Alternative investments funds (AIFs) have been critical in supporting the growth of the world’s third-largest startup ecosystem since its beginning. However, as the Indian startup ecosystem matures, the pace at which the capital is being deployed has also received greater regulatory attention.

Erstwhile, fund managers were raising larger pools of capital while identifying investment opportunities as fast as possible. But even after registering with the SEBI, launching new fund schemes often involved lengthy procedural requirements that, as per industry participants, could lead to a delay in capital deployment.

In a market where timing can be critical, particularly for venture capital (VC) and private equity (PE) investors, these delays sometimes risked slowing investments into promising companies.

In a bid to make the mechanism more time efficient, SEBI has introduced the Green-Channel: AIF Rollout Upon Document Acknowledgement, or GARUDA, mechanism.

With the framework, the regulator is seeking to accelerate fund launches by reducing approval timelines and placing greater reliance on disclosures, certifications and the accountability of fund managers. 

This marks a broader shift in the regulator’s approach from pre-launch scrutiny to post-facto supervision and enforcement.

What Exactly Changes Under GARUDA?

While GARUDA’s relaxations are linked to the type of investors participating in a scheme, it is useful to first understand the broader categories of AIFs and where venture capital funds fit within the ecosystem.

Category I AIFs: Include VC funds, angel funds, SME funds and infrastructure funds. Most startup-focused VC funds operate under this category.

Category II AIFs: Include private equity, debt and real estate funds. Most growth-stage and private equity investors fall under this category.

Category III AIFs: Include hedge funds and other funds that employ complex trading strategies and leverage.

GARUDA does not differentiate between these categories. Instead, the framework creates separate approval pathways based on the sophistication of investors participating in a scheme.

Historically, AIFs were required to file a private placement memorandum (PPM), a legally mandated disclosure document detailing a scheme’s investment strategy, fee structure, risks, governance framework and investor rights, through a merchant banker before launching a scheme. 

The process often involved regulatory review and could delay launches if SEBI sought clarifications or additional disclosures.

In April, SEBI introduced a fast-track mechanism that allowed AIFs to launch schemes 30 days after filing their applications, provided the regulator did not raise any objections. 

GARUDA takes that process a step further by shortening timelines and creating separate approval pathways based on the sophistication of investors.

For regular schemes catering to non-accredited investors, the launch timeline has been reduced from 30 days to 10 working days after filing through a merchant banker, unless SEBI raises objections.

Archana Jahagirdar, founder and managing partner at Rukam Capital, said the framework could help accelerate capital deployment and make India a more attractive destination for institutional investors.

“Foreign investors have often found it difficult to understand the time involved in launching AIF schemes in India. A more streamlined and predictable approval process can significantly enhance India’s attractiveness as an investment destination, facilitate greater foreign capital inflows and encourage increased participation through AIFs,” Jahagirdar said.

Important to note that the relaxation is more significant for accredited investor-only schemes and angel funds. Managers of such schemes can now file PPMs directly with SEBI, while the requirement for a merchant banker due diligence certificate has been replaced with undertakings from the CEO or the compliance officer of the AIF manager.

These schemes can be launched immediately upon registration or filing of the PPM, reflecting SEBI’s view that accredited investors are better equipped to assess investment risks and disclosures without extensive regulatory scrutiny.

The trade-off for faster approvals is greater accountability. Rather than conducting detailed reviews of every scheme before launch, SEBI will rely more on certifications, undertakings and disclosures while carrying out post-facto scrutiny based on risk assessments. Any misstatements or lapses in scheme documents would attract regulatory action.

The Speed Advantage For AIF Managers

For fund managers, the most immediate advantage is speed. Shorter launch timelines can reduce the gap between fundraising and deployment, enabling funds to capitalise on investment opportunities more quickly.

3one4 Capital’s managing partner Pranav Pai believes that the GARUDA framework would allow Indian AIFs to operate more in line with global best practices by reducing unnecessary delays in fund launches and placing greater reliance on the accountability of regulated fund managers.

“Once you’re a SEBI-registered manager, launching a new fund or scheme should not be such an exhausting process. In most mature markets, once the manager is licensed and the investors are sophisticated, the emphasis is on disclosures and accountability rather than repeated approvals. GARUDA moves India closer to that approach,” he said.

Industry executives, however, cautioned that faster scheme launches are only one part of the regulatory burden facing fund managers, with several compliance requirements continuing to add operational costs.

Unicorn India Ventures’ managing partner Anil Joshi believes that while GARUDA significantly eases the process of launching new schemes, fund managers continue to face a growing compliance burden.

“GARUDA helps in scheme launches, but fund managers still need to comply with a large number of regulatory requirements. If some of the non-essential compliances can be eased, it would be particularly beneficial for smaller funds,” he noted.

GARUDA may not solve every challenge facing India’s alternative investment ecosystem, but it removes one of the industry’s longest-standing friction points. By shortening launch timelines and reducing procedural hurdles, SEBI has signalled a willingness to adapt its regulatory framework to a maturing market.

For fund managers, investors and startups, the real test will be whether the reform translates into faster deployment of capital and quicker access to funding opportunities across India’s startup ecosystem.

Edited by Akshit Pushkarna

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