Introduction
SEBI inspections of Alternative Investment Funds (AIFs) have evolved significantly over the last few years. What was once a largely compliance- and disclosure-driven exercise now places sharp focus on IT systems, cybersecurity posture, data governance, and operational resilience. This change reflects a regulatory reality. AIFs today are technology-enabled financial entities handling sensitive investor data, market-moving information, and complex third-party integrations. As a result, cyber and IT failures are no longer viewed as isolated technical lapses. They are treated as governance and fiduciary failures.
Across multiple inspections, a consistent pattern of IT and cybersecurity guidelines for AIF has emerged. These gaps are not limited to poorly funded or small AIFs. They appear across fund sizes, strategies, and structures. In most cases, the issue is not a complete absence of controls, but lack of structure, evidence, ownership, and consistency. Informal practices that may work operationally often fail under regulatory scrutiny.
This article outlines the most common IT and cybersecurity gaps observed during SEBI inspection of AIFs. It explains why these gaps matter from a regulatory and fiduciary perspective, how they expose funds to compliance and operational risk, and what AIFs must do to close them. For fund managers, trustees, and compliance officers, this serves as a practical readiness guide, not theoretical commentary.
Why SEBI Is Scrutinising IT and Cybersecurity More Closely
SEBI’s mandate revolves around investor protection, market integrity, and systemic stability. In the modern investment ecosystem, IT systems and cybersecurity controls directly influence all three. A data breach can expose investor identities, a system compromise can leak deal information, and an outage can disrupt reporting or capital flows.
SEBI inspections increasingly assess:
- Whether cyber risks are identified and governed
- Whether sensitive data is adequately protected
- Whether IT dependencies are understood and controlled
- Whether incidents can be detected, contained, and reported
From SEBI’s perspective, weak IT and cybersecurity controls undermine fiduciary responsibility and investor trust.
Gap 1: Absence of Formal IT & Cybersecurity Governance Framework
One of the most frequently observed gaps is the lack of a documented IT and cybersecurity governance framework. Many AIFs operate with informal arrangements where IT decisions are handled ad hoc or delegated entirely to vendors without internal oversight.
Common issues include:
- No defined IT or cybersecurity ownership
- No board or trustee-level oversight
- No documented risk management approach
SEBI compliance for AIF to demonstrate governance, not just operational functionality. Without a framework, accountability becomes unclear during incidents or inspections.
Gap 2: Cyber Risk Not Integrated into Enterprise Risk Management
In many inspections, cyber risk is either missing from the risk register or mentioned superficially. This indicates that cyber threats are not being treated as material business risks.
Typical observations:
- No formal cyber risk assessment
- No linkage between IT risks and fiduciary obligations
- No defined risk appetite for cyber exposure
SEBI increasingly views this as a governance weakness, especially given the predictability of cyber threats in financial entities.
Gap 3: Inadequate Access Control and Privilege Management
Over-privileged user accounts remain a common issue. AIFs often rely on small teams where access is granted for convenience and rarely reviewed.
Observed gaps include:
- Shared administrative credentials
- Excessive access to deal data and investor records
- No periodic access reviews
Such practices increase insider risk and amplify the impact of account compromise, both red flags during inspections.
Gap 4: Weak Patch and Vulnerability Management
SEBI inspections frequently identify inconsistent or undocumented patch management practices. Many AIFs rely on vendors or employees to keep systems updated without defined timelines or evidence.
Key issues:
- No patching policy or SLA
- No tracking of patch status
- Legacy systems with unaddressed vulnerabilities
Unpatched systems are among the most common root causes in financial-sector cyber incidents, making this a high-risk gap.
Gap 5: Lack of Asset and Application Visibility
A surprising number of AIFs cannot produce a complete inventory of:
- IT assets
- Applications and platforms
- Data repositories
This includes SaaS tools used by investment teams, administrators, and compliance functions. SEBI views lack of visibility as a foundational weakness. Controls cannot be enforced on assets that are not known.
Gap 6: Over-Reliance on Third-Party Vendors Without Oversight
While outsourcing is common, many AIFs fail to demonstrate effective oversight of IT and cybersecurity vendors.
Inspection findings often include:
- No vendor risk assessments
- No cybersecurity clauses in contracts
- No monitoring of vendor controls or incidents
SEBI does not accept vendor-managed arrangements as a substitute for fiduciary accountability.
Gap 7: Inadequate Data Protection and Classification
Sensitive data is often stored without clear classification or protection measures. Investor data, deal documents, and compliance records may reside across emails, shared drives, and cloud platforms.
Common gaps:
- No data classification policy
- No encryption standards
- Uncontrolled data sharing
Given the sensitivity of AIF data, this is a major inspection concern.
Gap 8: Weak Backup, Recovery, and Resilience Planning
SEBI inspections frequently reveal that backups exist but are:
- Not tested
- Not isolated from primary systems
- Not aligned to business recovery needs
In ransomware scenarios, this gap can turn a manageable incident into a prolonged disruption, directly impacting investors.
Gap 9: Absence of Incident Response and Breach Handling Processes
Many AIFs lack a documented incident response plan. When asked how they would respond to a breach, answers are often vague or vendor-dependent.
Typical gaps:
- No incident classification
- No escalation matrix
- No regulatory or investor communication plan
SEBI expects preparedness, not improvisation.
Gap 10: Insufficient Evidence and Audit Readiness
Even when controls exist, many AIFs fail inspections due to lack of evidence. Policies are undocumented, actions are not logged, and reviews are not recorded.
From SEBI’s perspective:
- “We do this” is not sufficient
- Evidence of due care is mandatory
This gap alone can result in adverse inspection observations.
Why These Gaps Matter from a Fiduciary Perspective
Each of these gaps represents a failure to anticipate and mitigate foreseeable risks. SEBI increasingly interprets such failures as lapses in fiduciary duty, particularly when investor data, fund operations, or market integrity are at stake.
The cumulative impact of these gaps can lead to:
- Regulatory observations and remediation mandates
- Increased inspection frequency
- Reputational damage with LPs
- Loss of institutional investor confidence
How Infodot Helps AIFs Address SEBI IT & Cybersecurity Gaps
Infodot Technology helps AIFs close these gaps through a governance-first, inspection-ready approach. Rather than deploying isolated tools, Infodot focuses on building defensible IT and cybersecurity capability aligned with SEBI expectations.
Infodot supports AIFs by:
- Designing IT and cybersecurity governance frameworks
- Conducting SEBI-aligned risk and gap assessments
- Implementing access control, patching, and monitoring standards
- Establishing vendor oversight and accountability mechanisms
- Creating incident response and resilience playbooks
- Delivering audit-ready documentation and evidence
This enables AIF leadership to demonstrate due care, oversight, and control, which are core elements of fiduciary responsibility during SEBI inspections.
Conclusion
SEBI inspections have made one thing clear. IT and cybersecurity weaknesses are no longer peripheral issues for AIFs. They are central to regulatory assessment, fiduciary responsibility, and investor trust. The most common gaps observed, governance, access control, patching, vendor oversight, and evidence, are all preventable with structured effort.
AIFs that proactively address these gaps are not only better prepared for inspections but also more resilient, credible, and attractive to institutional investors. Those that rely on informal practices risk regulatory scrutiny and reputational harm disproportionate to their size.
By adopting a structured operating model and partnering with experienced providers like Infodot, AIFs can move from reactive compliance to confident, defensible readiness.
FAQs
Why does SEBI review IT and cybersecurity?
Because cyber failures directly impact investor protection, market integrity, and fiduciary responsibility of regulated AIFs.
Are small AIFs also inspected for cybersecurity?
Yes, expectations are proportionate, but cybersecurity governance applies to all AIFs regardless of size.
Is lack of documentation a serious issue?
Yes, undocumented controls are treated as non-existent during SEBI inspections.
Can AIFs outsource cybersecurity fully?
Execution may be outsourced, but accountability and oversight remain with the AIF.
Are third-party IT vendors scrutinised?
Yes, SEBI expects evidence of vendor due diligence and ongoing oversight.
Is patch management mandatory for AIFs?
Yes, unpatched systems are considered high-risk inspection findings.
Does SEBI expect incident response plans?
Yes, preparedness and escalation clarity are key inspection expectations.
Are backups reviewed during inspections?
Yes, especially their reliability and recovery readiness.
Is investor data protection a focus area?
Yes, investor data confidentiality is central to fiduciary duty.
Are access reviews required?
Yes, periodic access reviews demonstrate control over sensitive information.
Does SEBI mandate specific cybersecurity tools?
No, but effective and proportionate controls are expected.
Can informal IT practices pass inspections?
Rarely. SEBI expects structured, documented practices.
Is cyber risk part of fiduciary duty?
Increasingly, yes, as a foreseeable operational risk.
Do trustees have cybersecurity responsibility?
Yes, trustees are expected to oversee governance and controls.
Are cloud platforms included in inspections?
Yes, cloud usage does not reduce accountability.
Is asset inventory important?
Yes, unknown assets represent unmanaged risk.
Can SEBI penalise cybersecurity failures?
Yes, through observations, directives, and further scrutiny.
Is evidence more important than intent?
Yes, evidence demonstrates due care.
Are deal teams impacted by IT controls?
Yes, access and data controls apply to all users.
Does Infodot support SEBI readiness?
Yes, through structured governance and operational support.
Are cyber incidents reportable to SEBI?
Depending on impact, they may require disclosure.
Is periodic risk assessment expected?
Yes, cyber risk should be reviewed regularly.
Can weak cybersecurity affect fundraising?
Yes, LPs increasingly assess cyber posture.
Are legacy systems acceptable?
Yes, but only with documented risk management.
Does SEBI expect business continuity planning?
Yes, operational resilience is a key focus.
Is MFA relevant for AIFs?
Yes, especially for remote and privileged access.
Are internal audits expected?
Increasingly, yes, for assurance.
Can MSPs act as compliance enablers?
Yes, under proper governance.
Does cybersecurity impact valuation processes?
Indirectly, through data integrity and trust.
Are periodic reviews mandatory?
Yes, controls must be reviewed and updated.
Is training part of inspection scope?
Yes, user awareness is often assessed.
Are logs and monitoring reviewed?
Yes, for detection and evidence.
Does SEBI align with global regulators?
Yes, cybersecurity governance is globally emphasised.
Can AIFs prepare proactively?
Yes, with structured readiness programs.
Why act before inspection?
Because remediation after inspection increases regulatory and reputational risk.
