Conceptual · Article 3.1.4.2

Private Credit & Private Debt Funds.

Lending Directly to Companies — Beyond Banks and Public Markets.

Published as on 22 July 2026

When a company needs to borrow ₹100 crore, it can go to a bank, issue bonds on an exchange, or take a private loan from a credit fund. Private credit is that third path — pooled capital from institutions and HNIs, lent directly to companies as unlisted debt, outside both the banking system and public bond markets. In India these funds are built as SEBI-registered Category II Alternative Investment Funds. They demand a ₹1 crore minimum, lock capital for years, and target net IRRs of 13–18% — a premium paid for accepting illiquidity and concentrated credit risk. This is an HNI and accredited-investor asset class, taxed on a pass-through basis under Section 115UB, and it is a very different animal from a listed bond or a debt mutual fund.

Category II AIF

SEBI Structure

₹1 crore

Minimum Commitment

13–18%

Target Net IRR

Slab · Illiquid

Tax · 3–7 yr Lock-in

Executive Summary · Page 2

Executive Summary · 6 Findings

Private credit is what happens when the lender is not a bank. A fund pools capital from HNIs and institutions and lends it directly to companies — often mid-market borrowers too large for retail banking and too small to issue public bonds cheaply. The investor is paid an illiquidity premium of roughly 3–6% over comparable public debt. The catch is symmetrical: your capital is locked for years, there is no daily NAV to trust, and if a borrower defaults, you can lose principal — including, in a bad case, all of it.

Covers what private credit is and why companies use it, the Category II AIF structure and the instruments funds lend through, the strategy spectrum from senior secured to distressed, how gross yield erodes into net IRR, pass-through taxation under Section 115UB and the slab-rate reality, how to run due diligence on a manager, who should and should not invest, the distribution conflict of interest, and six questions Indian investors ask.

Key Findings

Direct lending, outside banks and public markets.

Private credit — also called private debt — is lending that bypasses both banks and listed bond markets. A fund lends directly to companies, usually via privately placed, unlisted Non-Convertible Debentures. Borrowers pay for speed and flexibility; investors are paid an illiquidity premium of roughly 3–6% over public debt of similar quality.

A Category II AIF — ₹1 crore to enter.

In India these funds are SEBI-registered Category II Alternative Investment Funds under the 2012 regulations: closed-ended, no leverage for investments, a ₹20 crore minimum corpus, up to 1,000 investors, and a mandatory ₹1 crore minimum commitment per investor. Managers must keep skin in the game — 2.5% of corpus or ₹5 crore, whichever is lower.

Gross yield is not what you keep.

Borrowers may be charged 15–22%, but management fees (1.5–2.5%), carried interest (15–20% above a hurdle) and — crucially — actual default losses erode this to a net IRR typically targeted at 13–18%. A realistic mid-market case, after two defaults and 60% recovery, can land nearer 11–12%. Returns are a target, never a guarantee.

Pass-through tax — usually slab-rate interest.

Under Section 115UB, Category I/II AIFs are tax pass-throughs: income keeps its character and is taxed in your hands. Private credit income is overwhelmingly interest, taxed at slab (up to ~34.32% with surcharge), with 10% TDS under Section 194LBB. That is structurally less efficient than the 12.5% on equity LTCG — a real drag above the 30% bracket.

Illiquidity and credit risk are the price of the premium.

Capital is locked for 3–7 years across a drawdown schedule; there is no formal secondary market for AIF units, and stressed loans may not be marked down promptly, flattering the NAV. Concentration is high — most funds hold 10–20 positions — so a single default matters. Outcomes hinge on the manager's underwriting and workout skill.

An HNI allocation — not a bond-fund substitute.

Private credit sits in the income bucket for investors who genuinely do not need the capital for years and can absorb loss. It complements, but never replaces, liquid fixed income. Do not confuse it with a debt mutual fund or a listed bond: those offer daily liquidity, standardised disclosure and modest yield. This offers neither liquidity nor a guarantee.

At A Glance

Metric	Value	Detail
Structure	Category II AIF	SEBI, 2012 regs
Min commitment	₹1 crore	Waived if accredited
Target net IRR	13–18%	Strategy-dependent
Liquidity	3–7 yr lock-in	Closed-ended
Manager stake	2.5% / ₹5 cr	Whichever is lower
Illiquidity premium	~3–6%	Over public debt
Tax	Slab · pass-through	10% TDS, 194LBB
Suits	HNI / accredited	Not retail

Exhibit 01: From Gross Yield to Post-Tax Return

Component	Impact	Running
Gross fund yield	+15%	15.0%
Fees (~2%)	−2%	13.0%
Default losses	−1.5%	11.5%
Pre-tax net	—	~11.5%
Tax @ 31.2%	−3.59%	~7.9%

Illustrative, FY 2025-26. A 30%-bracket investor on primarily interest income nets ~7.9% post-tax — versus ~5.17% on a 7.5% FD taxed identically. The ~2.7% edge holds only if targets are met and defaults are contained. Equity MF LTCG at 12.5% remains structurally more tax-efficient.

The Opening · Page 3

The Opening

Private credit begins with a gap in the market. A company that needs ₹50–500 crore is often too large for a standard bank product and too small to issue public bonds cost-effectively — and it may want the deal closed in weeks, with covenants tailored to its situation, not a template. Banks are slow and standardised; public markets are disclosure-heavy. Into that gap steps a fund that lends directly, usually through a privately placed, unlisted debenture that never touches an exchange. The company gets speed and structure; the investors get a contractual yield that public fixed income cannot match — the reward for supplying capital others will not.

"The illiquidity premium is the whole proposition. You are paid a few extra points a year precisely because you cannot get your money back when you want it. That is not a flaw to be managed away — it is the product. The question is whether you can genuinely afford to lock the capital, and survive a default, to earn it."
The Price of the Premium

What the fund actually holds. The workhorse instrument is the unlisted NCD — a fixed-interest loan documented as a debenture. Funds also use convertible debentures (CCDs and OCDs) that blend debt with an equity upside, zero-coupon bonds that pay everything at maturity, and pass-through certificates in securitisation deals. The common thread: these are private, negotiated, illiquid claims, not tradable securities with a daily price.

The FY 2025-26 context. Mid-market borrower demand in India remains strong, but a tightening credit cycle and higher base rates have partly compressed spreads. Vintage matters: funds raised in easy-liquidity periods offer thinner yields, while those raised into tighter conditions command more. None of this changes the core discipline — the manager's underwriting and recovery skill determines the outcome far more than the headline target.

The Honest Boundary: Private credit is NOT a fixed deposit — there is no DICGC cover and no guaranteed return of principal. It is NOT a debt mutual fund — there is no daily redemption and no standardised SEBI performance disclosure. It is NOT a beginner's asset — a single default can meaningfully impair returns. It IS a genuine yield premium for investors who can lock ₹1 crore-plus for years, tolerate loss, and select a manager with skill.

Structure

Part I

What Private Credit Is, the AIF Structure & Instruments

Part II

Strategies, Returns & the Risks That Define the Asset

Part III

Pass-Through Tax, Due Diligence & Who Should Invest

Part IV

The Verdict: A Premium With Strings Attached

Consider If

✓ ₹1 crore+ you can lock for 3–7 years

✓ You can absorb a capital loss

✓ Effective tax rate ~20% or below

✓ Advised by an alternatives specialist

Do NOT Use If

✕ You may need the money within 5 years

✕ It is your only alternative allocation

✕ You depend on it for regular income

✕ You have no professional advisor

Part I

What Private Credit Is, How the AIF Is Built, and What the Fund Lends Through

Direct lending that bypasses banks and public markets; the Category II AIF framework that houses it in India — closed-ended, ₹1 crore minimum, no investment leverage; and the private, unlisted instruments a fund deploys into, from NCDs to convertible debentures and securitised receivables.

Part I · Page 4

The AIF Framework at a Glance

Feature	Detail
Regulator	SEBI
Regulation	AIF Regulations, 2012
Category	Category II
Min per investor	₹1 crore
Min corpus	₹20 crore
Manager stake	2.5% or ₹5 cr (lower)
Max investors	1,000 per scheme
Leverage	Not permitted
Units	Unlisted, closed-ended

Category I houses VC, infrastructure and SME funds; Category III runs hedge-fund strategies with daily mark-to-market. Private debt lives in Category II — funds that take neither incentives nor concessions from the government and use no investment leverage, beyond a narrow emergency operational borrowing (max 30 consecutive days, four times a year, 10% of investable funds).

Why Companies Choose It

Speed, Structure, Size

Private deals close in weeks, not months. Lenders can customise covenants, repayment and security instead of following bank templates. And the ₹50–500 crore range falls in a gap — too large for retail banking, too small to issue public bonds efficiently. Acquisitions, promoter financing and bridge funding fit this route naturally.

What the Fund Lends Through

Instrument	Nature
Unlisted NCDs	Fixed-coupon loan
CCDs / OCDs	Debt + equity upside
Zero-coupon bonds	Return at maturity
Pass-through certs	Securitised receivables

The unlisted NCD is the workhorse — a privately documented debenture paying a regular coupon, never listed on an exchange. Convertible debentures blend interest now with equity participation later; zero-coupon bonds pay everything at maturity; pass-through certificates let a fund buy a pool of loan, lease or trade receivables.

The structural point: every one of these is a private, negotiated, illiquid claim — not a tradable security with a daily quoted price. That is what separates private credit from a listed bond or a debt mutual fund, and it is the source of both the yield premium and the lock-in.

Part II

The Strategy Spectrum, How Gross Yield Becomes Net IRR, and the Risks That Define the Asset

From senior secured performing credit to mezzanine and distressed situations; why management fees, carried interest and — above all — actual default losses separate the 15–22% charged to borrowers from the 13–18% investors target; and the credit, concentration, illiquidity and manager risks that no structure removes.

Part II · Page 6

The Strategy Spectrum

Strategy	Position	Target IRR
Performing / senior	Top of stack	13–15%
Mezzanine	Junior + warrants	16–20%
Special situations	Distressed / IBC	High / variable
Real estate debt	Project-secured	Project-specific
Promoter financing	Share-pledge	Concentrated

Risk-return varies sharply by strategy. Senior secured performing credit lends at the top of the capital stack against tangible assets — repaid first in a default. Mezzanine sits below senior lenders but above equity, taking coupon plus warrants. Special situations lend to, or buy the debt of, stressed companies in restructuring or IBC proceedings — high risk, potentially high recovery.

Gross Yield ≠ Net IRR

Borrowers may pay 15–22%. Then management fees of 1.5–2.5%, carried interest of 15–20% above a hurdle, and real default losses take their cut. A mid-market performing fund charging 18% gross can, after two defaults at 60% recovery and fees, land near an 11–12% net IRR. The target is a range, dependent entirely on underwriting and workout skill.

The Risks That Define It

Credit & Concentration Risk

Borrowers are often mid-market firms that cannot access rated public markets. If they cannot repay, the fund loses capital. With most funds holding just 10–20 positions — versus 50+ in an equity fund — a single large default can meaningfully impair returns. A well-run fund caps single-borrower exposure near 20–25%.

Illiquidity & Valuation Opacity

There is no secondary market for most AIF units; exiting early means a private sale at a discount, if at all. And NAVs rest on accrued interest and manager-assessed fair values — a stressed loan may not be marked down promptly, flattering NAV growth until a default is formally declared.

Manager & Regulatory Risk

This is a manager-driven asset class: underwriting, monitoring and recovery skill dominate outcomes far more than in index investing. And SEBI rules have been amended repeatedly since 2012 — future changes to leverage, distribution norms or Section 115UB pass-through status could shift returns.

Where It Sits vs Public Fixed Income

Asset	Return	Liquidity
AAA bond fund	~7.5–8.0%	Daily
AA-/A debt MF	~8.5–9.5%	Daily
PC — senior	13–15%	3–5 yr lock
PC — special sit.	16–20%	5–7 yr lock

Part III

Pass-Through Taxation, Manager Due Diligence, and Who Should Actually Invest

Section 115UB and why income retains its character in your hands — mostly slab-rate interest, with 10% TDS under 194LBB; the questions that separate a credible manager from a marketing brochure; and the honest test of who this asset class is, and is not, built for.

Part III · Page 8

Taxation (FY 2025-26)

Pass-Through Under Section 115UB

The fund pays no tax on investment income; it "passes through" to investors and retains its character — interest stays interest, capital gains stay capital gains. Only business income, rare for a credit fund, is taxed at the fund level. This is the opposite of Category III, which pays tax at the entity at the Maximum Marginal Rate.

Interest at Slab, 10% TDS

Private credit income is overwhelmingly interest, flowing through as income from other sources at your slab rate — up to 31.2% to ₹1 crore income, ~34.32% above ₹5 crore. Under Section 194LBB the AIF deducts 10% TDS on resident distributions, credited against your final liability. NRIs are taxed at the rate for the underlying income type.

Gains on Debt & on Your Units

Unlisted debt and AIF units held over 24 months qualify as LTCG at 12.5% without indexation (for sales on/after 23 July 2024); under 24 months, STCG at slab. The catch: interest — the dominant income — is slab-taxed, structurally less efficient than the 12.5% on equity LTCG. Material above the 30% bracket.

Due Diligence: Ask These

Check	What to Demand
Track record	Net IRR, all schemes
Default history	Count & recovery rate
Concentration	Single-name cap 20–25%
Collateral	First charge, cash-flow
Manager co-invest	Above the 2.5% floor?
Fee / hurdle	8% hurdle, 80:20

Unlike mutual funds, private credit publishes no standardised SEBI performance data. Demand audited net IRR after fees and actual losses for every past scheme — not a brochure of the best one. A manager claiming zero defaults across years and dozens of borrowers should be questioned, not trusted.

The Distribution Conflict

Many distributors earn upfront placement fees of 1–3% and trail of 0.25–0.5% from the manager — a structural incentive to sell the highest-paying fund, not the best. Urgency to beat a "closing date", data for only the best scheme, and refusal to share audited net IRR are red flags. A fee-only fiduciary earns no placement commission.

Part IV

The Verdict

A real premium — for capital you can truly afford to lock and to lose.

Part IV: The Verdict · Page 10

30-Second Summary

Private credit is direct lending to companies, outside banks and public markets, structured in India as a SEBI-registered Category II AIF. It demands a ₹1 crore minimum, locks capital for 3–7 years, and targets net IRRs of 13–18% — an illiquidity premium of roughly 3–6% over comparable public debt. The reward is real, but so is the risk: no DICGC cover, no guaranteed principal, concentrated exposure to 10–20 borrowers, and a NAV that can flatter a stressed loan until a default is declared.

Tax is pass-through under Section 115UB — income keeps its character, and since that income is mostly interest, it is taxed at your slab rate with 10% TDS under 194LBB. That makes it structurally less efficient than equity LTCG at 12.5%, and the drag is sharpest above the 30% bracket. This is an HNI and accredited-investor allocation, one slice of a diversified alternatives sleeve — never a substitute for a debt mutual fund, and never a place for money you might need.

"Private credit rewards a specific virtue: patience backed by capital you can afford to lose. Get the manager right, lock the money you genuinely don't need, and the premium is real. Get seduced by the headline yield, ignore the lock-in and the default math, and you have simply taken equity-like risk for a debt-like label. The discipline is knowing which one you are doing."
The Final Orientation

The Bottom Line: Treat private credit as a long-duration, illiquid income allocation for surplus capital only — ₹1 crore-plus you can lock for years and survive losing. Insist on audited net IRR across all of a manager's schemes, their true default and recovery record, single-name caps, and genuine co-investment above the SEBI floor. Set expectations to the post-tax net, not the gross yield: after fees, defaults and slab-rate tax, a 15% gross fund can net a 30% investor closer to 8%. Use a fee-only fiduciary advisor with no placement commission, and verify the fund's SEBI registration before committing a rupee.

ADWIZR · July 2026

Decision Rules

Use Correctly As

✓ A slice of a diversified alternatives sleeve

✓ Long-duration income you don't need

✓ A yield premium for locked capital

✓ A manager-led, well-diligenced bet

Misuse Destroys Value

✕ Money needed within five years

✕ Your only non-equity alternative

✕ Funding regular living expenses

✕ A debt mutual fund replacement

Three Misconceptions

What Investors Get Wrong

(1) "It's a bond, so it's safe." There is no DICGC cover and principal can be fully lost on default. (2) "13–18% is what I earn." That is a target before defaults and slab-rate tax; net can be far lower. (3) "I can exit if I need to." There is no real secondary market — treat it as locked for the full tenure.

vs Listed Debt / Debt MF

Private & Illiquid vs Public & Liquid

Private credit: unlisted, ₹1 crore minimum, 3–7 year lock, no standardised disclosure, higher yield. Listed bonds and debt mutual funds: exchange-traded or daily-redeemable, small tickets, SEBI-standardised data, modest yield. Different liquidity, different risk — not interchangeable.

₹1 cr

Minimum

Waived if accredited

13–18%

Target net IRR

Not guaranteed

Slab

Interest tax

115UB pass-through

Investor FAQ

Questions Indian Investors Ask

Six questions, answered directly.

Investor FAQ · Page 12

Frequently Asked Questions

Q1 Is private credit in India regulated by SEBI?

Yes. Private credit funds are structured as Category II Alternative Investment Funds and must be SEBI-registered under the SEBI (AIF) Regulations, 2012. Any manager raising money under a "private placement" label without a valid SEBI AIF registration is operating outside the framework. Always verify the fund's SEBI registration number before committing capital.

Q2 What is the minimum investment in a private credit fund?

₹1 crore per scheme is the standard AIF minimum for an individual investor, alongside a minimum fund corpus of ₹20 crore. For SEBI-recognised accredited investors, the ₹1 crore floor is fully waived and the amount is set by the fund's own subscription terms. Large Value Funds for Accredited Investors require every investor to commit at least ₹25 crore. For most investors the effective entry point remains ₹1 crore.

Q3 How is private credit taxed compared to an equity mutual fund?

Less efficiently for high-income investors. Under Section 115UB, Category I/II AIFs have pass-through status — income retains its character and is taxed in the investor's hands. Private credit income is overwhelmingly interest, taxed at the investor's slab rate (up to about 34.32% with surcharge and cess), with 10% TDS deducted under Section 194LBB. Equity mutual fund LTCG is taxed at 12.5% — roughly a third of the top slab. The higher gross yield of private credit only partly offsets this, so after-tax comparison is essential.

Q4 Can I exit a private credit fund before maturity?

Technically sometimes, practically rarely. These are closed-ended funds with no daily redemptions; AIF units are unlisted and have no formal secondary market in India. Exiting early means finding a private buyer, usually only at a discount to NAV, and sometimes not at all. Treat a private credit commitment as genuinely illiquid for its full 3–7 year stated tenure and drawdown schedule.

Q5 Is private credit different from P2P lending?

Yes — they are entirely separate regulatory and risk frameworks. P2P platforms are RBI-regulated NBFC-P2Ps that lend to individual borrowers, cap each lender at ₹50 lakh across all platforms, and offer retail digital access. Private credit Category II AIFs are SEBI-regulated, lend to corporate borrowers, require a ₹1 crore minimum, and are built for HNI and institutional investors. Different regulators, borrowers, ticket sizes and risk profiles.

Q6 Can NRIs invest in private credit funds?

Yes, subject to FEMA regulations and RBI guidelines. Investments via NRE or FCNR accounts are repatriable — both principal and post-tax returns can be transferred abroad; NRO-account investments are non-repatriable beyond USD 1 million per financial year. Category I/II AIF income is freely repatriable after tax, and NRIs should check whether a DTAA between India and their country of residence reduces the tax on distributed income.

Key Terms & Definitions

Private Credit / Private Debt

Lending that happens outside banks and public bond markets. A fund pools capital from institutions and HNIs and lends it directly to companies, usually via privately placed, unlisted debt instruments. Investors are compensated with an illiquidity premium over comparable public debt.

Category II AIF

The SEBI Alternative Investment Fund category that houses private debt: closed-ended, using no investment leverage, taking no government incentives. Requires a ₹1 crore minimum per investor, a ₹20 crore corpus, and a mandatory manager stake of 2.5% of corpus or ₹5 crore, whichever is lower.

Illiquidity Premium

The extra return — typically 3–6% a year over comparable public debt — earned for accepting that capital cannot be withdrawn on demand. It is the core value proposition of private credit, and it exists precisely because the fund supplies capital that more liquid lenders will not.

Section 115UB (Pass-Through)

The provision giving Category I/II AIFs pass-through tax status. The fund pays no tax on investment income; each income type flows to investors retaining its character — interest as interest, gains as gains — and is taxed in their hands. Only business income is taxed at the fund level.

Section 194LBB (TDS)

The provision under which an AIF deducts TDS of 10% on income distributions to resident investors at the time of credit or payment. Investors claim it as an advance credit against their final tax liability; non-residents are taxed at the rate for the underlying income type.

Carried Interest & Hurdle

The manager's performance fee — typically 15–20% of profits above a hurdle rate (commonly 8%, an 80:20 split). The hurdle is the minimum return investors earn before the manager shares in profit; below-market hurdles or excessive management fees are red flags in fund terms.