SEBI settles AIF continuing-interest lapse by Modulus Alternatives

The Enforcement Action

SEBI settled, on 3 August 2026, the proceedings that could have been brought against Modulus Alternatives Investment Managers Limited (PAN AAHCC9755G) over an alleged breach of the continuing-interest rule that governs how much of its own money a fund manager must keep invested alongside outside investors. The regulator recorded the outcome in an order numbered SO/PSD/2026-27/8664, against settlement application 8664/2025, and confirmed that the applicant had remitted the settlement amount of Rs 10,87,500 (Rupees Ten Lakh Eighty-Seven Thousand Five Hundred).

The matter concerns India Credit Opportunities Fund II, a Category II Alternative Investment Fund registered with SEBI and managed by Modulus Alternatives. Per the SEBI settlement order dated 3 August 2026, SEBI examined the fund's Quarterly Activity Reports and found, from alerts generated on the June 2024 report, that the manager's own drawdowns into the fund were not being made pro-rata with the drawdowns being taken from other investors. That, SEBI held, amounted to a failure to maintain the manager's continuing interest on the pro-rata basis required by Regulation 10(d) of the SEBI (Alternative Investment Funds) Regulations, 2012, read with clause 11.1.2 of the AIF Master Circular dated 7 May 2024.

Under the SEBI (Settlement Proceedings) Regulations, 2018, an entity may resolve enforcement proceedings by paying a settlement sum "neither admitting nor denying" the findings of fact and conclusions of law. Modulus Alternatives filed such a suo-motu application. The settlement therefore closes the matter without a finding of guilt and without any bar on the manager; it is not a penalty imposed after a contested order, and it carries no admission of wrongdoing. Beyond the application itself, the manager has not made a separate public statement on the settlement.

How the Scheme Worked

Continuing interest is the regulatory name for a fund manager's skin in the game. A sponsor or manager of an AIF must commit its own capital to the fund and keep it there for the life of the fund, so that its incentives are aligned with those of the investors whose money it deploys. Crucially, that commitment cannot simply sit as a promise; the manager must actually draw down its share of capital in step with everyone else, so its proportional stake never lags the pool it is managing.

Per the order, the Investment Manager had committed Rs 5 crore to India Credit Opportunities Fund II. The order sets out the drawdown schedule call by call. At the 24 August 2023 call, the manager had drawn Rs 0.5 crore, or 10 per cent of its commitment, while other investors had drawn 22.54 per cent of theirs. By the 5 April 2024 call, the manager stood at 40 per cent drawn against 44.46 per cent for other investors. At the calls of 27 August 2024 and 9 October 2024 the manager drew nothing further, leaving it at 40 per cent while other investors climbed to 63.88 per cent and then 80.69 per cent. Only at the 24 February 2025 call did the manager draw the balance, and the order notes it made a Rs 3 crore drawdown on 27 March 2025 that took it to 100 per cent.

The effect, SEBI observed, was that "the percentage of Investment Manager drawdown to its commitment was less than that of other investors" from 24 August 2023 until 27 March 2025. Throughout that window the manager's continuing interest was not being maintained pro-rata to the net funds raised from other investors, which is what Regulation 10(d) read with clause 11.1.2 of the Master Circular requires. The order records that the manager subsequently rectified the position in the quarter ending March 2025.

Because the application was filed under the settlement route, the file did not proceed to a contested show-cause and final order. Per the order, SEBI's Internal Committee met the applicant's authorised representatives on 11 March 2026 to deliberate the matter and the terms of settlement, and the timeline from there followed the standard settlement procedure described below.

The Law Invoked

The matter rests on Regulation 10(d) of the SEBI (Alternative Investment Funds) Regulations, 2012. That provision sets the manager's continuing-interest obligation, and, as clause 11.1.2 of the AIF Master Circular dated 7 May 2024 spells out, "the continuing interest criteria as per Regulation 10(d) shall be maintained pro-rata to the amount of funds raised (net) from other investors in the AIF". In plain terms, the manager's committed capital is meant to be present in the fund in the same proportion as investors' capital at each stage, not merely by the end.

The settlement itself was passed under Section 15JB of the SEBI Act, 1992, read with Section 19, and in terms of Regulation 23 of the SEBI (Settlement Proceedings) Regulations, 2018. Section 15JB is the statutory basis on which SEBI may settle administrative and civil proceedings on agreed terms. The settlement amount of Rs 10,87,500 was computed under Schedule II read with Regulation 10 of the Settlement Regulations. The order expressly preserves SEBI's rights under Regulations 28 and 31 to revive action if any representation is later found untrue or a settlement condition is breached.

What Happens Next

A settlement order under the 2018 regulations brings the matter to a close. Per the order, the terms travelled the standard settlement path: SEBI's Internal Committee met the applicant on 11 March 2026, the applicant filed revised terms the same day proposing Rs 10,87,500, the High Powered Advisory Committee considered them on 25 March 2026, and the Panel of Whole Time Members approved the settlement on 11 May 2026 in terms of Regulation 15. A Notice of Demand followed on 20 May 2026, and the applicant confirmed remittance by email on 25 May 2026.

With the sum paid, SEBI "shall not initiate any enforcement action against the Applicant for the said violations". The order takes effect immediately and is hosted on SEBI's website in terms of Regulation 25. It is not a determination of guilt, and there is no debarment, suspension or restriction on the manager's registration. Should SEBI later find that a representation made during settlement was untrue or that a term was breached, Regulations 28 and 31 allow it to reopen the matter. Contested SEBI orders, by contrast, are appealable to the Securities Appellate Tribunal; a voluntary settlement is not the kind of order a party would appeal.

What It Means

For AIF investors, the significance is less the modest sum and more the mechanism it illustrates. Continuing interest is one of the few structural protections investors have in the lightly disclosed world of private funds: it is the manager's own capital standing behind its judgement. SEBI's surveillance of Quarterly Activity Reports, and the automated alerts that flagged the drawdown mismatch here, show the regulator is checking not just whether a manager has committed capital but whether it is actually drawing that capital down in step with everyone else.

The practical takeaway is verification. Anyone investing in an AIF can confirm the fund's registration and category on SEBI's list of registered intermediaries, read the private placement memorandum for the manager's stated continuing-interest commitment, and ask, at each drawdown, whether the manager is contributing its pro-rata share. A manager that lags on its own capital calls, even inadvertently, is a signal worth a question. The episode is a reminder that alignment of interest in private funds is a rule that is monitored, not merely a marketing line.

FAQ

What exactly did SEBI order?

SEBI passed a settlement order dated 3 August 2026 (no. SO/PSD/2026-27/8664) resolving the proceedings that could have been initiated against Modulus Alternatives Investment Managers over an alleged breach of the pro-rata continuing-interest rule for its Category II AIF. The applicant paid Rs 10,87,500 to settle, neither admitting nor denying the findings.

Does settling mean the manager admitted wrongdoing?

No. A settlement under the SEBI (Settlement Proceedings) Regulations, 2018 is resolved on a neither-admitting-nor-denying basis. There is no adjudicated finding of guilt, no penalty imposed after a contested order, and no bar on the manager. It closes the matter; it is not a conviction or an admission of wrongdoing.

What is continuing interest in an AIF?

It is the manager's or sponsor's own capital committed to the fund, its skin in the game, which must be maintained through the fund's life to align the manager's incentives with investors'. Under Regulation 10(d), that interest must be held pro-rata to the funds raised from other investors, so the manager draws its share down in step with the pool.

Can a settlement order be appealed?

A settlement is a voluntary resolution the applicant proposes and accepts, so it is not the kind of order a party would ordinarily appeal. Contested SEBI orders can be appealed to the Securities Appellate Tribunal within the prescribed period. SEBI also retains the right under Regulations 28 and 31 to revive action if a settlement representation is later found untrue.

How can I check if an AIF or its manager is registered?

SEBI publishes its lists of registered Alternative Investment Funds and intermediaries on sebi.gov.in. Investors should confirm the fund's registration number and category, read the private placement memorandum for the manager's continuing-interest commitment, and verify drawdown practice before committing capital.

Where can I read the official order?

The full settlement order is published on SEBI's website under its enforcement orders for August 2026, and carries the reference SO/PSD/2026-27/8664.

This report is based on the official SEBI settlement order dated 3 August 2026, passed by the Panel of Whole Time Members and hosted on SEBI's enforcement-orders portal.