The scheme offers a structured exit for older venture capital funds transitioning to the AIF regime, with a deadline set for January 19, 2026
SEBI Unveils Exit Path for Legacy Venture Capital Funds
The Securities and Exchange Board of India (SEBI) has announced the VCF Settlement Scheme 2025, aimed at helping older venture capital funds (VCFs) close operations in a regulated and structured manner.
- The scheme offers a way for VCFs to settle regulatory lapses, especially for those with expired schemes that still hold unliquidated assets.
- The application window will be open from July 21, 2025, to January 19, 2026.
Eligible funds must apply via SEBI’s website and pay a non-refundable fee of INR 25,000 plus 18% GST.
Why This Matters: Migrating from VCF to AIF Regime
The initiative is a continuation of SEBI’s transition efforts from the now-defunct VCF Regulations, 1996, to the Alternative Investment Funds (AIF) Regulations, 2012.
- Though VCFs were allowed to operate under the old rules post-2012, SEBI had mandated all such funds to either wind up or migrate to the AIF framework.
- In 2024, SEBI offered an additional 1-year extension (ending July 19, 2025) for migrated VCFs to liquidate assets and complete winding-up.
Funds failing to comply post-July 19, 2025, face potential regulatory action if they:
- Have expired schemes with pending assets
- Did not migrate or apply under the new settlement scheme
Who Can Apply for the Scheme?
To be eligible for the VCF Settlement Scheme 2025, funds must:
- Be registered under the old VCF regulations
- Have at least one expired scheme
- Already migrated to the AIF framework
This scheme provides a one-time opportunity to settle outstanding regulatory issues without litigation and exit in compliance with SEBI’s updated regulations.
Why Legacy Funds Face Liquidation Challenges
Many of the legacy funds launched pre-2010 have been unable to sell remaining illiquid assets such as underperforming or inactive startup equity.
- SEBI had previously allowed rolling such assets into new schemes, but this was discontinued due to tax and compliance issues for LPs.
- As a result, the regulator now requires that any such assets, if unsold and carried forward, be recorded at a symbolic INR 1 valuation—ensuring fund manager accountability.
SEBI’s Broader Reforms in the AIF Space
Over the last few years, SEBI has aggressively reformed the alternative investment fund landscape to enhance transparency, protect LPs, and promote domestic investments.
Key developments include:
- Mandating LP approval (75%) for fund dissolution or asset continuation
- Introducing bid-based asset liquidation mechanisms
- Promoting co-investment options for LPs alongside AIFs
- Supporting reverse flipping and easier Indian listings for startups
With India’s startup and VC ecosystem booming post-2015, SEBI is actively addressing the backlog of expired, underperforming, or non-compliant funds.
What Comes Next?
SEBI’s move is expected to unlock capital stuck in expired funds, offer closure clarity to managers and LPs, and clean up the regulatory books for legacy funds.
For funds unwilling or unable to apply under the VCF Settlement Scheme, enforcement action may follow, further incentivizing compliance.
