SEBI Mulls Settlement Scheme for Legacy Venture Capital Fund Violations

Based on a Report by Moneycontrol.com

In a significant move towards regulatory streamlining, the Securities and Exchange Board of India (SEBI) is reportedly considering introducing a settlement scheme to address past regulatory violations by Venture Capital Funds (VCFs) registered under the now-defunct SEBI (Venture Capital Funds) Regulations, 1996.

Source: Moneycontrol.com – June 4, 2025

What Is Being Proposed?

SEBI may allow these legacy funds—many of which are in breach of winding-up obligations or are still holding on to illiquid assets—to settle historical violations by paying a pre-determined settlement amount, thereby avoiding litigation or enforcement action. This would be a one-time window applicable to specific classes of breaches and structured in a time-bound manner.

Regulatory Context

SEBI had in July 2024 already enabled a voluntary migration of VCFs to the AIF (Alternative Investment Fund) regime—a more modern and operationally relevant regulatory framework. However, many legacy VCFs did not opt in, either due to unliquidated assets or procedural hurdles.

By July 19, 2025, these funds must choose whether to migrate or face increased scrutiny and reporting obligations. The proposed scheme would give non-compliant VCFs a third route: settlement and clean exit.

Legal and Practical Analysis

1. Regulatory Pragmatism

This proposed scheme reflects SEBI’s increasing shift from purely punitive regulation to risk-based, practical enforcement. By offering a settlement mechanism, SEBI acknowledges the operational difficulties VCFs may face while winding up schemes with hard-to-sell or illiquid assets—especially given the vintage nature of many investments.

2. Clarity for Fund Managers and LPs

For General Partners (GPs) and Limited Partners (LPs), lingering compliance issues have become a roadblock to closure and final distribution. The settlement scheme would offer legal closure and reputational relief especially important for fund managers looking to launch new AIFs or raise successor funds.

3. Precedent for Other Fund Categories

If implemented, this could set a useful precedent for similar resolution schemes applicable to older AIFs, PMS schemes, or NBFCs with legacy portfolio issues. It also strengthens the broader push towards regulatory certainty and ease of doing business in the Indian alternative investment ecosystem.

4. Concerns to Watch

The actual calculation methodology for the settlement amount will be key if punitive, uptake may be low.

There could be differential treatment of similarly placed funds, which might attract criticism if not carefully calibrated.

Clarity will be needed on whether investor grievances are automatically resolved through settlement or require parallel resolution.

Conclusion

SEBI’s likely move to introduce a settlement scheme for old VCF violations could unlock a much-needed path to closure for legacy funds. For fund managers and compliance teams, this is a golden opportunity to clean up historical baggage and align with current regulatory expectations.

At Trailblazer, we help fund managers and GPs navigate complex regulatory transitions and compliance frameworks. If you're managing a legacy VCF or planning a move to the AIF regime, we can assist in assessing eligibility for the settlement scheme and ensuring regulatory compliance throughout the process.

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Disclaimer: This article is based on publicly available information reported by Moneycontrol.com.