SEBI Launches VC Fund Settlement Scheme For Legacy Fund Closure

Markets regulator Securities and Exchange Board of India (SEBI) has introduced the VCF Settlement Scheme 2025 to help older venture capital funds (VCFs) close their operations in an organised manner.

In 2012, SEBI notified the Alternative Investment Funds (AIF) Regulations, which led to the repealing of VCF Regulations, 1996. However, VCFs registered under the VCF Regulations were allowed to be regulated under the repealed norms till their existing schemes or funds were wound up.

However, a number of VCFs were unable to liquidate their investments during the tenure of the fund, and continue to hold the unliquidated investments beyond the expiry of their tenure. To facilitate the movement of these VCFs to the AIF Regulations, the markets regulator last year released a new circular.

Under the circular, VCFs were provided an additional period of 1 year to liquidate their investments and wind up the schemes. Once migrated, they could enter into a dissolution period after obtaining approval from their investors. The last date for applying for such migration was set July 19, 2025.

Now, the new scheme offers the VCFs a way to settle any regulatory issues that have arisen due to delays in winding up expired schemes that still hold unliquidated investments.

Structured Exit Route For Legacy Funds

Under the scheme, only those VCFs that have at least one expired scheme and have already completed the migration to the AIF regime will be eligible.

The scheme will be open from July 21, 2025, to January 19, 2026. Funds wishing to apply must submit a settlement application through SEBI’s website and pay a non-refundable fee of INR 25,000 along with 18% GST.

“Upon expiry of the last date of migration, i.e. July 19, 2025, SEBI may initiate action against such VCFs that have schemes whose liquidation period has expired but not wound up and that continue to hold the unliquidated investments, and have not availed the opportunity under the VCF Settlement Scheme, 2025,” the markets regulator said in a statement. 

This move is aimed at resolving long-standing issues with older funds and bringing them in line with current regulations in a fair and timely manner. Notably, many of these legacy funds were launched in the early 2000s or before, with fund tenures of 10 to 12 years.

In 2020, SEBI directed all such funds to either wind up or migrate to the AIF regime. It later provided a structured process for migration and, in 2024, granted a one-year extension to enable migrated funds to complete the winding-up process. SEBI also introduced the concept of “Migrated VCFs”, funds that had moved to the AIF framework but still held expired schemes with unliquidated assets.

SEBI On The Move 

With the sharp rise in the number of funded startups in the country over the last decade or so, the markets regulator has been actively coming up with regulations for AIFs.

It recently raised concerns about funds, including AIFs, trying to extend their tenure without a clear plan to liquidate assets. Since many startups grew rapidly after 2015, a large number of AIFs are now either in their liquidation phase or have already used up SEBI’s extension. 

The liquidation period is a one-year window after a fund’s term ends, during which the manager must sell any remaining assets and return the money to investors (LPs). If assets still remain, funds can enter a dissolution period but only with approval from 75% of LPs by value, and this consent must be obtained during the liquidation year. 

Notably, selling unsold or unattractive assets is tough, and in the past, SEBI allowed rolling them into new schemes. However, this caused tax and compliance issues for LPs and has since been discontinued. 

To address the challenge, SEBI introduced new rules last year. If 75% LP approval is secured, fund managers must seek bids for the remaining assets and offer an exit to those LPs who don’t want to continue. 

If no bids are received, the fund can still proceed with dissolution, but the remaining assets must be reported at a symbolic value of INR 1 to benchmarking agencies, and this isn’t a real loss but a way to hold managers accountable.

Other SEBI initiatives in the investing space include providing more flexibility for investors to co-invest with the AIFs and approving amendments to boost Indian startup listings and promote reverse flipping to the country.