A Category III fund buys a listed stock at 9% of the fund. Six months later, the stock has doubled while the rest of the portfolio is flat, and the position is now well above 10%. Has the fund breached SEBI's concentration limit? The answer depends on which base the fund uses, how NAV is computed, and whether the breach is active or passive. This article explains the Category III concentration norm, the NAV option for listed equity, the passive breach rule, and the controls a manager needs once it chooses the NAV route.
A Category III AIF may invest not more than 10% of its investable funds in one investee company. For investments in listed equity, it may instead apply the 10% limit to its net asset value, measured on the business day immediately preceding the investment. NAV includes cash and mark-to-market values but excludes borrowed funds. A passive breach caused by market movement must be rectified within 30 days.
The basic concentration limits for AIFs
Regulation 15 of the SEBI (Alternative Investment Funds) Regulations, 2012 caps how much a scheme may invest in a single investee company, directly or through units of other AIFs. The purpose is diversification: no single company should be able to sink a scheme.
| Category | Standard limit per investee company | Large value fund for accredited investors |
|---|---|---|
| Category I and II | 25% of investable funds | Up to 50% of investable funds |
| Category III | 10% of investable funds; for listed equity, may use 10% of NAV | Up to 20%, with the same NAV option for listed equity |
Investable funds broadly means the corpus net of expenditure for administration and management of the fund. For a closed-ended private equity fund, that base is relatively stable. For an open-ended or actively traded Category III fund, whose size moves with markets, inflows and redemptions, a fixed base can be misleading. That is the problem the NAV option addresses.
How the NAV option for listed equity works
Following an amendment to the AIF Regulations in November 2021 and a SEBI circular dated 22 November 2021, a Category III AIF, including a large value fund, may calculate the concentration limit for investments in listed equity of an investee company with reference to its net asset value rather than investable funds. The key mechanics are:
- Reference date. The limit is computed on the NAV of the scheme on the business day immediately preceding the date of investment.
- What NAV includes. The total value of all securities, adjusted for mark-to-market gains or losses, plus cash and cash equivalents.
- What NAV excludes. Funds borrowed by the AIF. A Category III fund cannot inflate its concentration headroom by borrowing.
- Scope. The NAV basis applies to listed equity. Investments in other instruments of the same investee company remain tested against investable funds.
The effect is that the limit tracks the current economic size of the scheme. A fund whose NAV has grown through performance gets proportionately more headroom; a fund that has shrunk through losses or redemptions gets less.
Investable funds or NAV: a worked comparison
A Category III scheme has investable funds of ₹200 crore. Through gains, its NAV on the business day before a proposed purchase is ₹260 crore, including ₹15 crore of cash. It has also borrowed ₹20 crore, which is held in the portfolio.
On the investable funds basis, the single-company limit is 10% of ₹200 crore, or ₹20 crore.
On the NAV basis, the borrowed ₹20 crore is excluded, so NAV for this test is ₹240 crore and the limit for listed equity is ₹24 crore. If the scheme already holds ₹18 crore of the company's listed shares at market value, it can buy up to ₹6 crore more.
The same arithmetic works in reverse. If the scheme's NAV had fallen to ₹170 crore, the NAV-based limit would be ₹17 crore, below the ₹20 crore investable funds limit. Managers choosing the NAV approach accept both sides of that trade-off.
Passive breaches: when markets push a holding over the limit
A passive breach occurs when the fund has not made a new investment, but the market value of its listed equity holding in an investee company rises above the permitted limit, or the NAV falls so that an existing holding becomes too large relative to it. The framework treats this differently from an active breach caused by a fresh purchase.
A passive breach must be rectified within 30 days from the date of the breach. That allows orderly selling rather than forced liquidation, but the clock starts on the day the limit is crossed, not the day someone notices. A fund that only checks month-end positions may find that most of its cure period has already gone.
Buying more of a stock while it is in passive breach converts the problem into an active breach. Trading systems should block fresh purchases of any name that is at or above the limit.
Why the NAV approach demands stronger controls
The NAV basis is more market-aligned, but it is also more demanding. It needs an accurate daily NAV, a clear treatment of borrowed funds, and real-time position monitoring. It also needs consistency: a manager should not switch bases opportunistically depending on which gives more room on a given day. The chosen basis should be disclosed in the PPM and applied consistently.
These records feed directly into the annual Compliance Test Report and the PPM audit, where concentration compliance is routinely tested.
Checklist for Category III managers using the NAV basis
- Document the choice. Record in the PPM and investment policy that listed equity concentration is tested on NAV, and how NAV is computed.
- Exclude borrowings correctly. Ensure the NAV used for the test strips out borrowed funds.
- Use the right date. Test each purchase against NAV of the business day immediately preceding the investment.
- Monitor daily. Run end-of-day reports of each issuer's weight against NAV, including holdings through other AIFs where relevant.
- Act within 30 days. On a passive breach, record the start date, block further purchases and plan an orderly sell-down.
- Report internally. Escalate breaches to the Compliance Officer and investment committee, and keep evidence for audit.
Frequently asked questions
What is the concentration limit for a Category III AIF?
A Category III AIF may invest up to 10% of its investable funds in one investee company. For listed equity, it may measure the 10% against NAV instead. Large value funds for accredited investors have a higher limit of 20%.
How is NAV calculated for the concentration test?
NAV is the total value of all securities after mark-to-market adjustments, including cash and cash equivalents, but excluding funds borrowed by the AIF. It is taken as at the business day immediately preceding the investment.
What is a passive breach in a Category III AIF?
A passive breach happens when the limit is exceeded because of market movement rather than a new investment, for example when a stock rises sharply. It must be rectified within 30 days from the date of breach.
Does the NAV basis apply to unlisted or debt investments?
No. The NAV option applies to investments in listed equity. Other investments in the investee company remain tested against investable funds.
Can a Category III fund borrow to increase its concentration headroom?
No. Borrowed funds are excluded from NAV for this purpose, so borrowing does not increase the permissible exposure to a single company.
Conclusion
The NAV option gives Category III managers a concentration limit that moves with the real size of the fund, which suits liquid listed equity strategies. The price of that flexibility is discipline: a reliable daily NAV, borrowings stripped out, pre-trade checks, early warnings and a documented response to every passive breach within 30 days. Managers who build those controls can use the flexibility with confidence; those who do not will find the NAV basis creates more breaches than it solves.
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Talk to usThis article is for general information only and does not constitute professional advice or solicitation. Examples are illustrative. Limits for specific schemes, including large value funds and accredited-investor-only funds, should be confirmed against the Regulations and current Master Circular. Provisions are summarised as of October 2026. Please refer to the relevant provisions and seek advice on your specific facts.