Direct founder impact

SEBI’s 16 June 2026 circular does not impose a new filing obligation directly on ordinary startups. But it matters to founders because many Indian startups raise capital from AIFs, venture capital funds and fund vehicles that must manage fund life, exits, residual liabilities and investor distributions. If your investor is close to the end of its fund life, its ability to hold securities, exit, distribute proceeds or remain registered can affect your cap table conversations.

The circular is titled “Guidelines for winding up of AIFs with respect to retention of proceeds and Inoperative Fund status” and carries Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026 dated 16 June 2026 (https://www.sebi.gov.in/legal/circulars/jun-2026/guidelines-for-winding-up-of-aifs-with-respect-to-retention-of-proceeds-and-inoperative-fund-status_102171.html). SEBI also states that the AIF Regulations were amended and notified on 18 April 2026 to provide flexibility around winding up and surrender of registration.

What changed

The circular specifies conditions and modalities for three connected issues:

When can an AIF retain proceeds

SEBI permits retention beyond permissible fund life where at least one condition is met:

1. There is demonstrable receipt of litigation notice or demand, including official written communication from tax authorities, regulators, law enforcement, courts, investors or counterparties.
2. At least 75 percent of investors by value consent where proceeds are retained for anticipated liabilities from possible or probable litigation or tax demand.
3. The retained amount is substantiated for residual winding-up operational expenses through invoices, supporting documents or comparable prior expenses.

For operational expense retention, SEBI states that the period cannot exceed three years from the end of permissible fund life. Monies retained under the circular must be invested in accordance with Regulation 15(1)(f) of the AIF Regulations.

What is Inoperative Fund status

An AIF with one or more schemes retaining monies may apply to SEBI for Inoperative Fund status by emailing the application in the prescribed format to [email protected]. SEBI also allows an AIF that has not retained monies, but wants to continue registration solely in anticipation of a favourable pending litigation outcome, to apply.

Once tagged as an Inoperative Fund:

• No new scheme can be launched under that AIF.
• No management fees can be charged for any scheme.
• Retained monies must follow the permitted investment framework.
• The fund must apply to surrender registration only after liabilities are satisfied and retained monies are distributed.

Annual reporting requirement

AIFs that retain monies and AIFs tagged as Inoperative Funds must submit an annual status report on retained monies and outstanding liabilities to SEBI and investors of the relevant schemes. The circular says this report must be submitted on the SEBI Intermediary portal within 30 calendar days from the end of March of every financial year.

This is useful for founders because fund-side reporting discipline can affect how quickly investor consents, exits, confirmations and follow-on matters are handled.

Which startups should pay attention

Founders should pay attention if:

• A current or proposed investor is an AIF, VCF or fund nearing the end of fund life.
• The startup is discussing secondary transfers, buybacks, exits or liquidation preference payments.
• The company has old institutional investors that are no longer actively investing.
• A merger, acquisition or IPO-prep exercise requires clean investor confirmations.
• The company has a complex cap table with multiple fund entities.

Documents founders should keep ready

Even though the circular applies to AIFs and VCFs, founders should keep investor-facing documents clean:

Mistakes to avoid

• Assuming a fund near the end of life can automatically continue holding or transacting without internal approvals.
• Ignoring old investor rights during a new round.
• Not checking whether transfer or exit clauses require fund consent.
• Keeping outdated Articles that do not reflect investor rights.
• Treating cap table cleanup as a closing-day task.

Founder action plan

1. Ask whether any investor fund is close to expiry, extension, winding up or inoperative status.
2. Review transfer, consent and exit clauses in the SHA and Articles.
3. Keep investor contact details and authorised signatory details updated.
4. Reconcile cap table, statutory registers and ROC filings.
5. If raising from an AIF, ask for the fund name, scheme name, registration status and investment authority early in diligence.

Sources and official references

• SEBI circular dated 16 June 2026: https://www.sebi.gov.in/legal/circulars/jun-2026/guidelines-for-winding-up-of-aifs-with-respect-to-retention-of-proceeds-and-inoperative-fund-status_102171.html
• SEBI attached circular PDF: https://www.sebi.gov.in/sebi_data/attachdocs/jun-2026/1781613591249.pdf
• SEBI registered AIF list: https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognisedFpi=yes&intmId=16

FAQ Section

Founder / Business Takeaway

The circular is fund-side regulation, but founder teams should read it as cap table intelligence. If an AIF investor is near fund closure, winding-up or litigation-linked retention, the startup should prepare consents, transfer documents and investor records early. The Best CS Firm In India mindset is to catch these issues before they become closing blockers.

Related BSA Resources

• Fund Raise Due Diligence: https://www.bhavyasharmaandassociates.com/services/fund-raise-due-diligence-service-for-startups-delhi-bangalore-gurgaon-2025/
• FEMA Compliance: https://www.bhavyasharmaandassociates.com/services/fema-compliance-foreign-investment-startups-2025-delhi/
• Blog: https://www.bhavyasharmaandassociates.com/blog/