From Fundraising to Enforcement: Private Equity Under SEBI's AIF Lens

Ruchir Saluja* 

INTRODUCTION

India's private equity landscape has witnessed substantial participation, with global and domestic investors deploying funds across high-growth sectors. L Catterton announced a $600 million India-focused fund, targeting various consumer brands, while Quadria Capital closed a $1 billion healthcare fund, aimed at healthcare, diagnostics, and tech development relating to health.

Both are registered as Category II Alternative Investment Funds (AIFs), which are privately brought in funds collected via select investors, institutional investors, qualified buyers, venture capitalists, and angel investors. These investment vehicles are regulated by SEBI (Alternative Investment Funds) Regulations, 2012, to invest in specific assets like startups, private companies, real estate, or debt, having a defined investment strategy. A Category II AIF is a fund that does not undertake leverage, that is, does not take up debt to fulfil its investment goals; it may only take up debts for operational day-to-day activities and not for investing or returning the promised return to the investor.

L Catterton’s fund limits its exposure to a single investee to avoid concentration and protect investors as required under Regulation 15(1)(c), it avoids excessive leverage, and follows independent valuation methods under Regulations 3(4)(b) and 23, respectively. Similarly, Quadria Capital’s fund complies with the closed-end structure, disclosure norms, and investor safeguards as required under Regulations 13 and 22, respectively.  

Separately, HDFC Capital Advisors Ltd, the manager of HDFC Capital Affordable Real Estate Fund-I, settled with the Securities and Exchange Board of India (SEBI) in a ₹36 lakh order for alleged violations of conflict-of-interest governance norms and internal lapses.

This article examines how L Catterton’s consumer-focused fund and Quadria’s Capital fund will specifically operate under SEBI (Alternative Investment Funds) Regulations, 2012. It examines the specific regulations that govern AIFs, disclosures, and valuation norms. Additionally, this article delves into how SEBI enforces its regulations by taking the case of HDFC Capital Advisors’ settlement with SEBI.

L CATTERTON’S CONSUMER-FOCUSED INVESTMENT

L Catterton, one of the top consumer-focused private equity firms globally, is planning on setting up a $600 million fund to be invested in India. The fund's goal is to invest in mid-sized companies, especially in the space of lifestyle, wellness, healthcare, and retail. As per International Finance Corporation (IFC), a member of the World Bank Group, the fund has plans to invest between $25 to $150 million in each company.

This fund is registered with the Securities and Exchange Board of India (SEBI) as a Category II Alternative Investment Fund (AIF) under the SEBI (AIF) Regulations, 2012. This is not a venture capital or angel investment, this is a growth stage fund, private equity investment.

Under Regulation 15(1)(c), this fund is restricted from investing more than 25% of its total investable pool in any single investee company. This rule is laid down to prevent concentration risk in the market and to ensure that investors aren't exposed to high risks, and this fund plans on investing cheques valued from 25 million to 150 million in seven to nine companies (less than and equal to 25% of the total investment pool), complying with the stated regulation.

Further, under Regulation 23 and SEBI’s master circular dated May 7^th 2024 (Chapter 22), it is mandatory for L Catterton to carry out the valuations for their investments according to disclosed policies and have an independent valuation by a qualified professional, which ensures price transparency in the market, and helps in fair valuation at the time of exit. By mandating independent valuations, SEBI aims to prevent manipulation or mispricing and to hold fund managers accountable for accurate disclosures and governance. Since this fund is registered with SEBI (AIF) Regulations, 2012, it is in accordance with this specific regulation. In a recent case of the KellyGamma fund, SEBI did not entertain the non-compliance with this regulation and slapped a fine of ₹8 Lakhs.

Under Regulation 28, the fund's activity and compliance must be periodically filed with the board. SEBI’s intent with this regulation is to ensure continuous regulatory oversight and transparency, ensuring governance and safeguarding investor confidence. Previously, SEBI recommended the cancellation of Golden Bird AIF and 7 other funds due to their non-compliance with Regulation 28.

QUADRIA CAPITAL’S HEALTHCARE INVESTMENT

In another development, Quadria Capital has disclosed plans to invest through its newly raised fund, amounting to almost $1 billion (exceeding its previous target to raise up to $800 million), this fund includes $954 million in primary capital and $114 million in co – investments with an additional $300 million to be infused in the deployment stage. It is stated to become the largest dedicated private equity fund in South and Southeast Asia, targeting scalable businesses in pharma, single-speciality hospitals, and digital health platforms. This fund has already deployed 40% of its capital in companies like Aragen Life Sciences, NephroPlus, and Maxivision Eye Hospitals.

The fund is structured as a private equity vehicle that targets unlisted healthcare companies and pharma, which makes it fall under the purview of the SEBI (AIF) Regulations, 2012. Under Regulation 3(4)(b), private equity and debt funds should not undertake leverage other than for operational requirements, which means that they should not invest money other than the funds invested by an investor; the debt could only be used for operational requirements. Quadria Capital’s fund would not have gotten a green signal from SEBI if there was any investment undertaken by leverage. The reason behind this restriction is to protect the funds of the common investor and to ensure respect for such fiduciary responsibilities. SEBI in 2023 passed an order reinforcing this restriction due to the case of the India Infrastructure Fund.

Further, Regulation 13 mandates the disclosure of the investment horizon for a minimum three-year period and should be a closed-end fund. Quadria Capital’s fund does comply with this regulation as it is a closed-end fund and has disclosed the horizon of its investment for a minimum three–year period. This is important for sensitive sectors, according to SEBI, like healthcare, as they require a longer period to mature, for example, infrastructure development and expanding the diagnostics chains.

Given the fund’s size, cross-border capital sources, and being a sensitive FDI sector, this fund will also have to comply with Regulation 22, where the memorandum of such infusion has to include all the material information about the AIF, targeted investors, fee and expenses, tenure, conditions or limits on redemption and risk management tools.

Quadria Capital’s fund expressly states the value of capital it is infusing, the targeted investors, the strategy to invest in healthcare specifically, and it holds previous robust governance records. This regulation holds a crucial value behind the legislation: investor protection. The disclosures must comply with the FDI policy, particularly Press Note 3, which mandates prior government approval for any foreign investments with beneficial ownership from bordering countries, thus safeguarding national interest in sensitive sectors like healthcare and any material ESG or public health risks.

With respect to Regulation 28, SEBI may, at any time, call for information of books of accounts, documents, and affairs of the AIF under Regulation 26. Healthcare is both a strategic and socially sensitive sector; it is crucial for SEBI to oversee the issuance made by foreign partners, if any, or co-investments in regulated sub-sectors like pharma or elder care. SEBI may inspect for compliance not only with AIF but for broader public interest activities.  

HDFC CAPITAL ADVISORS LTD SETTLEMENT WITH SEBI

To understand the practical implications of non-compliance, we will now analyse the recent case involving HDFC Capital Advisors Ltd and its Category II AIF – HDFC Capital Affordable Real Estate Fund – I (HCARE-I). On 6^th May 2025, SEBI issued a final settlement order in the alleged regulatory breaches, governance lapses, and most importantly, a conflict-of-interest issue.

This issue arose from the fund’s investment of ₹200 crore in NCDs (non-convertible debentures) of Acme Realties Pvt Ltd (ARPL) and ₹99 crore via NCDs of Ascent Construction Pvt Ltd (ACPL), both being the subsidiaries of Acme Housing (India) Pvt Ltd. At the time of this investment, HDFC Ltd was also a senior lender to ARPL and ACPL. SEBI alleged that the invested funds were re-routed to pay back the existing dues to HDFC, therefore, creating a circular path of funds to get a benefit for the sponsor (HDFC Ltd).

This was in violation of the fiduciary duties, in furtherance, the Investment Advisory Board (IAB) that approved the deal comprised only HDFC executives, and it also did not consult the conflict resolution committee, breaching the governance protocols. HDFC Capital Advisors reported no conflict, but SEBI found this to be inaccurate. The parties then, submitted a Suo Moto settlement application under SEBI (Settlement Proceedings) Regulation, 2018, and SEBI after careful review by both its internal and high-powered advisory committee, imposed a ₹36 Lakh settlement of 18 March 2025.

This case highlights that SEBI’s AIF regulations are not merely procedural in nature but also actively enforced to protect investor confidence and governance standards. It validates the relevance of detailed and truthful disclosure requirements, conflict resolution mechanisms, and adherence with enacted regulations.

CONCLUSION

These recent investment deals demonstrate that while private equity in India continues to thrive, it does so within a framework designed to ensure transparency, protect investors, and maintain the integrity of the market. This article also provided an insight into how private equity transactions are structured, mainly through regulated fund vehicles, detailed disclosure documents, and strategic planning of fund infusion. It highlights the importance of regulatory alignment at each stage, from raising funds to a calculated exit.

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* Ruchir Saluja, 4th year law student, Symbiosis Law School, Noida.