Inspection
Chapter V- INSPECTION
Section 30. Board’s right to inspect
SEBI may appoint one or more Inspecting Authorities to inspect the books of account, records, and documents of an AIF.
The inspection may be initiated by SEBI on its own (suo-motu) or after receiving information or a complaint.
The Inspecting Authority is responsible for examining whether the AIF is complying with the regulatory requirements.
(a).
To ensure that the books of account, records, and documents are being maintained in the manner prescribed under the AIF Regulations.
The inspection verifies whether the required records are complete, accurate, properly maintained, and readily available for regulatory review.
Proper record maintenance supports transparency, accountability, and effective regulatory supervision.
If deficiencies are identified, SEBI may take appropriate regulatory action in accordance with the SEBI Act and the AIF Regulations.
(b).
The inspection may be conducted to examine complaints received from investors, clients, or any other person.
The complaint must relate to any matter that has a bearing on the activities or operations of the AIF.
The Inspecting Authority may review the books of account, records, documents, and other relevant information to verify the allegations.
The inspection helps determine whether the AIF has complied with the SEBI Act and the AIF Regulations.
(c).
The inspection may be conducted to ascertain whether the provisions of the Act and these regulations are being complied with by the AIF.
The Inspecting Authority may examine the books of account, records, documents, and other relevant information during the inspection.
The inspection covers all regulatory obligations, including registration requirements, investment restrictions, disclosure obligations, governance standards, and reporting requirements.
(d).
The inspection may be conducted if SEBI considers it necessary in the interest of the securities market or the investors.
SEBI does not need to receive a complaint or specific information before initiating such an inspection.
The Inspecting Authority may examine the books of account, records, documents, and other relevant information relating to the AIF.
This power enables SEBI to detect potential regulatory violations, market misconduct, or governance issues before they adversely affect investors or the market.
Suo motu inspections strengthen market integrity, investor confidence, and overall regulatory oversight of AIFs.
If the inspection reveals any non-compliance, SEBI may issue directions or take appropriate regulatory or enforcement action under the SEBI Act and the AIF Regulations.
Section 31. Notice before inspection
31(1).
Before ordering an inspection under Regulation 30, SEBI must give the AIF at least 10 days' prior notice.
The notice informs the AIF that SEBI intends to conduct an inspection of its books, records, and documents.
The minimum notice period is 10 days, allowing the AIF reasonable time to prepare for the inspection.
The notice generally specifies the proposed inspection and the information or records that may be required.
During the notice period, the AIF is expected to cooperate with SEBI and facilitate the inspection process.
31(2).
SEBI may order an inspection without giving the 10-day prior notice if it considers it necessary in the interest of investors.
This is an exception to the general rule requiring prior notice before an inspection.
SEBI must be satisfied that giving advance notice may not be in the interest of investors.
The decision to conduct an inspection without notice must be made through a written order issued by SEBI.
An unannounced inspection helps prevent the destruction, alteration, or concealment of records and evidence.
The AIF is required to cooperate with the Inspecting Authority even if no prior notice has been given.
31(3).
An AIF undergoing an inspection must comply with all the obligations prescribed under Regulation 32.
These obligations apply throughout the inspection process, from the commencement of the inspection until its completion.
The AIF is legally bound to cooperate with the Inspecting Authority during the inspection.
Compliance with Regulation 32 includes providing access to records, furnishing information, producing documents, and extending all necessary assistance required for the inspection.
Section 32. Obligation of Alternative Investment Fund on inspection
32(1).
Every officer of the AIF must cooperate with the Inspecting Authority when an inspection is ordered under Regulation 30.
The obligation applies to every officer of the AIF in respect of whom the inspection has been ordered.
It also applies to any associated person who possesses information relevant to the conduct and affairs of the AIF.
The obligation specifically includes the Manager of the AIF, where applicable.
Such persons must produce all books of account, records, and other documents that are in their custody or control.
They must also furnish any statements or information requested by the Inspecting Authority.
The information and documents must be provided for the purpose of facilitating the inspection.
Failure to produce the required records or information may result in regulatory action under the SEBI Act and the AIF Regulations.
32(2).
Every officer of the AIF must assist and cooperate with the Inspecting Authority during an inspection.
The obligation also applies to any associated person who possesses information relating to the conduct and affairs of the AIF.
The duty specifically includes the Manager of the AIF.
Such persons must provide all assistance required by the Inspecting Authority for conducting the inspection.
They must extend full cooperation throughout the inspection process.
They must furnish all information sought by the Inspecting Authority in connection with the inspection.
The assistance and information must be provided promptly and completely to facilitate an effective inspection.
32(3).
The Inspecting Authority may examine persons on oath during an inspection.
The Authority may record the statements of the persons examined as part of the inspection proceedings.
This power extends to employees of the AIF.
It also applies to directors of the AIF.
The Authority may examine any person responsible for or connected with the activities of the AIF.
It also includes any other associated person who possesses relevant information relating to the AIF.
The examination helps the Inspecting Authority verify facts, clarify issues, and gather evidence during the inspection.
32(4).
The Inspecting Authority may obtain authenticated copies of documents during an inspection.
This power is exercised for the purpose of conducting the inspection effectively.
The Authority may obtain authenticated copies of the AIF's documents, books, and accounts.
The copies may be obtained from any person who has custody or control of those documents, books, or accounts.
Authenticated copies serve as reliable evidence for examining compliance with the SEBI Act and the AIF Regulations.
Persons having custody or control of the records must provide the authenticated copies when required by the Inspecting Authority.
Section 33. Submission of report to the Board
After completing the inspection, the Inspecting Authority must submit an inspection report to SEBI.
The report must be submitted as soon as possible after the inspection is completed.
The inspection report contains the findings, observations, and conclusions reached during the inspection.
It may include details of any non-compliance, deficiencies, or irregularities identified in the AIF's operations.
The report enables SEBI to evaluate whether the AIF has complied with the SEBI Act and the AIF Regulations.
SEBI may use the inspection report as the basis for issuing directions or initiating regulatory or enforcement action, where necessary.
Submission of Interim Inspection Report
The Inspecting Authority may be directed by SEBI to submit an interim inspection report before the inspection is completed.
This is an exception to the general rule of submitting the inspection report after completion of the inspection.
SEBI may require an interim report if it needs preliminary findings or urgent information during the inspection.
The interim report contains the observations and findings gathered up to that stage of the inspection.
Submission of an interim report does not conclude the inspection, and the Inspecting Authority must continue the inspection until it is completed.
After completing the inspection, the Inspecting Authority must still submit the final inspection report to SEBI.
Section 34. Communication of findings, etc. to the Alternative Investment Fund
After considering the inspection report and giving the AIF:
Its trustees, directors, or Manager a reasonable opportunity of being heard, SEBI may issue appropriate directions.
These directions may be issued if SEBI considers them necessary in the interest of the securities market or investors.
(a).
SEBI may prohibit an Alternative Investment Fund from launching new schemes.
SEBI may also prevent the AIF from raising money from investors during the specified period.
The restriction applies only for the period specified by SEBI in its direction.
Such directions are generally issued where SEBI identifies regulatory violations, non-compliance, or risks to investors or the securities market.
(b).
SEBI may prohibit the concerned person from disposing of the assets of an AIF or its scheme that were acquired in violation of the AIF Regulations.
This direction may be issued after considering the inspection report and providing a reasonable opportunity of hearing.
The restriction applies only to properties or assets acquired in contravention of the AIF Regulations.
The concerned person cannot sell, transfer, mortgage, pledge, or otherwise dispose of those assets while the direction remains in force.
Such directions protect the interests of investors and maintain the integrity of the securities market.
(c).
SEBI may direct the concerned person to dispose of the assets of an AIF or its scheme in a specified manner.
This direction may be issued after considering the inspection report and providing a reasonable opportunity of hearing.
SEBI may specify how, when, and to whom the assets must be disposed of.
The concerned person must follow the method and conditions prescribed in SEBI's directions.
Such directions may be issued to rectify regulatory violations, protect investors, or safeguard the securities market.
The disposal must be carried out strictly in accordance with SEBI's directions and within the specified timeframe, if any.
(d).
SEBI may direct the concerned person to refund money or assets collected under an AIF scheme to the affected investors.
This direction may be issued after considering the inspection report and providing a reasonable opportunity of hearing.
The refund may consist of money, assets, or both, depending on the circumstances of the case.
SEBI may also require the refund to be made along with the applicable interest, where appropriate.
Such directions are generally issued where funds or assets were collected, managed, or retained in violation of the AIF Regulations.
The concerned person must make the refund in the manner and within the timeframe specified by SEBI.
(e).
SEBI may prohibit the concerned person from operating in or accessing the capital market for a specified period.
This direction may be issued after considering the inspection report and providing a reasonable opportunity of hearing.
The prohibition may restrict the person from participating in, carrying out, or undertaking activities in the capital market.
SEBI may also bar the person from raising funds, investing, or dealing in the capital market during the specified period, as permitted by the direction.
The restriction remains effective only for the period specified by SEBI.
Such directions are generally issued where serious violations of the AIF Regulations or conduct harmful to investors or the securities market are identified.
CHAPTER VI. PROCEDURE FOR ACTION IN CASE OF DEFAULT
Section 35. Liability for action in case of default.
35(1).
An Alternative Investment Fund may face regulatory action under the SEBI (Intermediaries) Regulations, 2008 if it commits any of the following defaults:
(a). Contravention of the Act or Regulations
Violates any provision of the SEBI Act or the AIF Regulations.
Any breach of statutory or regulatory requirements may attract enforcement action.
(b). Failure to Furnish Information
Does not provide information relating to its activities when required by SEBI.
An AIF must furnish complete information within the time specified by SEBI.
(c). Furnishing False or Misleading Information
Provides information that is false, inaccurate, or misleading in any material respect.
Supplying incorrect information to SEBI is treated as a serious regulatory violation.
(d). Failure to Submit Returns or Reports
Does not file the periodic returns or reports required by SEBI.
Timely regulatory reporting is a continuing compliance obligation.
(e). Non-Cooperation with SEBI
Fails to cooperate during any enquiry, inspection, or investigation conducted by SEBI.
Cooperation includes producing documents, providing information, and assisting SEBI officials.
(f). Failure to Resolve Investor Complaints
Does not resolve investor complaints.
Fails to provide a satisfactory response when SEBI seeks an explanation regarding such complaints.
Where any of the above defaults occur, the AIF will be dealt with under the SEBI (Intermediaries) Regulations, 2008.
SEBI may initiate appropriate enforcement or disciplinary proceedings in accordance with those regulations.
35(2).
35(1) shall not prejudice the powers of the Board to:
Issue directions or take measures under Regulation 34.
Exercise powers under Section 11 of the SEBI Act.
Exercise powers under Section 11B of the SEBI Act.
Exercise powers under Section 11D of the SEBI Act.
Exercise powers under Section 12(3) of the SEBI Act.
Exercise powers under Section 24 of the SEBI Act.
Exercise powers under Chapter VIA of the SEBI Act.
Exercise powers under any other law for the time being in force.
Even if proceedings are initiated under the Intermediaries Regulations, SEBI may simultaneously or separately exercise its powers under the SEBI Act or any other applicable law.
SEBI may:
Issue Directions or regulatory measures under Regulation 34 of the AIF Regulations whenever necessary.
Exercise its powers under Sections 11, 11B, 11D, Section 12(3), Section 24, or Chapter VIA of the SEBI Act, depending on the nature of the violation.
CHAPTER VI-A POWER TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS
Section 35A. Exemption from enforcement of the regulations in special cases.
35A(1).
SEBI may exempt any person or class of persons from the operation of all or specified provisions of the AIF Regulations.
The exemption is granted to promote innovation in the securities market.
It allows eligible persons to test new products, processes, services, business models, or similar innovations.
The testing must take place in the live environment of SEBI's Regulatory Sandbox, under SEBI's supervision.
The exemption is temporary and may be granted for a period specified by SEBI, not exceeding 12 months.
SEBI may exempt all provisions or only specific provisions of the regulations, depending on the nature of the innovation being tested.
Once the exemption period expires:
The person must comply with the applicable provisions of the AIF Regulations unless SEBI grants any further regulatory relief in accordance with law.
35A(2).
Any exemption granted by SEBI under the Regulatory Sandbox is subject to conditions specified by the Board.
The applicant must satisfy all the conditions prescribed by SEBI before the exemption is granted.
SEBI may impose different conditions depending on the nature of the product, service, process, or business model being tested.
The applicant must continue to comply with the specified conditions throughout the exemption period, not just at the time of approval.
These may include ongoing reporting, risk management, investor protection measures, disclosure requirements, or operational safeguards.
If the applicant fails to comply with the specified conditions, SEBI may modify, suspend, or withdraw the exemption.
Explanation:
Regulatory Sandbox
A Regulatory Sandbox is a live testing environment created by SEBI to encourage innovation in the securities market.
It allows new products, processes, services, business models, or similar innovations to be tested under SEBI's supervision.
The testing is conducted using a limited set of eligible customers, rather than being made available to the entire market.
The testing is permitted only for a specified period of time, as determined by SEBI.
The purpose is to evaluate how the innovation performs in real market conditions before wider implementation.
The testing is subject to the conditions specified by SEBI, including safeguards for investors and the securities market.
CHAPTER VII. MISCELLANEOUS
Section 36. Power of the Board to issue clarifications
SEBI may issue clarifications and guidelines to remove difficulties in applying or interpreting the AIF Regulations.
The clarifications or guidelines may be issued through circulars.
SEBI may also issue separate circulars, guidelines, or frameworks for each category of Alternative Investment Fund.
Different categories of AIFs may receive category-specific regulatory guidance based on their unique investment strategies and operations.
These clarifications help ensure uniform interpretation and consistent implementation of the AIF Regulations.
AIFs, Managers, Sponsors, and other stakeholders must comply with the applicable circulars, guidelines, and frameworks issued by SEBI.
Section 37. Delegation of powers
SEBI may delegate its powers under the AIF Regulations to one of its officers.
The delegation must be made through an order issued under Section 19 of the SEBI Act, 1992.
Once the powers are delegated, the authorised officer may exercise those powers on behalf of SEBI.
The officer can exercise only those powers that have been specifically delegated by SEBI.
Delegation enables faster and more efficient administration and enforcement of the AIF Regulations.
The delegated officer must exercise the powers in accordance with the SEBI Act, the AIF Regulations, and the terms of the delegation order.
Although the powers are exercised by the authorised officer, they are treated as powers exercised on behalf of SEBI.
Section 38. Amendments to other Regulations
The Third Schedule specifies amendments to other SEBI regulations.
These regulations are amended in the manner and to the extent provided in the Third Schedule.
The Third Schedule forms an integral part of the AIF Regulations.
Only the changes specifically mentioned in the Third Schedule take effect under this provision.
Persons governed by the affected regulations must comply with those regulations as amended by the Third Schedule.
Section 39. Repeal and Saving
39(1).
The SEBI (Venture Capital Funds) Regulations, 1996 stand repealed upon the commencement of the AIF Regulations.
The repeal means that the 1996 Regulations are no longer in force.
Venture Capital Funds are thereafter governed by the SEBI (Alternative Investment Funds) Regulations, subject to the applicable transitional provisions.
The repeal replaces the earlier regulatory framework with a comprehensive framework for Alternative Investment Funds.
Existing Venture Capital Funds must comply with the transitional and migration requirements prescribed under the AIF Regulations.
39(2).
(a).
The repeal of the SEBI (Venture Capital Funds) Regulations, 1996 does not invalidate actions taken under those Regulations.
Anything done or any action taken under the repealed Regulations is deemed to have been done under the corresponding provisions of the AIF Regulations.
This includes the suspension or cancellation of a certificate of registration.
It also covers any inquiry or investigation that was commenced before the repeal.
Show cause notices issued under the repealed Regulations continue to remain valid after the repeal.
Ongoing regulatory proceedings continue under the corresponding provisions of the AIF Regulations without restarting the process.
(b).
Any application submitted to SEBI under the SEBI (Venture Capital Funds) Regulations, 1996 and pending on the date of repeal is deemed to have been made under the AIF Regulations, 2012.
Applicants are not required to submit a fresh application solely because the 1996 Regulations have been repealed.
SEBI will continue processing the pending application under the corresponding provisions of the AIF Regulations.
The application retains its validity despite the change in the regulatory framework.
Pending applications are treated as if they had originally been filed under the corresponding provisions of the AIF Regulations.
(c).
Venture Capital Funds and their schemes launched before the notification of the AIF Regulations continue to be governed by the SEBI (Venture Capital Funds) Regulations, 1996.
This applies only to funds or schemes that were launched before the AIF Regulations came into force.
Such funds are not automatically brought under the AIF Regulations.
They continue to comply with the 1996 Regulations until the fund or scheme is wound up.
The regulatory framework applicable to these existing funds remains unchanged during their remaining life.
New Venture Capital Funds established after the AIF Regulations must comply with the AIF regulatory framework, unless covered by applicable transitional provisions.
Restriction on Launching New Schemes
Existing Venture Capital Funds governed by the 1996 Regulations cannot launch any new scheme after the notification of the AIF Regulations.
This restriction applies even though the existing fund continues to be governed by the 1996 Regulations until it is wound up.
Existing schemes may continue to operate until their winding up.
Only new schemes are prohibited after the AIF Regulations come into force.
Any new investment vehicle or scheme must comply with the AIF regulatory framework, where applicable.
Migrated Venture Capital Funds
A Venture Capital Fund may seek registration as a Migrated Venture Capital Fund under Chapter III-D of the AIF Regulations.
Once SEBI grants the certificate of registration, the fund is governed by the AIF Regulations.
The change takes effect from the date on which the certificate of registration is granted.
From that date onwards, the migrated fund must comply with the provisions applicable under the AIF Regulations.
Until registration is granted, the fund continues to be governed by the applicable transitional provisions and the earlier regulatory framework.
Enhanced Reporting for Non-Migrated Venture Capital Funds
SEBI may prescribe enhanced regulatory reporting and other regulatory measures for Venture Capital Funds that do not migrate under Chapter III-D.
This applies to Venture Capital Funds that choose not to seek registration as a Migrated Venture Capital Fund.
SEBI may require additional reporting, disclosures, or compliance measures from such funds.
The enhanced requirements enable SEBI to continue monitoring funds that remain outside the migrated AIF framework.
The nature and extent of these measures are determined by SEBI from time to time.
Non-migrated Venture Capital Funds must comply with any enhanced reporting or other measures specified by SEBI.
39(3).
After the repeal of the SEBI (Venture Capital Funds) Regulations, 1996:
References to those regulations in other SEBI regulations, guidelines, or circulars are automatically treated as references to the corresponding provisions of the AIF Regulations.
This applies to all regulations, guidelines, and circulars issued by SEBI that refer to the repealed Regulations.
The substitution happens automatically without requiring amendments to every existing SEBI document.
References are interpreted as referring to the corresponding provisions of the AIF Regulations.
