This article provides a step-by-step guide for first-time fund

managers in India, outlining the process of setting up a private

equity or venture capital fund.

What is a Fund? A private pool of

investments managed by professionals and registered with SEBI

(Securities and Exchange Board of India).

Category I (Venture Capital Fund): Offers tax benefits and

invests in unlisted companies.

Category II Fund: More flexibility in investment strategies but

Steps to Setting Up a Fund:

Choose a fund category (I or II).

Understand investment conditions (minimum investment,

investable funds, etc.).

Decide on the fund structure (trust, company, etc.).

Appoint and onboard key entities (investment team, custodian,

Prepare the Private Placement Memorandum (PPM).

Apply for registration with SEBI.

Considerations for First-Time Managers:

Category selection depends on investment goals and investor

The process can be complex, so understanding regulations is

Private Equity Funds and Venture Capital Funds in India are set

up as Alternative Investment Funds

"Funds") which have to be registered

under the Securities and Exchange Board of India (Alternative

Investment Funds) Regulations, 2012 ("Fund

Regulations") to carry on their activities.

It is a privately pooled investment vehicle which collects funds

from investors, whether Indian or foreign, for investing it in

accordance with a defined investment policy for the benefit of its

investors. Funds may raise funds from any investor whether Indian,

foreign or non-resident Indians by way of issue of

Funds can be established or incorporated in the form of a trust

or a company or a limited liability partnership or a body corporate

and are liable to also comply with the separate laws under which

they are incorporated.

STEP I: CHOOSING A CATEGORY OF FUND

The Fund Regulations specify three categories under which Funds

Category I Fund:  Venture Capital Funds,

small and medium enterprise funds, social venture funds,

infrastructure funds and any funds as may be specified.

Category II Fund:  Funds which do not

fall under category I and III and which do not undertake leverage

or borrowing. PE Funds or debt funds for which no specific

incentives or concessions are given by the government can be

considered as category II Funds.

Category III Fund:  Funds that employKanpur Stock

diverse or complex trading strategies and may employ leverage

including through investment in listed or unlisted derivatives

First time managers are often faced with the choice between a

Category I (Venture Capital Fund) and a Category II Fund. The key

differences between the two categories are mentioned below.

Investment Conditions:  At least 75% of

the investable funds have to be invested in unlisted equity shares

or equity linked instruments of a venture capital

undertaking2 or in companies listed or proposed toSurat Investment

be listed on a SME exchange or SME segment of an exchange.

Target Investments:  venture capital

undertakings, special purpose vehicles, limited liability

partnerships, units of other Category I Funds of the same sub

category, units of Category II Funds.

Registration Fee: INR 5,00,000

Investment Conditions:  Primarily (at

least 50.1%) in unlisted companies directly or through investment

in units of other Funds.

Target Investments:  companies, units of

Category I Funds, units of Category II Funds, up to 49.99% can

technically be done in listed securities

Registration Fee: INR 10,00,000

STEP II: UNDERSTANDING INVESTMENT

The Fund Regulations place certain conditions and restrictions

on the Funds with regards to investment. The investment

restrictions and conditions differ across various categories of the

Funds, however, the general conditions applicable to all Funds are

A Fund shall not have more than 1000 investors in

any one scheme and shall not accept an investment of

less than Rs. 1 Crore from an investor.

However, the minimum investment is Rs. 25 lakhs in case of

employees/ directors of the Fund or the manager and does not apply

in case of accredited investors.

In case of angel funds (a

sub-category of Category I Fund), the minimum

investment is Rs. 25 lakhs and the maximum number of

investors in one scheme is 200.

Each scheme of a Fund shall have a minimum corpus

A Fund can invest up to 25% of the investible

funds in securities of companies

incorporated outside India subject to

guidelines as specified by RBI and SEBI4.

Category I and II Funds cannot invest more than

25% of the investable funds in an investee company

directly or through investment in the units of other Funds.

Funds may invest in units of other Funds provided that

contribution is not accepted from other Funds.5

Fund shall issue units in dematerialised form as prescribed by

SEBI from time to time.

STEP III: STRUCTURING THE FUND

One of the most important decisions for forming an Fund is the

structure in which it will be set up.As stated above, Funds can be

formed as a trust, company, LLP or a body corporate. Each of the

structure has its pros and cons, however, a trust is preferred

choice for structuring Funds in India. Since, most of the Funds in

India are formed as trust, an illustrative structure of an Fund set

up as a trust is explained below.

For the purpose of the illustration below, it is assumed that

the Trust has only one scheme. However, fund managers can launch

multiple schemes under one trust.

From a legal and commercial perspective, it is advisable for

a Manager to launch multiple schemes under a single trust as a cost

effective mechanism.

Trustee: The Registrar of Trusts is the

primary regulatory authority responsible for the registration of

trust in India. Their role involves maintaining a comprehensive

database of all registered trusts in the country. The registration

process for private trusts is governed by the Trusts Act of 1882..

A trust is created and administered through the trust deed which is

executed between the settlor and the trustee. The settlor, being

the author of the trust settles the trust with an initial amount,

which is then transferred to the proposed trustee. While trusts

usually have their own trustee/board of trustees, in case of Funds,

the trustee is often an independent institutional trustee, who

agrees to provide the trusteeship services to the Fund for a

Sponsor: The sponsor may be an

individual/company or LLP. The choice of entity is often dictated

by regulator or tax considerations. The role of the sponsor is to

contribute the continuing interest in the fund. Such interest may

be maintained pro-rata to the amount of funds raised (net) from

other investors in the Fund.6

Manager: The trustee of the Fund appoints a

manager for managing the Fund by entering into an investment

management agreement. The manager along with the investment

committee (if constituted) and the key investment team takes the

investment decisions of the Fund. The Manager charges management

fee for the services provided to the Fund.

Investors: The investors of the Fund enter

into an agreement with the trustee and investment manager making a

capital commitment to invest the minimum contribution by signing a

Contribution Agreement.

Typically, the commitment amount is drawn down by the Fund

over a period of four years.

STEP IV: APPOINTING & ONBOARDING ENTITIES FORKolkata Investment

Key Investment Team: Each member should

be either employee, partner or director of the Investment Manager,

where at least one personnel should have a professional

qualification (such as CA, CFA, MBA) and hold the NISM

Series-XIX-C: Alternative Investment Fund Managers Certification.

These two requirements can be fulfilled by two different members or

Merchant Banker:  The Fund shall onboard

a Merchant Banker to file the application for registration with

Custodian: The custodian for a scheme of

an Fund shall be appointed prior to the date of first investment of

Registrar and Transfer Agent (RTA):  RTA

appointed by Funds shall collect the stamp duty on issue, transfer

and sale of units of Funds.

Legal Advisor:  Legal Advisors assist the

Manager in structuring and preparing the documentation, which

includes the Private Placement Memorandum (PPM), Investment

Management Agreement and the Contribution Agreement, for the

registration and operation of Funds.

Tax Advisor:  The tax advisors can advise

the Managers on the taxation and valuation for the Fund.

STEP V: PREPARING THE PRIVATE PLACEMENT MEMORANDUM

A draft of the PPM has to be submitted along with the

application Form A by the applicant. A PPM is a document which

contains all the important information about the Fund. As per

regulation 11 of the Fund Regulations, a PPM must contain all the

important information about Fund, sponsor, manger, tenure,

investment strategy, risk management tools and parameters employed,

key service providers, conflict of interest, disciplinary history,

manner of winding up etc. The PPM has to be filed with SEBI through

a SEBI registered merchant banker, who independently exercises due

diligence of all disclosures in the PPM. The due diligence

certificate provided by the merchant banker has to be submitted at

the time of registration.

The application is made online through the SEBI Intermediary

Application Fees:  INR 1,00,000

Scheme Fees (to be paid for a

new scheme under an existing Fund): INR

Registration Fees: INR 5,00,000 (Category

I Fund); INR 10,00,000 (Category II Fund)

The specified fee can be paid through NEFT/RTGS/IMPS or online

payment using SEBI Payment Gateway. Thereafter, subject to

responses being provided to queries from SEBI, the certificate of

registration is granted to the applicant. As per regulation 6(5) of

the Fund Regulations, an Fund can accept money only after receiving

certificate of registration from SEBI.

Setting up a fund in India can be a complex process, especially

for first-time fund managers. Understanding the different

categories of funds, the regulatory requirements, and the

investment conditions is crucial for successful establishment.

While Category I (Venture Capital Fund) offers tax benefits and

a more focused investment mandate, Category II provides greater

flexibility in investment strategies. The choice between these

categories ultimately depends on the fund manager's investment

objectives, risk tolerance, and the specific needs of their

By carefully considering the factors outlined in this guide,

first-time fund managers can make informed decisions and navigate

the regulatory landscape to establish a successful fund in

This post has been contributed by Ms. Vaneesa Agrawal,

Founding Partner and Ms. Sanyukta Srivastav, Senior

1. Regulation 10 (a),

SEBI (Alternative Investment Funds) Regulations 2012

capital undertaking" means a domestic company which is not

listed on a recognised stock exchange at the time of making

3. Regulation 10(b),

SEBI (Alternative Investment Funds) Regulations 2012

no.  CIR/IMD/DF/7/2015, dated October 01,

5. Regulation 15 (da),

SEBI (Alternative Investment Funds) Regulations 2012

Circular  CIR/IMD/DF/14/2014 dated June 19,

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.