Disputes in the Indian funds industry: Structural drivers and resolution pathways

The AIF industry in India is a catalyst for raising and mobilising private capital in start-ups and companies with limited or no access to capital markets. AIFs are premised on an alignment between investors and AIF managers. However, the very architecture that enables pooled capital deployment, characterised by delegation of control, illiquidity, long investment horizons and asymmetric information, can also create conditions that give rise to disputes. As the Indian funds market matures, with larger pools of domestic and offshore capital, more sophisticated investors and increasingly complex transaction structures, disputes are becoming more visible across the ecosystem.

Understanding where disputes arise and why is therefore critical for sponsors, AIF managers, investors and advisers operating in the Indian market.

Funds are typically structured such that investors commit capital, while day-to-day management and control remains with the AIF manager, creating an inherent asymmetry in roles. The AIF manager formulates and executes the investment strategy, evaluates investment opportunities, manages portfolio entities and ensures compliance with governing documents and applicable laws. In this capacity, the AIF manager exercises significant control over investment decisions, capital deployment and exit timing, and also provides inputs on asset valuation and portfolio reporting. This concentration of decision-making authority often becomes a focal point for conflicts, particularly when fund performance deteriorates or investor expectations diverge.

Disputes typically arise over opaque valuation practices, distribution of unliquidated investments, related-party investments and the exercise of discretionary powers relating to timing and exits. Such issues expose AIF managers to legal, commercial, and reputational risks, potentially undermining investor confidence in the fund’s governance.

• Regulatory and compliance disputes

  As of 31 December 2025, AIFs registered with the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations), had received cumulative commitments of approximately INR 15,74,050 crore. Out of this, INR 6,45,026 crore had been deployed towards investments. With the exponential growth of AIFs, SEBI’s initial light-touch approach has gradually evolved into increased regulatory scrutiny and oversight. Since 2012, several amendments to the AIF Regulations have strengthened disclosure standards and reporting requirements, leading to a rise in compliance-related disputes.

  • Term extension and dissolution: Term extension and dissolution of AIFs have emerged as a common theme of dispute between regulators and AIF managers. Most venture capital (VC)/private equity (PE) funds have a fixed term and make investments in illiquid securities. Unlike global funds, where term extension is governed by contractual arrangements, in the Indian context, term extension is governed by the AIF Regulations, which permit only extensions of up to two years with 66.67% investor consent. Therefore, contractual term extensions of funds by AIF managers have been the subject of several SEBI orders, both for venture capital funds (VCF) registered with SEBI under the erstwhile SEBI (VCF) Regulations, 1996, and the present AIF Regulations.

    SEBI’s orders have penalised AIF managers for contractually extending the fund’s term and failing to liquidate it within the term prescribed in the fund documents. In several cases, extensions were sought due to the absence of viable exit or liquidation options resulting from market conditions, geopolitical factors, and macro-economic considerations, such as industry or sector downturns. Following industry representations and consultations, SEBI has now introduced the concept of ‘dissolution period’ as a last resort for an AIF for liquidation of unliquidated investments, which permits extension of tenure without accepting new commitments or making fresh investments.

  • Breach of fiduciary duty and poor governance: SEBI has also penalised AIF managers for contravention of the AIF Regulations and attendant circulars in relation to delayed filings, audit lapses, withholding of crucial information and opaque valuation practices resulting in misleading the investors. The AIF Regulations impose an overarching obligation on the AIF manager and sponsor to act in a fiduciary capacity and disclose to investors all conflicts, as and when they arise or seem likely to arise.

    AIFs are also required to ensure transparency and disclosure of information to their investors. In a SEBI inquiry into HDFC Capital Affordable Real Estate Fund-I, SEBI held that the fund failed to exercise independent professional judgment and act in the interest of investors, placing the sponsor’s interests above those of investors.¹

  Regulatory action can also trigger parallel investor claims, particularly where investors allege reliance on disclosures or representations made by the AIF manager.

• Investor-AIF manager disputes

  The inherent dependence of investors on the AIF manager and the contractual framework governing the fund can lead to disagreements between investors and AIF managers, driven by factors such as lack of transparency, misaligned economic incentives, investor defaults, and challenges at the exit stage.

  • Illiquidity and long duration: Unlike public market investments, private fund investors cannot exit easily. This lack of liquidity often leads to disputes, as investors have to rely on contractual remedies rather than market solutions.
  • Lack of information and transparency: Effective fund governance depends on the free flow of information between investors and the AIF manager. During fundraising, representations made to investors may sometimes be overly optimistic, creating unrealistic expectations. Distributors must therefore be expressly cautioned against making representations of assured returns and must clearly explain the nature of the investment and the risks associated with an AIF. Most investor complaints, particularly on the SEBI Complaints Redressal System (SCORES), arise from misplaced expectations of assured returns on investments in AIFs. In a recent matter, a settlement order of approximately INR 61 lakh was passed against a fund for alleged failure to disclose conflicts of interest to investors as and when they arose or were likely to arise.
  • Incentive misalignment: The incentives of AIF managers are usually twofold – management fees, which provide revenue stability, and carried interest/additional returns, which depend on performance. This bifurcated structure can create tensions around investment and divestment decisions, timing of exits, and portfolio support decisions, such as reinvestment or follow-on investment.
  • Default by investors of AIFs: Defaults by investors are another possible source of dispute between investors and AIF managers. Issues such as an investor’s failure to meet capital contribution obligations or refusal to comply with their giveback obligations can escalate into serious conflicts. Capital contributions directly affect a fund’s ability to execute investments, while giveback obligations are critical to ensuring compliance with regulatory requirements. Conflicts around such issues may arise from ambiguity in the interpretation of fund documents or deteriorating market conditions that impact an investor’s ability to meet its obligations.
  • No exit post-expiration of tenure: Exit stage issues are another potential source of prolonged conflict. Extensions of a fund’s tenure are often inconvenient for investors, as they may result in continued lock-in of funds and additional management fees to the AIF manager. Additionally, where investors remain unable to exit even after the term has expired, disputes may intensify, especially where initial expectations of assured returns prove misplaced.

• Sponsor-level (internal) disputes

  The growth of the alternative funds industry has seen the rise of several domestic VC/PE firms, often involving partnerships between experienced AIF managers. Unlike established institutions, many such fund management entities are individual or founder-led and inherently personalised, making them susceptible to internal conflicts over time. Common friction points include disagreements over carry allocation among partners, departures of founders or senior professionals, strategic divergence between investment teams, governance deadlocks within management companies, and spin-outs or team transitions to competing platforms. Disputes within the sponsor or fund management entity itself can be very disruptive, even though they may be less visible externally.

  During fundraising, inter-se contracts or arrangements between AIF managers often receive limited attention. However, when differences subsequently emerge, these arrangements become extremely crucial. It is therefore important that such arrangements are clearly documented and that partners are aligned in their understanding of economic sharing, non-compete, and non-solicitation obligations, as well as their respective roles both during the partnership and post its severance.

  Such disputes often cascade into investor concerns, especially where they trigger key-person provisions, strategy shifts or operational instability. In emerging markets like India, where platform identity is frequently associated with individual sponsors, internal conflicts can materially undermine investor confidence and influence portfolio performance.

• Fund versus portfolio company disputes

  Disputes between funds and portfolio companies often stem from differences in approach or expectations. Many Indian investee companies involve founder-led or family-owned businesses. Governance disputes between institutional investors and promoters can escalate quickly due to differing expectations around control, reporting, valuation and exit timelines.

  Governance failures within portfolio companies can also result in large-scale crises, as seen in the cases of Gensol-BluSmart and Byju’s. These examples highlight the high-risk tendencies of start-up culture, which can lead to conflicts within the portfolio company and between the portfolio company and its investors. A robust internal governance framework can be instrumental in reducing the likelihood of such disputes.

While disputes are an inevitable feature of complex investment structures, their frequency and intensity can often be reduced through careful fund structuring, transparent governance practices and well-designed dispute resolution mechanisms. The Indian regulatory framework and fund documentation structures, therefore, play an important role in mitigating such conflicts.