps are the right move to bring VCs under one umbrella,” said Anant Nag, who manages angel investments for 360 One. “Historically, foreign funds have played a major role in Indian startup investments. Under the new structure, there will be more domestic participation. This will balance the VC system,” Nag said.
SEBI’s push for compliance came in the wake of enforcement actions. In February 2024, it issued an adjudication order against the India Growth Fund, a scheme of the Kotak SEAF India Fund. Due to unresolved litigation involving its portfolio companies, Kotak extended the fund’s duration past its original end date. The regulator insisted on adhering to the fund’s original tenure.
The migration framework also addresses practical challenges faced by fund managers. Many legacy VCFs have struggled to liquidate investments due to ongoing litigation with portfolio companies, tax-related issues or market conditions. The new rules are expected to allow for a certain period of extension post-migration, enabling managers to maximise asset value rather than sell at distressed prices.
“Hopefully, the new provisions, including the ability to extend the VCF’s tenure and providing additional liquidation periods, will resolve these issues, offering VCFs greater flexibility in managing unliquidated investments,” said Ashwin Singh of Nishith Desai, a tier I corporate law firm, in a report.
Despite these advantages, uptake has been slow, with many managers waiting until the last minute to act, Shah said. The IVCA and SEBI are urging all legacy funds to immediately begin the migration process to avoid falling out of compliance.
