Last verified: July 1, 2026
For decades, an Indian bank could not lend against shares to bankroll a takeover, and a company still cannot give financial assistance to buy its own shares (Section 67(2) of the Companies Act, 2013, for public companies). That single constraint is why the leveraged buyout, the engine of global private equity, barely existed here. From 1 July 2026, it changes. The Reserve Bank of India’s new acquisition-financing framework lets banks fund up to 75 percent of an acquisition’s value, with the acquirer bringing at least 25 percent of its own equity. One rule, and a whole model of dealmaking that India had watched from the sidelines is suddenly on the table.
Here’s the thing about that reform: it only matters if you understand the machine it plugs into. Private equity runs on three ingredients, pooled capital, control, and leverage. India always had the capital and the appetite for control. What it lacked was the bank leverage. So this guide unpacks the whole machine: what private equity actually is, how a fund makes money, how it is structured and regulated in India through SEBI’s Alternative Investment Fund regime, how deals are built and financed, how the money is taxed, and how investors eventually get it out.
The scale is worth pausing on. India drew USD 60.7 billion of private equity and venture capital across 1,475 deals in 2025, according to the EY-IVCA Trendbook 2026. Global funds are relocating their Asia leadership to Mumbai as China cools, and one large manager has publicly framed an India ambition of roughly USD 100 billion. Two 2026-fresh legal shifts sit underneath the money: the abolition of the “angel tax” from assessment year 2025-26, and the new Income-tax Act, 2025, in force from 1 April 2026.
So who is this for? A law, company-secretary, chartered-accountancy, or MBA student meeting private equity for the first time. A junior corporate associate who needs the India-law scaffolding, not a Wall Street explainer. A founder deciding whether PE, and not venture capital, fits their stage. Or a career-switcher weighing PE as a path. Whichever you are, this is the page that carries the weight.
Start with the cleanest possible definition, one built for India rather than for Wall Street.
Private equity (PE) is a form of investment in which a fund pools capital from institutional and high-net-worth investors to buy stakes in private companies, or take public companies private, improve them over several years, and sell at a profit. In India, PE funds are regulated by the Securities and Exchange Board of India as Category II Alternative Investment Funds.
One orienting note before we go deep. This is a long read, by design. Use the table of contents to jump; nothing below assumes you read front to back.
What is private equity?
Let’s be honest: most people first meet the phrase and assume it means “buying shares.” It doesn’t, not in the way you buy a listed stock on a Tuesday. Private equity is investment in the equity of companies that are not traded on a public stock exchange, made through a professionally managed fund, with a plan to own for years and sell once. The “private” is doing real work in that sentence. You can’t click a button and buy in, and you can’t click one to sell out.
Three players make up the picture. The fund is the pool of money. The investors who supply that money are the limited partners (LPs), pension funds, insurers, sovereign wealth funds, family offices, and wealthy individuals who commit capital but stay hands-off. The general partner (GP), or fund manager, runs everything: finding deals, negotiating them, sitting on boards, and eventually selling. The companies the fund buys are its portfolio companies.
So how is this different from owning a mutual fund or a share of Infosys? Two ways. First, control. A PE fund usually buys a large stake, often a majority, and actively steers the business, changing management, cutting costs, funding expansion. Second, horizon and liquidity. Public shares are liquid; you exit whenever the market’s open. A PE investment is illiquid and long, typically locked up for five to seven years, sometimes more.
What most people miss is that this illiquidity is a feature, not a bug. Freed from quarterly earnings pressure, a PE-owned company can take three years to fix its supply chain or rebuild a management team. That patience is the whole pitch. It’s also why, in India, the structure that houses this patience is tightly defined by regulation, which is where we go next.
How private equity works: the fund lifecycle and economics
A private equity fund is not a permanent institution. It’s a closed-end vehicle with a life, usually around ten years, that moves through five overlapping phases. Understand the lifecycle and the rest of PE stops feeling mysterious.
It starts with fundraising. The GP spends a year or two persuading LPs to commit capital, closing the fund in stages (a first close, then interim closes, then a final close). Crucially, LPs don’t hand over all the cash on day one. They make a commitment, a promise, and the GP “draws down” the money in tranches through capital calls as actual deals come up. The committed-but-uncalled money sitting in reserve has a name you’ll hear constantly: dry powder.
Then comes the investment period, typically the first three to five years, when most of the fund’s capital gets deployed into portfolio companies. After that, the holding-and-value-creation phase: five to seven years of active ownership, where the GP tries to make each business more valuable through operational improvement, bolt-on acquisitions, margin expansion, and paying down any acquisition debt. Finally, the exit or harvest phase, where investments are sold and cash flows back to LPs.
How does the GP get paid for all this? Through a model the industry shorthands as “2 and 20.” The “2” is an annual management fee of roughly 2 percent (charged on committed capital during the investment period, on invested capital later) that funds salaries and operations. The “20” is carried interest, or “carry”: the GP’s share of the profits, conventionally 20 percent, but paid only after LPs have got their capital back plus a minimum return. Worth flagging clearly: 2 and 20, the ten-year life, the 8 percent hurdle, these are market conventions written into fund documents, not figures fixed by Indian statute.
That minimum return is the hurdle rate (or preferred return), commonly around 8 percent. The GP earns nothing on carry until LPs clear the hurdle; then a “catch-up” lets the GP take a larger slice until the overall split reaches the agreed 80:20. And here’s a pattern every new LP notices and panics about: the J-curve. Early in a fund’s life, returns look negative, because fees and deal costs hit immediately while investments haven’t yet appreciated or been sold. The curve dips, then climbs, tracing a “J” as value-creation and exits kick in. Returns get measured two ways: IRR (the annualised rate, sensitive to timing) and MOIC (multiple on invested capital, the plain “how many times our money” number).
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How private equity is structured in India: the AIF framework
Here’s where India diverges sharply from the American picture, and where most generalist explainers go quiet. In India, a PE fund is almost never a “limited partnership” in the US sense. It’s a SEBI-registered Alternative Investment Fund (AIF), governed by the SEBI (Alternative Investment Funds) Regulations, 2012. Get this framework and you understand how PE actually operates in India.
The AIF Regulations sort every fund into one of three categories. Category I covers funds the government treats as socially or economically desirable: venture capital, angel, SME, infrastructure, and social-impact funds. Category III covers funds that use complex or leveraged trading strategies, essentially hedge funds. Private equity sits squarely in Category II: funds that don’t fall in Category I or III and don’t borrow except for day-to-day operations. Private-credit, real-estate, and fund-of-funds vehicles live here too.
So how does the American GP/LP model translate? Through a trust. More than 95 percent of Indian AIFs are set up as irrevocable trusts under the Indian Trusts Act, 1882, because a trust needs no company-charter filing and lets the deed carry any commercial arrangement the parties want. The roles map cleanly: the Sponsor sets up the fund and keeps skin in the game; the Investment Manager makes the deal and portfolio decisions (the GP function); the Trustee holds legal title to the assets; and the Contributors are the investors (the LPs). Fair warning: don’t import the US idea of “unlimited GP liability” onto the Indian Sponsor or Manager. Their exposure is contractual and fiduciary under the AIF Regulations, not general-partner liability.
The rules that bind a Category II PE fund are specific, and they explain why PE is not a retail product. A scheme needs a minimum corpus of Rs 20 crore. Each investor must put in at least Rs 1 crore (Rs 25 lakh for employees or directors of the fund, its manager, or its sponsor). A scheme can have at most 1,000 investors. The Sponsor or Manager must maintain a “continuing interest” of the lower of 2.5 percent of the corpus or Rs 5 crore, and it has to be real cash, not waived fees. And a Category II fund must be close-ended with a minimum tenure of three years.
| AIF category | What it is | Typical funds | Leverage |
|---|---|---|---|
| Category I | Government-encouraged sectors | Venture capital, angel, SME, infrastructure, social-impact | No |
| Category II | Everything not in I or III, no borrowing except operational | Private equity, private credit, real estate, fund of funds | No (operational only) |
| Category III | Complex or leveraged trading strategies | Hedge funds, PIPE funds | Yes |
Now, here’s where it gets interesting for 2026. SEBI has been building a lighter-touch lane for sophisticated money. A Large Value Fund for Accredited Investors (LVF), a fund where every investor is accredited, saw its minimum ticket cut from Rs 70 crore to Rs 25 crore under the SEBI (AIF) (Third Amendment) Regulations, 2025, notified on 18 November 2025. LVFs get real relaxations: no standardised private placement memorandum template, longer permitted tenure extensions, and looser concentration limits. The direction of travel is clear: heavier protection for smaller investors, freedom for the big, accredited ones.
Types of private equity
Ask ten people what “private equity” means and half will describe a leveraged buyout. That’s one strategy, not the whole field. So what are the others?
Buyout (or control) funds acquire a majority, take charge, and often use debt. Growth equity funds take significant minority stakes in companies that are already profitable and scaling, usually without much leverage. Venture capital backs early-stage startups (and in India, remember, VC funds register as Category I, not II). Distressed or special-situations funds buy troubled companies, frequently through India’s Insolvency and Bankruptcy Code, 2016 process, and turn them around. Then there are real-estate funds, private-credit funds that lend rather than take equity, and funds of funds that invest in other funds.
The comparison readers actually search for is private equity versus venture capital. Here’s the clean version.
| Feature | Private equity | Venture capital | Growth equity | Hedge fund |
|---|---|---|---|---|
| Stage of company | Mature, established | Early-stage startup | Profitable, scaling | Any (listed securities) |
| Stake | Majority / control | Minority | Significant minority | Trading positions |
| Leverage | Often high (buyouts) | Rarely | Low | Yes (strategy-driven) |
| Horizon | 5-7 years | 7-10 years | 3-6 years | Short, liquid |
| Return driver | Control + operations + leverage | Company growth | Growth | Market/trading |
The short version? PE buys mature businesses and steers them; VC buys into young ones and rides their growth; growth equity sits in between; and a hedge fund isn’t really in the same family at all, it trades liquid securities and lets investors redeem periodically, where PE locks money up for years. If you want the deeper contrast, iPleaders has a dedicated breakdown of how private equity differs from venture capital and a closer look at the different types of private equity funds.
How PE deals are structured in India: instruments and shareholder rights
When a PE fund invests, what does it actually receive? Rarely plain equity shares alone. In India, the workhorse instruments are compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCDs). Why these? Because FEMA treats compulsorily convertible instruments as equity for foreign-investment purposes, while their preference features let the fund engineer downside protection and a preferred economic position. A pure optionally-convertible instrument, by contrast, gets treated as debt and drags in external-commercial-borrowing rules.
The real architecture of the deal lives in the shareholders’ agreement (SHA) and share subscription agreement. This is where a PE lawyer earns their keep. A handful of clauses recur on almost every Indian PE deal. Liquidation preference decides who gets paid first on a sale or winding-up (a 1x preference means the fund recovers its money before others share the rest). Anti-dilution protects the fund’s stake if a later round prices lower. Tag-along lets the fund sell alongside a promoter who’s exiting; drag-along lets a majority force minorities into a sale. Affirmative-vote (or reserved-matters) rights hand the fund a veto over key decisions, new debt, big capital expenditure, changes to the business, senior hires.
Here’s a wrinkle that trips up people who learned PE from US textbooks: the put option problem. Funds love an assured exit, a right to “put” their shares back to the promoter at a guaranteed price. Indian foreign-exchange law resists exactly that. Under FEMA pricing rules, a non-resident generally cannot exit at a pre-agreed, assured return; the exit price is capped at fair value. The enforceability of assured-return puts has been litigated hard, in NTT DoCoMo Inc. v. Tata Sons Ltd., 2017 SCC OnLine Del 8078 and in Cruz City 1 Mauritius Holdings v. Unitech Ltd., 2017 SCC OnLine Del 7810, both before the Delhi High Court in 2017, and the practical lesson is that a fund must price its downside protection carefully rather than assume a guaranteed floor. (We’ll come back to the FEMA machinery in the next section.)
If you’re drafting or reviewing these documents, the clause-level craft matters. For the adjacent building blocks, see iPleaders on the clauses that go into an Indian term sheet and on convertible instruments like CCDs and notes.
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Leveraged buyouts and acquisition financing in India
A leveraged buyout (LBO) is the strategy that made private equity famous: buy a company mostly with borrowed money, use the target’s own cash flows to service the debt, improve the business, and sell. In the United States, it’s routine. In India, until now, it’s been rare, and the reasons are legal.
Two barriers stood in the way. First, Section 67(2) of the Companies Act, 2013 bars a public company from giving financial assistance to anyone buying its own or its holding company’s shares (private companies are exempted, subject to conditions, by a 2015 notification). That kills the classic structure where the target’s assets secure the acquisition debt. Second, and just as important, the RBI long prohibited banks from lending against shares to fund a takeover. Between them, these rules meant Indian buyouts were funded with equity and offshore or structured debt, not domestic bank leverage. The textbook LBO was, in practice, an import that didn’t clear customs.
That’s what makes the 2026 reform genuinely significant. Under the RBI’s new acquisition-financing framework, effective 1 July 2026 (deferred from an original 1 April date), banks may finance up to 75 percent of an acquisition’s value, provided the acquirer contributes at least 25 percent from its own funds. The facility is secured on the target’s shares or CCDs plus a mandatory corporate guarantee, and the acquirer’s consolidated debt-to-equity ratio can’t exceed 3:1 after the deal. For the first time, an Indian buyout can be built on Indian bank leverage.
So what changes on the ground? Expect more control deals and take-privates funded domestically, and expect demand for a scarce skill set: lawyers who can combine acquisition-financing structuring with FEMA and shareholders’-agreement work. The engine that powered global PE for forty years has finally been wired into the Indian grid. For how these buyouts intersect with the wider deal market, see iPleaders’ complete 2026 guide to mergers and acquisitions in India.
Private equity, FEMA and foreign investment
A large share of the money in Indian PE comes from abroad, which means the Foreign Exchange Management Act, 1999 (FEMA) is never far away. How does a foreign investor actually get money into an Indian fund, and what happens when that fund invests?
Getting in is the easy part. AIF units are “non-debt instruments,” and a person resident outside India may invest in an AIF as an “Investment Vehicle” under Schedule VIII of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. The fund files a Form InVI with the RBI within 30 days of issuing units to the non-resident. So far, so administrative.
The consequential question comes next: when that fund invests in an Indian company, does the investment count as domestic or as foreign? The answer turns on a test in the Explanation to Rule 23 of the NDI Rules. If both the Sponsor and the Manager of the AIF are owned and controlled by resident Indians (ownership meaning more than 50 percent, control meaning the right to appoint most directors or drive policy), the fund’s downstream investment is treated as domestic, and FDI entry routes, sectoral caps, and pricing rules don’t bite by reason of the fund. If either the Sponsor or the Manager is foreign-owned or foreign-controlled, the downstream investment is treated as indirect foreign investment, and it must comply with the full FDI rulebook.
Why does this matter so much in practice? Because it decides whether a fund can freely back a company in a capped or restricted sector. It’s also why fund sponsors think carefully about the residency of their management entity, and why the land-border consent rule under Press Note 3 (2020) can stop a deal cold if a foreign LP’s home country shares a border with India. One more FEMA reality worth repeating from the last section: pricing rules cap a non-resident’s exit at fair value, so no assured-return put. For the reporting mechanics that sit alongside all this, iPleaders has a practical walkthrough of FEMA reporting such as FC-GPR and FC-TRS filings.
How private equity is taxed in India
Tax is where a lot of PE explainers are simply out of date, and where a 2026 guide can be genuinely useful. The single most important idea is “pass-through.” Does the fund pay tax, or do the investors? For Indian PE, the answer is mostly the investors, thanks to Section 115UB of the Income-tax Act, 1961.
Under Section 115UB, income of an “investment fund” other than business income (so interest, dividends, and capital gains) is exempt at the fund level and taxed directly in the investors’ hands, as if each investor had made the underlying investment personally. The character of the income is preserved on the way through. Critically, an “investment fund” for this purpose means only a Category I or Category II AIF. So PE funds, being Category II, get statutory pass-through. Business income, by contrast, is taxed at the fund level (for a trust, generally at the maximum marginal rate).
| AIF category | Non-business income (interest, dividend, capital gains) | Business income |
|---|---|---|
| Category I and II | Pass-through: taxed in investors’ hands (Section 115UB) | Taxed at fund level (maximum marginal rate) |
| Category III | No statutory pass-through: generally taxed at fund level | Taxed at fund level |
Category III funds get no equivalent statutory pass-through, which is one reason PE and credit strategies prefer Category II. Now, three 2026-specific points that competitors miss. First, carried interest has long been a grey area, is the GP’s carry a capital gain or a services fee? The Finance Act, 2025 helped by amending the definition of “capital asset” so that securities held by Category I and II AIFs are treated as capital assets (applying from assessment year 2026-27), which supports capital-gains treatment, though the broader characterisation debate isn’t fully closed.
Second, and this is the big one for founders: the “angel tax” under Section 56(2)(viib), which taxed a company on share premium above fair value, has been abolished by the Finance (No. 2) Act, 2024. There’s no angel-tax levy on share issuances from assessment year 2025-26 (financial year 2024-25) onward, for resident and non-resident investors alike. Removing that valuation-premium risk is quietly one of the most PE-friendly changes in years. Third, funds deduct TDS on investor income under Section 194LBB (10 percent for residents). And looking ahead, the new Income-tax Act, 2025 (in force 1 April 2026) carries the regime over: the pass-through provision continues as Section 224, and the AIF TDS provision as Section 393.
How PE firms exit their investments
A private equity investment isn’t real until the fund sells and returns cash to its LPs. So how do PE firms actually get out, and what does 2026 tell us about which routes are working?
Four routes dominate. An initial public offering (IPO) lists the company and lets the fund sell into the public market, though SEBI’s lock-in rules restrict how quickly pre-IPO shareholders can sell after listing. A strategic sale hands the company to an industry buyer, often at a control premium. A secondary sale passes it to another financial investor, another PE fund. And a share buyback lets the company itself repurchase the fund’s stake. Each route has a different tax and regulatory footprint, which is why exit planning starts at entry, not at the end.
What did 2025 actually look like? Strong. Indian PE exits reached USD 32.9 billion across 257 deals, the second-highest on record, according to the EY-IVCA Trendbook 2026. The standout shift was strategic sales, which tripled to roughly USD 16 billion, about 48 percent of all exit value. Public-market exits stayed important too; Kedaara Capital’s exit through the Vishal Mega Mart IPO was among the year’s largest.
And here’s the trend to watch. When exits slow, GPs increasingly turn to GP-led secondaries and continuation funds, moving a strong asset into a new vehicle so existing LPs can cash out while the GP keeps running the business. Once exotic, these structures are now a real part of the Indian toolkit, and they’re reshaping how “exit” is even defined.
The Indian private equity market in 2026
How big is Indian private equity, really? The honest answer starts with a caution, because the two most-cited sources count different things, and blending them produces nonsense.
By the broad EY-IVCA measure, which counts the full PE and VC universe, India saw USD 60.7 billion across 1,475 deals in 2025, up 8 percent in value on 2024. By Bain & Company’s narrower “PE-only” lens, which strips out venture and some other segments, PE investment was USD 19.6 billion in 2025, down 33 percent, as global funds pulled back from large buyouts. Both numbers are correct. One says the market grew; the other says mega-buyouts cooled. The truth is both, and anyone who quotes a single figure without saying which basket it counts is guessing.
Where’s the money going? In 2025, five sectors, financial services, infrastructure, real estate, technology, and e-commerce, absorbed roughly 72 percent of investment. Fundraising by India-focused funds hit an all-time high of USD 23.2 billion, which matters because it deepens the pool of domestic “dry powder” (and note: there’s no reliable India-only dry-powder figure published, so treat that fundraising number as the best proxy, not a headline stock). A few marquee deals give the numbers a face: Temasek’s roughly USD 1 billion investment in Haldiram (India’s largest consumer PE deal), KKR’s buyout of Healthium MedTech, and Blackstone’s roughly USD 705 million stake in Federal Bank.
Who are the players? Among global funds, Blackstone (which has framed an India ambition near USD 100 billion), KKR, Carlyle, Bain Capital, and Brookfield are the most active, with several now running their Asia PE leadership out of Mumbai as China slows, which is exactly why analysts call India “Asia’s buyout hub.” On the domestic side, ChrysCapital (whose roughly USD 2.2 billion 2025 fund is the largest ever raised by an independent India fund), Kedaara Capital, Multiples, and True North lead. The structural story of 2026 is that India is no longer just a place global capital visits; it’s a place that raises and deploys its own.
Risks, criticisms and why PE deals fail
Let’s not oversell it. Private equity attracts serious criticism, and a guide that skips the downside isn’t being straight with you. So what’s the case against?
The loudest critique is leverage. Load a company with acquisition debt, and a downturn that a debt-free business would survive can push a leveraged one into distress. The second is the cost-cutting reputation: PE owners are accused of squeezing margins through layoffs and reduced investment to hit return targets, sometimes at the expense of the workforce and long-term health. Add over-valuation in hot markets, and the illiquidity that locks investors in for years whether or not they like how things are going, and you have a strategy that is not remotely risk-free.
India adds its own frictions. Promoter-led family businesses often resist the control and governance rights a PE fund demands, and that tension sinks deals or sours them after signing. Due-diligence opacity, related-party dealings, informal arrangements, patchy records, remains a real problem in mid-market targets. And the FEMA constraint we’ve met twice already, no assured exit price for non-residents, means a foreign fund can’t fully guarantee its way out, which occasionally turns exits into litigation.
Why do deals actually fall through? Usually one of a few reasons: a valuation gap the parties can’t bridge, red flags surfaced late in diligence, promoters unwilling to cede real control, or regulatory approvals (competition clearance, sectoral consent) that don’t come. The practical reality is that the deals that close cleanly are the ones where control, price, and regulatory path were honestly mapped before the term sheet, not after.
Investing in, and building a career in, private equity in India
Two questions dominate the search results here, so let’s answer both plainly. Can an ordinary person invest in private equity in India? And how do you build a career in it?
On investing: mostly, no, not directly, and by design. Because a PE fund is a Category II AIF, the minimum cheque is Rs 1 crore (Rs 25 lakh only for fund employees or directors). That threshold deliberately keeps small retail investors out of an illiquid, high-risk asset class. The realistic routes for wealthy individuals are becoming an LP in an AIF, going through a feeder fund or portfolio-management scheme that aggregates smaller commitments, or, at the smallest scale, buying listed proxies. If you’re a founder on the other side of the table wondering why a company takes PE money at all, the answer is growth capital plus governance discipline plus a credible path to a future exit, and iPleaders has a founder-focused guide on how to raise finance from private equity investors.
On careers: the investment ladder runs analyst, associate, vice-president, principal or director, then partner, and it’s genuinely competitive, drawing from investment banking, consulting, chartered accountancy, and increasingly law. But here’s what most students miss: PE doesn’t only hire investors. It runs on lawyers. Fund-formation lawyers structure the AIF and draft the PPM; transaction lawyers build the SHAs and run diligence; and with SEBI’s post-2023 compliance wave (standardised valuation, dematerialisation, pro-rata rights), fund-compliance roles are expanding fast. For a law graduate, the differentiating skills are financial literacy, genuine command of the SEBI AIF and FEMA regimes, and real drafting ability on shareholders’ agreements. Those are learnable, and they’re in short supply.
Professionals who pair deal-execution skill with command of the SEBI, FEMA, and AIF frameworks move into corporate practice, in-house investment teams, and fund advisory. LawSikho’s Diploma in M&A, Institutional Finance and Investment Laws is built to get you there, taught by practitioners, with real drafting output. Course page: /lawsikho/diploma-merger-acquisitions-institutional-finance-investment-laws.
Frequently asked questions
1. What is private equity in simple terms?
Private equity is money pooled from large investors into a fund that buys stakes in private companies (or takes public ones private), improves them over several years, and sells at a profit. In India, these funds are regulated by SEBI as Category II Alternative Investment Funds, and investors typically stay locked in for five to seven years.
2. How is private equity different from the stock market?
Public stocks are liquid: you can buy and sell any trading day, usually as a tiny minority holder. Private equity is illiquid and long-term, usually involves a large or controlling stake, and gives the fund active control over the business. You can’t casually buy into or exit a PE fund the way you trade a listed share.
3. Who are LPs and GPs in a private equity fund?
Limited partners (LPs) are the investors who supply the capital, pension funds, insurers, sovereign wealth funds, family offices, and wealthy individuals, and stay passive. The general partner (GP), or fund manager, runs the fund: sourcing deals, managing portfolio companies, and exiting. In India’s trust structure, the GP function is split between the Sponsor and the Investment Manager.
4. How does a private equity fund make money?
Two ways. A management fee of roughly 2 percent a year covers operations, and carried interest of around 20 percent gives the fund manager a share of the profits, but only after investors get their capital back plus a minimum “hurdle” return (often about 8 percent). This is the “2 and 20” model. These figures are market conventions, not statutory requirements.
5. What is carried interest?
Carried interest, or “carry,” is the share of a fund’s profits paid to the fund manager as a performance reward, conventionally 20 percent. It’s paid only after investors recover their capital and clear the hurdle rate. In India, the Finance Act, 2025 supported capital-gains treatment for gains on securities held by Category I and II AIFs, though the tax characterisation of carry has historically been contested.
6. What is the “2 and 20” fee structure?
“2 and 20” describes the two ways a PE fund manager is paid: a 2 percent annual management fee on the capital, plus 20 percent carried interest on profits above a hurdle. The management fee funds day-to-day operations regardless of performance; the carry rewards actual returns. Exact percentages vary by fund and are set in the fund documents, not by law.
7. How is private equity regulated in India?
Private equity funds are regulated by SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012, as Category II AIFs. FEMA and the Non-Debt Instruments Rules, 2019 govern foreign investment into and by the fund, the Income-tax Act governs taxation, and the Companies Act governs the portfolio companies. It’s a multi-regulator framework, with SEBI at the centre.
8. What is a Category II AIF?
A Category II Alternative Investment Fund is a SEBI-registered fund that doesn’t fall in Category I or III and doesn’t use leverage except for operational needs. Private equity, private credit, and real-estate funds sit here. Category II funds must be close-ended, have a minimum corpus of Rs 20 crore, and take a minimum of Rs 1 crore per investor.
9. What is the minimum investment for private equity in India?
For a Category II AIF, the statutory minimum is Rs 1 crore per investor, reduced to Rs 25 lakh only for employees or directors of the fund. This high floor is deliberate: it restricts private equity to institutional and high-net-worth investors who can absorb the illiquidity and risk. Retail investors generally cannot invest directly.
10. Can retail investors invest in private equity in India?
Not directly, in most cases. The Rs 1 crore minimum ticket for a Category II AIF prices out ordinary retail investors. The realistic routes are through a feeder fund or portfolio-management scheme, by qualifying as an accredited or high-net-worth investor, or indirectly through listed vehicles that hold private assets. Direct PE remains an institutional and HNI product.
11. Are leveraged buyouts legal in India?
They’re legal but were historically constrained. Section 67(2) of the Companies Act, 2013 bars a public company from giving financial assistance to buy its own shares, and banks were long barred from lending against shares for takeovers. From 1 July 2026, the RBI’s acquisition-financing framework lets banks fund up to 75 percent of an acquisition, making domestically financed buyouts viable for the first time.
12. How is private equity taxed in India?
Category I and II AIFs (which include PE) get “pass-through” taxation under Section 115UB of the Income-tax Act: income other than business income is taxed in investors’ hands, not the fund’s. Business income is taxed at the fund level. Category III funds get no such pass-through. From 1 April 2026, the new Income-tax Act, 2025 carries this regime forward as Section 224.
13. What is the difference between private equity and venture capital?
Private equity typically buys mature, established companies, often a majority stake, and may use debt. Venture capital backs early-stage startups, taking minority stakes and betting on growth. VC also carries higher failure rates. In India, VC funds register as Category I AIFs, while PE funds are Category II. Both pool capital and aim to exit at a profit.
14. What is the difference between private equity and a hedge fund?
Private equity takes illiquid, long-term, often controlling stakes in private companies and profits from operational improvement and eventual sale. A hedge fund trades liquid securities (stocks, bonds, derivatives) using varied strategies and lets investors redeem periodically. In India, hedge funds register as Category III AIFs; PE funds are Category II. The horizons and liquidity are worlds apart.
15. Which are the top private equity firms in India?
Among global firms active in India: Blackstone, KKR, Carlyle, Bain Capital, and Brookfield. Among domestic firms: ChrysCapital (which raised a roughly USD 2.2 billion fund in 2025, the largest ever by an independent India fund), Kedaara Capital, Multiples, and True North. Several global funds now base their Asia leadership in Mumbai, reflecting India’s rise as a buyout hub.
16. What salary does a private equity associate earn in India?
Compensation is high but varies widely by firm, fund size, and city. PE roles typically pay above investment-banking benchmarks at the associate level, with a large share of long-term pay coming from carried interest as you rise. Entry usually follows investment banking, consulting, chartered accountancy, or law, and the roles are highly competitive. Treat any single figure as indicative, not fixed.
References
Statutes and regulations
- SEBI (Alternative Investment Funds) Regulations, 2012 (last amended 9 September 2025); regulations cited: 3(4) (categories), 10 (corpus, minimum investment, investor cap, continuing interest), 13 (tenure), 15 (concentration); read with the SEBI Master Circular for AIFs dated 7 May 2024 and the SEBI (AIF) (Third Amendment) Regulations, 2025 (LVF minimum reduced to Rs 25 crore).
- Foreign Exchange Management (Non-Debt Instruments) Rules, 2019; Schedule VIII (Investment Vehicle), Rule 21 (pricing), Rule 23 and Explanation (downstream investment).
- Companies Act, 2013; Section 67 (restriction on financial assistance for purchase of own shares), read with MCA Notification G.S.R. 464(E) dated 5 June 2015 (private-company exemption).
- Income-tax Act, 1961; Section 115UB (taxation of investment funds and unit holders), Sections 10(23FBA) and 10(23FBB) (fund-level exemptions), Section 56(2)(viib) (angel tax, abolished), Section 194LBB (TDS). Successor provisions in the Income-tax Act, 2025 (in force 1 April 2026): Section 224 (pass-through) and Section 393 (TDS).
- Finance (No. 2) Act, 2024 (abolition of Section 56(2)(viib) angel tax from AY 2025-26); Finance Act, 2025 (amendment to the definition of “capital asset” for securities held by Category I and II AIFs, from AY 2026-27).
- Reserve Bank of India, acquisition-financing framework for banks (effective 1 July 2026): maximum 75 percent bank funding, minimum 25 percent acquirer contribution, post-acquisition consolidated debt-to-equity capped at 3:1.
Case law
- NTT DoCoMo Inc. v. Tata Sons Ltd., 2017 SCC OnLine Del 8078. (2017) 241 DLT 65; AIR 2017 Del 160; decided 28 April 2017 (Delhi High Court). Enforcement of a foreign arbitral award treated as damages, over a FEMA pricing/assured-return objection.
- Cruz City 1 Mauritius Holdings v. Unitech Ltd., 2017 SCC OnLine Del 7810. (2017) 239 DLT 649; decided 11 April 2017 (Delhi High Court). A FEMA contravention does not by itself bar enforcement of a foreign award on public-policy grounds.
Secondary sources
- EY-IVCA, “Trendbook 2026” (India PE/VC 2025: USD 60.7 billion across 1,475 deals; exits USD 32.9 billion across 257 deals; fundraising USD 23.2 billion).
- Bain & Company, “India Private Equity Report 2026” (PE-only investment USD 19.6 billion in 2025).
Legal disclaimer
This article is published for informational and educational purposes. It does not constitute legal, tax, or investment advice, and should not be relied upon as a substitute for consultation with a qualified advocate, chartered accountant, or SEBI-registered adviser on the specific facts of any fund, transaction, or investment. Private equity in India involves statutory, regulatory, foreign-exchange, and tax issues that depend on structure, parties, and timing, and the law continues to evolve. Readers are advised to consult qualified professionals before taking any action based on this article. iPleaders, its authors, and LawSikho assume no liability for any loss arising from reliance on the content here.
