Mumbai, July 8 -- The Securities and Exchange Board of India (Sebi) is reviewing a set of new rules for alternative investment funds (AIFs) following growing concerns from fund managers, legal advisors and investors, at least five people aware of the development told Mint on the condition of anonymity. The rules, which came into effect in December 2024, were designed to ensure equal treatment of investors, but many in the industry say they are too inflexible and may disrupt existing fund structures and global investor participation, experts said. AIFs-private pools of capital that invest in startups, real estate, and unlisted companies-have become a major vehicle for capital formation in India. As of March 31 2025, AIFs had invested Rs.5.38 lakh crore, according to Sebi data. Of this, real estate accounted for Rs.69,896 crore, IT services for Rs.34,553 crore and non-banking financial companies (NBFCs) for Rs.25,564 crore. The December 13 Sebi circular mandates that all AIF investors must be treated equally, both in how capital is drawn down and how returns are distributed. This is based on two key principles: pro-rata rights, which require profits and losses to be shared in proportion to each investor's committed capital; and pari-passu rights, which ensure all investors are treated equally, unless a specific exemption applies. The rules were meant to bring clarity and fairness to the AIF space. But they have also cast uncertainty over existing fund structures, especially those involving differentiated rights, preferred investor classes, or global institutional limited partners (LPs). Before the rule change, private funds had more leeway to tailor rights for different investors. Some offered priority distribution models where "senior" investors received returns before "junior" ones, often in exchange for taking on less risk. While Sebi always promoted fair treatment in spirit, these practices were not explicitly restricted until now. The regulator first signalled discomfort with these structures in 2022, when it paused fundraising by funds using such waterfall distribution models. The December circular went further, formalising a uniform treatment requirement and narrowing the scope for deviation. Since then, legal and industry experts have warned that the rules, though well-intentioned, could stifle fund design and discourage foreign participation....