Category II AIF

Category II Alternative Investment Fund (AIF) is a regulatory classification under SEBI's AIF Regulations, 2012. It is the most common structure for venture capital and private equity funds in India. Category II AIFs can raise capital from up to 1,000 investors and deploy funds into unlisted companies, debt instruments, and other alternative assets.

Unlike Category I AIFs (which get tax pass-through and lighter regulation), Category II funds face standard taxation and closer scrutiny. They must have a minimum fund size of ₹10 crore for domestic funds and $10 million for offshore funds. The fund manager must maintain 20% co-investment or have skin in the game, though this requirement was relaxed in 2018 for emerging fund managers.

Category II is designed for sophisticated institutional and high-net-worth investors. The structure allows flexibility in deployment strategies—VCs use it for equity stakes, PEs for control acquisitions, and some funds blend debt and equity. Fund tenure is typically 10 years with 2-year extension clauses. SEBI registration is mandatory, and annual compliance filings are required.

Category II dominates Indian VC fundraising. As of 2023, over 70% of registered domestic VC funds operated as Category II structures. Prominent examples include Sequoia Capital India, Accel Partners, and Tiger Global's India operations. The ₹10 crore minimum (roughly $1.2 million) was calibrated to allow mid-market and emerging fund managers to participate without the steep requirements of institutional alternatives.

The 20% co-investment rule, originally strict, was relaxed by SEBI in 2018 to allow emerging managers with limited capital to raise Category II funds—a crucial move that unlocked the second-generation VC ecosystem. However, LPs still expect founder commitment. Category II taxation applies standard corporate tax rules, making fund structuring more complex than Category I.

SEBI's regulatory framework has evolved—recent circulars (2022-2023) clarified valuation norms and side-pocket rules for illiquid holdings, addressing tail-end governance issues that plagued early Category II funds. Most domestic LPs (insurance, pension boards) prefer Category II for its transparency and regulatory track record.