SEBI now requires all AIF investors to receive fair, pro-rata treatment on undrawn commitments. This changes how you draft your PPM, manage capital calls, and handle side letters.
In December 2024, SEBI issued a circular that changed how every AIF in India must treat its investors. The core principle is simple: all investors in a fund must receive fair and equal treatment with respect to their undrawn commitments, on a pro-rata (proportional to their commitment) and pari-passu (equal standing) basis [1][2]. No more special drawdown terms for large investors. No more preferential exit rights negotiated through side letters. No more situations where two investors with the same economic interest receive different treatment.
I think this is one of the most significant regulatory changes to hit the Indian AIF market in years, and many first-time managers do not yet appreciate how it affects fund design. I want to explain what the circular requires, how it changes your PPM and operations, and what it means for your investor relationships.
What the circular requires
The December 2024 circular establishes two binding principles for all domestic AIFs [1][2]:
Pro-rata rights on undrawn commitments. Every investor's undrawn capital must be called and deployed proportionally to their total commitment. If Investor A has committed INR 10 crore and Investor B has committed INR 5 crore, and the fund needs to call INR 3 crore, Investor A is called for INR 2 crore and Investor B for INR 1 crore. You cannot call disproportionately from one investor to avoid calling from another.
Pari-passu treatment. All investors within the same class must receive equal economic terms. This includes fees, carried interest calculations, distribution waterfalls, and co-investment rights. If your fund offers a management fee reduction to one investor, the same terms must be available to all investors in that class [1].
The circular requires that your Private Placement Memorandum explicitly specify how undrawn commitments will be managed (whether on a pro-rata basis relative to total commitment or on another basis) [1][2]. Once specified, this methodology becomes binding for the life of the fund. You cannot change it mid-stream.
Why SEBI introduced this
The circular was a direct response to market practices that had become common in the Indian AIF space. Larger investors (family offices, institutional allocators, anchor LPs) routinely negotiated preferential terms through side letters [1]. These terms might include priority drawdown schedules, reduced management fees, extra information rights, or even preferential exit or redemption provisions.
The result was that investors with the same fund exposure on paper received materially different economic outcomes. A smaller LP might have their capital called early and parked in cash, while a larger LP negotiated delayed drawdown. Or a large LP might receive co-investment rights that smaller investors did not, effectively giving them access to better deals at lower fees.
SEBI's position is that this creates unfair outcomes and conflicts of interest. I agree with the direction, even though the implementation creates real operational challenges. The principle that similarly-situated investors should receive similar treatment is foundational to fair fund governance.
What changes in your PPM
If you are forming a new AIF post-December 2024, your Private Placement Memorandum must address the pro-rata framework explicitly [1][2]. Specifically:
- Capital call methodology. State whether capital calls will be made on a pro-rata basis relative to total commitments or on some other permitted basis. Describe the mechanics: how calls are calculated, what notice period investors receive, and how defaults are handled.
- Fee equalisation. If you offer different fee terms to different investors (for example, reduced management fees for anchor LPs), disclose this and explain how fee parity is maintained across classes. SEBI expects that any fee differential is justified and disclosed, not hidden in side letters.
- Co-investment policy. If you offer co-investment opportunities alongside the fund, specify how these are allocated among investors. The pro-rata framework implies that co-investment rights should be offered proportionally, not selectively [1].
- Distribution methodology. Lay out how returns are distributed: pro-rata to drawn capital, pro-rata to commitments, or some other basis. The chosen methodology must be consistent with the pari-passu principle.
Your merchant banker should review these sections carefully during the PPM due diligence process. SEBI is likely to scrutinise compliance with the pro-rata framework during registration review.
Side letters: what you can and cannot do
The practical question every manager asks is: can I still have side letters? The short answer is: yes, but with limits.
You can still have side letters for terms that do not affect the economic rights of other investors. Reporting frequency, information rights, advisory committee seats, ESG reporting: these are typically permissible because they do not alter the pro-rata economic treatment of other LPs [1].
What you likely cannot do is offer one investor a materially different fee structure, drawdown schedule, or distribution priority without disclosing it to all investors and making equivalent terms available. The circular does not explicitly ban side letters, but it creates a framework where most of the terms historically negotiated in side letters would violate the pro-rata or pari-passu requirements if not disclosed and equalised.
My practical advice: design your fund terms to be standard across all investors from the outset. Use investor classes (rather than individual side letters) if you need to differentiate terms for different commitment levels. Disclose everything in the PPM. The more uniform your terms, the simpler your compliance and the less likely you are to face regulatory questions.
Operational implications: the record-keeping requirement
The circular requires managers to maintain detailed records of each investor's commitments in rupees and demonstrate how pro-rata rights are applied at each capital call [1][2]. This is not aspirational guidance; it is a compliance requirement that will be verified.
In practice, this means:
- Capital call calculations must be documented. For every capital call, you need to show the math: each investor's total commitment, drawn capital, undrawn commitment, and the proportional call amount. This documentation must be available for trustee review and SEBI inspection.
- Trustee verification is mandatory. The fund's trustee must certify compliance with the pro-rata framework [1]. This means the trustee needs access to your capital call records, distribution calculations, and any investor-specific arrangements. If you are using a passive trustee who rubber-stamps everything, that approach is no longer tenable.
- Compliance Test Reports must cover pro-rata compliance. The enhanced CTR requirements effective in 2026 [3] include verification that the fund's capital call and distribution practices comply with the fairness framework. This is an auditable item.
For a small GP team managing their first fund, this record-keeping requirement adds real operational overhead. You need systems, whether software-based or through your fund administrator, that track commitments, calls, and distributions at the individual investor level with audit-trail quality documentation.
Transition rules for existing funds
The circular provides transition relief for AIFs that were already operating before December 2024 [1]. Existing funds operating under prior PPM terms do not need to retroactively comply with the pro-rata framework for investments already made. But all new investments and capital calls from December 2024 forward must comply.
For second-time managers launching new funds while their first fund is still operating, this creates a dual-compliance situation. Fund I may operate under legacy terms while Fund II must comply with the new framework. Investors who are in both funds may notice the difference in treatment and ask questions. Be prepared to explain the transition clearly.
What this means for fundraising
I see the pro-rata framework as a net positive for emerging managers, even though it adds operational complexity. Here is why:
Smaller LPs, the investors most likely to back a first-time manager, historically got the worst terms. Large anchor investors negotiated preferential treatment, and smaller LPs had to accept the standard terms or walk away. The fairness framework levels the playing field. When you tell a prospective LP that all investors receive the same economic treatment, that is a genuine selling point. It builds trust.
The flip side is that large anchor investors who expect preferential terms may be harder to close. If a family office is used to getting a management fee discount and priority co-investment rights, and you tell them those terms are no longer available unless offered to everyone, they may push back. This is a real tension. My view is that the right response is transparency: explain the regulatory requirement, show how it protects all investors (including them), and structure your terms to be fair at every commitment level.
How Allocator One Bharat handles pro-rata compliance
At Allocator One Bharat, we have updated our fund administration workflows to fully support the December 2024 pro-rata framework. Our platform calculates capital calls on a pro-rata basis automatically, generates the investor-level documentation that trustees need to verify compliance, and produces the CTR data points related to fairness framework adherence.
We help emerging managers draft PPM sections that address the pro-rata and pari-passu requirements clearly, and we advise on how to structure investor classes if differentiation is needed. If you are setting up a new fund and need to design your capital call and distribution mechanics around this framework, talk to our team.
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