AIF commitments have crossed ₹15 lakh crore even as tax pass-through, hybrid instrument restrictions, and pricing guideline rationalisation remain unresolved across CBDT, DEA, DPIIT, SEBI, and MCA. Why has the capital grown while the structural impediments have not been addressed, and what would it take for the institutional architecture to process them as the interconnected system the industry actually experiences?
The AIF Regulations were introduced by SEBI in 2012. The tax framework under Section 115UB came in 2015. But the regulatory infrastructure that a PE or VC fund actually navigates, FEMA pricing guidelines, Companies Act valuation norms, CBDT operational circulars, and DEA policy on foreign fund structures, predates the AIF framework by decades and was built for a different kind of capital. The industry has grown inside this architecture, not because the architecture accommodates it, but because the opportunity in India is large enough to absorb the friction.
India needs this capital. The government has said so at every investor summit, every bilateral dialogue, and every Budget speech. Yet the institutional architecture that governs how this capital enters, is structured, is taxed, and eventually exits has not been rationalised to reflect that need. Understanding why requires looking at what actually happens when these representations arrive inside the system.
A pre-budget representation from the PE/VC industry reaches the Revenue Secretary's office. It is marked to the Joint Secretary (TPL). The JS evaluates it against revenue forgone implications, drafts a note, and routes it for internal concurrence. The note returns with "may be examined further," which in institutional vocabulary means: not this year. The representation is resubmitted the following February. The cycle repeats. The JS TPL who processes the representation is not hostile to the industry. They are operating within a framework where every exemption is a revenue line item that must be defended before the Finance Secretary and, ultimately, in Parliament.
The institutional resistance is not ideological. It is architectural. CBDT cannot operationalise pass-through for Category III without a compliance infrastructure that does not yet exist. Building that infrastructure is not a policy decision; it is a technology and capacity investment that no Budget cycle has prioritised. SEBI, which classifies Category III as a distinct risk category with different leverage and redemption norms, does not see the tax treatment as its jurisdiction. The result is a structural orphan: CBDT says it cannot move without SEBI reclassifying. SEBI says taxation is not its mandate. The industry submits the same representation every February.
Pricing guidelines present a different institutional pattern but the same underlying dynamic: no ministry will defer to another's framework.
When a PE fund invests in an Indian company, the valuation is simultaneously governed by FEMA pricing norms (administered by RBI), Companies Act fair value rules (administered by MCA), Income Tax Act valuation (administered by CBDT), SEBI's AIF reporting requirements, and state-level stamp duty valuations. A single investment can be compliant under one statute and challenged under another, because each statute's valuation norms serve a different institutional purpose and no authority has reconciled them.
The Empowered Committee that could reconcile these frameworks has never been constituted. Not because no one has proposed it, but because no ministry wants to convene a process whose outcome might diminish its own jurisdiction. The inter-ministerial meeting where this would be discussed requires a convenor, and the convenor would be the ministry that acknowledges the problem sits within its mandate. No ministry has volunteered.
The Variable Capital Company framework sits in a separate register: an architectural reform announced but not operationalised, revealing a different institutional pattern from the inter-ministerial orphan dynamic. Singapore's VCC structure, launched in 2020, permits an umbrella fund to hold multiple sub-funds with segregated assets, shared corporate services, and unified compliance; over 1,400 VCCs had registered by Q1 2025, and the structure has become the preferred vehicle for Asian fund managers. India's response, proposed through IFSCA for units operating within GIFT City, has been under discussion since 2022 with consultation papers, draft regulations, and inter-ministerial coordination through IFSCA, the Ministry of Finance, and the Ministry of Corporate Affairs. The framework has not yet been notified in operational form. What is distinctive is that this is not an inter-ministerial orphan; institutional ownership is reasonably clear, IFSCA leads, the Department of Economic Affairs concurs, and the MCA addresses the corporate-law interface. The delay is of a different character: the tax treatment, the FEMA interface, and the governance architecture each require specific statutory provisions that have not yet been drafted, and the Finance Bill cycle that would carry these provisions has consistently prioritised other reforms in its final consolidation. An architecturally clear reform can wait not because no ministry owns it, but because the Budget cycle that would operationalise it through legislation is itself a rationed resource. For global fund managers evaluating India as a domicile, the VCC framework is the architectural answer; its absence in operational form is why Singapore continues to accumulate the registrations that IFSC was designed to attract.
The issues that get resolved are those where a single ministry owns the outcome. ECMS moved at unprecedented speed because MeitY owned it end to end. The issues that persist across the PE/VC regulatory landscape are those where three or four institutional owners must concur, and none has the mandate, the jurisdiction, or the institutional incentive to convene the others. The result is not deadlock. It is something quieter: a regulatory environment that functions, that processes applications, that grants approvals, but that never quite resolves the structural friction that the industry has identified, documented, and represented on for half a decade. The system is not hostile to private capital. It is indifferent to the experience of deploying it.
What would change this is specifiable. It would require one of three forcing mechanisms: a cross-ministry convenor of the kind the Empowered Group of Secretaries occasionally provides for strategic sectors, which has not been constituted for the PE/VC regulatory landscape; a crisis visible enough to force consolidation, which the capital-committed-but-friction-tolerated pattern has foreclosed; or a Budget cycle that prioritises the rationalisation over the competing reforms it must otherwise carry in its final consolidation. Absent these, the structural impediments will persist alongside the capital that tolerates them.
For a PE or VC fund evaluating India, the opportunity is genuine; ₹15.74 lakh crore in AIF commitments as of December 2025 and 20.6% year-on-year growth confirm that. But the regulatory cost of deploying capital is not a single compliance exercise. It is a concurrent engagement across five institutional jurisdictions, each operating on its own timeline, with its own interpretive framework, and no single interface that processes the fund's experience as a whole. The funds that deploy capital successfully are those that have mapped this architecture before committing, not after.