Balancing Freedom and Regulation: SEBI’s Light-Touch Amendment to the AIF Regulations

INTRODUCTION

The Securities and Exchange Board of India (“SEBI”), through the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”), provides a regulatory framework for governing AIFs in India. AIFs as an asset class has grown tremendously in last 15 years, where commercial terms are typically negotiated between investors and fund managers to reflect their respective commercial and risk preferences. Over time, SEBI has introduced a range of regulatory measures relating to governance, disclosures, and differential rights, with the objective of strengthening investor protection. While these measures have enhanced transparency and accountability, they have also, in certain cases, curtailed the flexibility available to large sophisticated and institutional investors-who typically possess greater risk appetite and play a key role in driving fundraising cycles-thereby dissuading their participation in AIFs.

Recognising the need to facilitate greater participation by sophisticated and institutional investors, SEBI, introduced the framework for Large Value Funds for Accredited Investors (“LVF schemes”), granting them relaxations from certain requirements under the AIF Regulations.¹ These relaxations include, inter alia, exemption from filing the private placement memorandum (“PPM”) through a SEBI-registered merchant banker, exemption from maintaining pari passu rights among investors (subject to disclosure), relaxed diversification norms, and extension of the tenure of close-ended schemes by up to five years. Notwithstanding these relaxations, SEBI noted limited adoption of the LVF framework. As per SEBI’s consultation paper, as of June 30, 2025, (“Consultation Paper”) only 62 LVF schemes had been registered.² To facilitate wider adoption of the LVF schemes, SEBI amended the AIF Regulations through the SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025 (“Amendment Regulations”)³ and provided additional relaxations through circular dated December 08, 2025 (“December Circular”).⁴

AIFs, being privately pooled investment vehicles, connect sophisticated investors having higher risk appetite than retail investors, with enterprises in need of risk capital. At the time of introduction of the AIF Regulations in 2012, investor sophistication was primarily assessed through a minimum investment commitment of INR 1 crore, which was intended to act as a proxy for financial sophistication and risk tolerance.

Drawing from regulatory frameworks in jurisdictions such as Singapore and the United States, SEBI introduced the concept of Accredited Investor (“AI’)⁵ in 2021, alongside the minimum commitment threshold, based on objective criteria such as income and net worth.⁶ SEBI recognised that certain classes of investors possess the requisite financial knowledge, expertise, and risk appetite to independently evaluate investment opportunities. Accordingly, such investors have been granted greater regulatory flexibility, including relaxation of minimum investment thresholds and other entry barriers.

SEBI further observed that the minimum commitment threshold introduced in 2012 may not be an appropriate indicator of an investor’s risk sophistication. Specifically, the quantum of capital committed by an investor does not necessarily reflect the investor’s overall financial capacity, particularly when compared with more reliable indicators such as income and net worth. Consequently, there remains a risk that certain investors may allocate a disproportionate portion of their wealth to AIFs, which are inherently higher-risk investment vehicles.

In this context, and with the objective of transitioning towards accreditation as the primary eligibility criterion for investor participation, SEBI has, in addition to providing relaxations to LVF schemes through the Amendment Regulations, inter alia, introduced a regulatory framework for Accredited Investor-only Funds (“AI-only Funds”).

The AIF Regulations prior to the Amendment Regulations did not provide a clarity on whether a normal AIF scheme could be converted into an LVF scheme. The SEBI has declared conversion from a normal scheme to LVF as void ab initio in its settlement order dated July 01, 2025, in the matter of IROHA Emerging India Fund.⁷ In order to facilitate the transition of existing eligible AIFs/Schemes of AIFs to AI only schemes/ LVF schemes, the December Circular prescribes operational modalities governing such migration.

This hotline examines the key features of the newly introduced AI-only Fund, the additional relaxations granted to LVFs, and the procedural and regulatory considerations governing migration of existing AIF schemes to the AI-only regime.

A. Additional relaxations granted to LVF schemes

LVFs are defined as AIFs, or schemes of an AIF, in which each investor (other than the Manager, Sponsor, employees or directors of the AIF, or employees or directors of the Manager) qualifies as an AI and commits a minimum investment of not less than INR 70 crore (USD 7.7 million).

SEBI, in its consultation paper,⁸ identified three key considerations supporting the recalibration of the minimum investment threshold for LVFs.

• First, the existing threshold of INR 70 crore (USD 7.7 million) had the effect of restricting participation predominantly to large global institutional investors, thereby limiting access for domestic investors who, despite being financially sophisticated, may operate at relatively lower investment thresholds.

• Second, SEBI noted that insurance companies, which constitute an important source of domestic institutional capital for AIFs, are subject to stringent exposure norms, and a lower investment threshold would facilitate greater participation by such investors.

• Third, SEBI highlighted the regulatory inconsistency between the AIF Regulations and the SEBI (Portfolio Managers) Regulations, 2020 (“PMS Regulations”), under which AI are permitted to invest with a minimum commitment of INR 10 crore (USD 1.10 million) and may allocate up to 100% of their portfolio to unlisted securities, in contrast to the significantly higher threshold prescribed for LVFs.

The Amendment Regulations have reduced the minimum investment threshold for LVF schemes from INR 70 crore (USD 7.7 million) to INR 25 crore (USD 2.75 million) per investor. Given that LVFs are exclusively open to Ais, who are considered capable of undertaking independent and informed investment decisions, SEBI has extended additional regulatory relaxations to such schemes. These include exemptions from (i) the requirement to adhere to the standardised template for the PPM, without obtaining specific waiver from investor (ii) the mandatory annual audit of compliance with the terms of the PPM without obtaining specific waiver from investor, (iii) the regulatory responsibility framework applicable to members of the investment committee constituted by the Manager for approving investment decisions of the AIF, (iv) the requirement for key members of the investment team of the Manager to obtain certification from the National Institute of Securities Markets (“NISM”). Further, the Amendment Regulations allows the delegation of the trustee's operational responsibilities under the AIF Regulations to the Investment Manager, while appropriately retaining the fiduciary duties with the Trustee.

Under the AIF Regulations, the maximum number of investors in an AIF scheme was capped at 1,000, a limit uniformly applicable across all scheme categories, including LVF schemes. Recognising that LVF schemes are intended exclusively for AIs, who typically make significantly larger capital, the Amendment Regulation has removed the cap on the maximum number of investors permitted in an LVF scheme.

B. AI-Only Fund under the AIF Regulations

Given SEBI’s intent to gradually transition towards accreditation as the primary eligibility criterion for investor participation in AIFs, it was necessary to ensure the existence of a sufficiently large and active pool of Ais. However, the number of AI remains relatively limited, with fewer than 1,000 Ais compared to approximately 72,000 investors currently participating in the AIF ecosystem.⁹

While the relaxations granted to LVF schemes are expected to attract Ais capable of making higher-ticket investments, broader adoption of the accreditation framework requires extending similar regulatory incentives to Ais investing at comparatively lower commitment levels. Accordingly, SEBI has introduced the concept of AI-only Funds, extending certain relaxations analogous to those available to LVF schemes. This framework serves as an initial step towards facilitating participation by non-institutional Ais and Ais with lower investment thresholds.

An AI-only Fund is defined as an AIF, or a scheme thereof, in which each investor, other than the sponsor, manager, and their employees or directors, qualifies as an AI. LVF schemes are included within the broader category of AI-only Funds. However, the converse does not hold true: not all AI-only Funds qualify as LVF schemes. Consequently, while AI-only Funds benefit from certain relaxations similar to those available to LVF schemes, they do not enjoy the full extent of regulatory relaxations specifically reserved for LVF schemes.

We have summarised in the table below the relaxations and flexibilities provided to the LVFs / AI only Fund:

C. Migration to AI-only Fund / LVF schemes

The December Circular specifies the following modalities for migration to AI-only Fund or LVFs schemes:

• Eligibility- Pursuant to the December Circular, existing AIF schemes may migrate or convert into an AI-only Fund or a LVF scheme, provided they meet the applicable eligibility criteria. In the case of an AI-only Fund, each investor (other than the manager, sponsor, and their respective employees and directors) must qualify as an AI. In the case of an LVF scheme, each investor must qualify as an AI and undertake a minimum investment of INR 25 crore.

• Conditions precedent to migration - Eligible AIF schemes may migrate or convert into an AI-only Fund or a LVF scheme, subject to obtaining affirmative consent from all investors. Further, the scheme is required to include the words “AI-only fund” or “LVF”, as applicable, at the end of the scheme name (for example, “Xyz AI-only fund” or “Abc LVF”). Earlier, LVF were not required to include abbreviation like “LVF”. In case of existing LVFs, it is unclear if such LVFs are required to change their names to specifically include ‘LVF’ in their name

• Conditions subsequent to Migration- Such conversion and the consequent change in the scheme name are required to be reported to SEBI by email to [email protected] within 15 days of the conversion. The change in the scheme name is also required to be reported to the depositories within 15 days of the conversion for effecting necessary system updates. Further, trustee/ sponsor of the AIF to ensure that the compliance test report prepared by the manager includes compliance with the Circular.

• Continuity of AI status- The December Circular further clarifies that where an investor qualifies as an AI at the time of onboarding into an AIF scheme, such investor shall continue to be treated as an AI for the entire life of the scheme, even if the investor were to lose such status in the interim. This clarification provides significant regulatory certainty.

• Tenure-In relation to tenure, the maximum extension permissible for AI-only Fund shall be five years in aggregate, inclusive of any tenure extensions availed prior to conversion into an AI-only Fund or an LVF scheme.

NDA comments

The Amended Regulations represent a welcome and positive regulatory development for AIFs and signal SEBIs intention to provide a lighter touch regulatory framework for sophisticated investors (i.e. AIs).

In relation to LVFs, the reduction of the minimum investment threshold for LVFs from INR 70 crore to INR 25 crore is expected to significantly broaden participation, particularly from domestic institutional investors such as insurance companies and other AIs who were previously constrained by higher ticket sizes. Further, other operational relaxations in terms of exemptions from the standard PPM format, annual PPM audit, NISM certification requirement etc. are also welcome and should provide flexibility both to the LVF managers and investors.

Introduction of AI-only Funds signals SEBIs long-term positioning of AIF industry for AIs only. A key distinction between AI-only Funds and LVFs lies in disclosure oversight: AI-only Funds continue to require filing of the PPM through a merchant banker in accordance with the prescribed template, together with annual PPM audits, thereby retaining a higher degree of disclosure standardisation despite investor accreditation.

The transition towards accreditation as the primary eligibility criterion will depend on two key factors: the robustness of the accreditation infrastructure and the adequacy and inclusiveness of the eligibility criteria governing AI status. While accreditation-based regimes are well established in jurisdictions such as the United States, the United Kingdom, and Singapore, these frameworks typically incorporate broader qualitative criteria, such as investment experience, professional expertise, or regulatory status, in addition to financial thresholds, to assess investor sophistication. A framework based solely on financial criteria may therefore be underinclusive as a proxy for true investment capability and, if extended as a universal eligibility standard across AIFs, could potentially constrain investor participation over time.

Recognising the need to operationalise the accreditation regime at scale, SEBI has also proposed expanding the accreditation ecosystem by permitting KYC registration agencies (“KRAs”) to act as accreditation agencies alongside existing entities such as CDSL Ventures Limited and NSDL Data Management Limited.¹⁰ This is expected to improve accessibility, reduce accreditation timelines and costs, and support wider adoption of the accreditation framework. However, achieving meaningful scale in AI participation will require timely implementation of these measures and sustained ecosystem development.

A significant regulatory relaxation applicable to LVFs and AI-only Funds is the exemption from the requirement to provide pari-passu rights to all investors within a scheme. The Standard Setting Forum for AIFs (“SFA”) had previously formulated a positive list of differential rights that could be offered to investors. However, this list did not include several commercially negotiated rights, such as differential provisions relating to investor defaults, transfer restrictions, or consent rights, which are commonly sought by sophisticated investors. From an investor perspective, a prescriptive positive-list approach was viewed as overly restrictive in a regime intended for financially sophisticated participants.

The relaxation from the pari-passu requirement therefore represents a pragmatic shift towards contractual flexibility, enabling managers and investors to structure investor-specific commercial arrangements through side letters and bespoke terms. The framework increasingly relies on investor sophistication and negotiated protections, rather than regulatory uniformity, as the primary safeguard against potential inequities among investors.

On an overall basis, the Amended Regulations mark a clear evolution in the AIF regulatory framework from a uniform, protection-oriented model towards a differentiated regime calibrated to investor sophistication.