As the May 2025 deadline looms, fund managers scramble to comply with SEBI’s AIF certification rule, raising questions about competence, accountability, and access in the venture capital space.
India’s venture capital ecosystem is bracing for a regulatory shake-up as the Securities and Exchange Board of India (SEBI) enforces a long-overdue certification requirement for alternative investment funds (AIFs). By May 2025, at least one key personnel in the investment team of every AIF—whether new or existing—must be certified under the National Institute of Securities Market (NISM) Series-XIX-C: Alternative Investment Fund Managers Certification Examination.
This rule, first introduced by SEBI in March 2023, has now become non-negotiable for all new fund registrations and the launch of new schemes post-May 10, 2024. The aim? To ensure a more skilled, accountable, and transparent VC ecosystem as the sector faces growing scrutiny and rising investor expectations.
Why SEBI is Acting Now?
The past few years have seen a massive surge in the number of AIF registrations. From startup founders pivoting to become fund managers, to a record number of VC funds launched during the zero-interest-rate era, SEBI’s corridors have been flooded with applications. By some industry estimates, over 1,300 AIF applications were pending clearance at the peak in 2022–2023, with only about 300 receiving registration.
SEBI is now tightening the entry barrier, not just to reduce the backlog but also to weed out inexperienced or underqualified fund managers. The new certification requirement aims to ensure that those managing other people’s money understand the regulatory framework, fund structures, valuation techniques, and exit strategies.
Beyond the NISM exam, fund managers must also possess a professional qualification in finance, economics, capital markets, or banking from a recognized institution—or be a CFA charterholder.
LP Frustrations Push SEBI to Act
Much of SEBI’s urgency stems from growing discontent among limited partners (LPs), especially state-backed investors such as SIDBI. The GoMechanic debacle in early 2023—where a cofounder admitted to inflating revenues—exposed glaring gaps in due diligence by some of India’s top funds, several of which were backed by SIDBI.
The collapse in valuation of companies like GoMechanic and BYJU’S has shaken LP confidence, especially when combined with the ongoing partner churn at many VC firms. LPs often invest based on trust in a particular general partner. When that partner exits, LPs are left vulnerable and uncertain about the stewardship of their capital.
This has led to a growing shift in preference: high-net-worth individuals (HNIs) and family offices are increasingly investing directly in startups rather than through funds. Public market volatility and pandemic-driven shifts further accelerated this trend.
Training Scramble: VCs Head Back to School
With the May 2025 deadline just months away, VC funds across India are scrambling to prepare their investment teams. Some firms have launched internal training programs, while consultants are offering crash courses to help personnel clear the NISM exam.
Interestingly, younger analysts are reportedly faring better in these tests than senior partners and CIOs—many of whom haven’t faced an exam in decades. “It’s funny to think that fund managers have to worry about marks again,” joked one Delhi-based investor.
Some industry insiders, however, worry that the rule may be gamed. Since SEBI mandates certification for just one investment team member, some funds may nominate a figurehead with the certification across multiple funds or schemes—leaving the actual decision-making to uncertified partners.
This opens the door for opportunistic professionals with the certificate—but no relevant experience—to become placeholder personnel for multiple AIFs.
Will SEBI Raise the Bar Further?
The concern that SEBI’s current rules don’t go far enough is widely shared. Several VC partners argue that certification is just the first step. It addresses skill, but not accountability. LPs often don’t know who’s really calling the shots, especially when fund structures are murky and GPs have minimal equity ownership.
“SEBI is solving the skills problem, but not the ownership and alignment issue,” said one VC partner based in Delhi. “Many LPs were blindsided when their trusted partners exited funds, leaving them stuck with poor-performing portfolios.”
There is growing consensus that SEBI needs to go beyond certification and impose stricter norms around disclosures, GP equity ownership, and decision-making roles.
Risks of Overregulation?
While most industry players welcome SEBI’s intent, some worry that stringent compliance norms could stifle innovation and prevent fresh talent from entering the VC space. During the 2021–2022 boom, the VC landscape began to democratize. New GPs from diverse backgrounds launched micro-funds, backed by angel networks and small LPs.
Overregulation could tilt the scales back in favor of elite institutions and large firms, reversing the inclusive trend of recent years.
That said, many also argue that the certification rule is lenient in its current form. “It’s a soft compliance regime right now. SEBI is nudging the ecosystem towards professionalism without choking it,” said another Mumbai-based VC.
A Welcome Reset?
Ultimately, SEBI’s certification requirement may represent a much-needed reset for India’s venture capital industry. After years of hype-led investments and valuation excesses, the startup funding ecosystem needs a dose of discipline.
While this rule won’t solve every problem—from weak governance to poor fund performance—it raises the baseline for skill and knowledge. And that, many agree, is a step in the right direction.
Whether SEBI tightens these norms further or not, the message is clear: the era of “spray and pray” VC funding is over. Fund managers must now prove not just their network and track record, but also their understanding of regulations and fiduciary responsibility.
As the 2025 deadline approaches, India’s VC funds will either adapt—or risk being left behind.
