Reshaping the AIF Landscape - SEBI's Recent Consultation Papers on Accredited Investors-Only Schemes and Flexibilities for Large Value Funds
Background and Introduction
Alternative Investment Funds ("AIF(s)") represent a class of privately pooled investment vehicles that collect funds from investors, whether Indian or foreign, for investing in accordance with a defined investment policy for the benefit of investors.
On August 8, 2025, the Securities and Exchange Board of India ("SEBI") issued two separate consultation papers that deal with very similar concepts:
- The 'Consultation Paper on introduction of separate type of AIF scheme for only Accredited Investors' (the "CP on AI-only Schemes")1.
- The 'Consultation Paper on providing flexibilities to Large Value Funds for Accredited Investors ("LVFs") under SEBI (AIF) Regulations' (the "CP on LVFs")2.
These consultation papers are intended to create a significant and strategic shift in the regulatory framework governing AIFs and how they can attract sophisticated investors. At their core, these papers aim to establish a 'lighter-touch regulatory framework' for sophisticated investors seeking to invest in AIFs and for AIFs to be able to onboard sophisticated investors more easily.
The CP on AI-only Schemes: (i) envisages a long-term, gradual transition towards a regulatory model where the degree of sophistication of a sophisticated investor is determined by their accreditation status as an accredited investor ("AI(s)") with the relevant accreditation agency, rather than a capacity to fulfil the minimum commitment of INR 1 crore and thereby being eligible to invest in AIFs 3 and; (ii) provides for the 'AI-only AIFs' to enjoy a more laissez-faire regulatory landscape, thereby attracting more investments by AIs into high-risk portfolios operated by such 'AI-only AIFs'.
The 'CP on LVFs' proposes additional flexibilities within the existing provisions governing Large Value Funds ("LVFs"), which are essentially 'AI-only AIFs', but with a larger threshold ticketsize, where each AI participating in an LVF is required to invest at least INR 70 crores.4
By way of these consultation papers, SEBI seeks to: (i) Enhance robustness in identifying AI(s); (ii) Ease regulatory requirements on 'AI-only AIFs' and LVFs; and (iii) Attract more sophisticated investors within the fold of AIs who can infuse capital into LVFs and 'AI-only AIFs'.
Against this backdrop, it is important to understand the concepts of AI(s) and LVFs within the current regulatory framework.
Definitions of an Accredited Investor and Large Value Funds
The definitions of AIs and LVFs were introduced vide the SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2021 dated Aug 03, 2021.
Definition of Accredited Investor
Regulation 2(1)(ab) of the SEBI AIF Regulations defines "accredited investor" to mean:
"any person who is granted a certificate of accreditation by an accreditation agency who,
- in case of an individual, Hindu Undivided Family, family trust
or sole proprietorship has:
- annual income of at least two crore rupees; or
- net worth of at least seven crore fifty lakh rupees, out of which not less than three crores seventy-five lakh rupees is in the form of financial assets; or
- annual income of at least one crore rupees and minimum net worth of five crore rupees, out of which not less than two crore fifty lakh rupees is in the form of financial assets.
- in case of a body corporate, has net worth of at least fifty crore rupees;
- in case of a trust other than family trust, has net worth of at least fifty crore rupees;
- in case of a partnership firm set up under the Indian Partnership Act, 1932, each partner independently meets the eligibility criteria for accreditation."
Definition of Large Value Funds
Regulation 2(pa) of the SEBI AIF Regulations defines "large value fund for accredited investors" as:
"an Alternative Investment Fund or scheme of an Alternative Investment Fund in which each investor (other than the Manager, Sponsor, employees or directors of the Alternative Investment Fund or employees or directors of the Manager) is an accredited investor and invests not less than seventy crore rupees".
Both these definitions were introduced by SEBI with the intention of identifying a class of sophisticated investors who can invest in large value and high-risk investment portfolios. With the introduction of these consultation papers, the aim of SEBI is to (i) concretise the identification of sophisticated investors as AIs; (ii) provide relaxation in regulatory frameworks governing AIFs catering solely to sophisticated investors and (iii) attracting a greater number of sophisticated investors to participate in these AIFs.
Consultation Paper on Accredited Investors-only Schemes
The CP on AI-only Schemes outlines a proposal to introduce an option to launch schemes exclusively for AIs, with a "lightertouch" regulatory framework. Key proposals under the CP on AIonly Schemes are discussed below.
Gradual Transition to Accreditation as the Primary Criterion for Investor Participation
SEBI proposes a long-term move of determining sophistication of investors who can participate in AI-only schemes by their accreditation status with the relevant accrediting agencies, which will be based on the net worth of the investors seeking to be accredited as AIs. Accreditation status as a mode of determining sophistication of an investor is considered to be more robust. Investor participation eligibility that is determined based on the minimum investment commitment of INR 1 crore may not be flawless because (i) minimum commitments do not always translate into actual drawdowns, making them an imperfect indicator of financial strength of an investor; (ii) the threshold has remained static at INR 1 crore since 2012 and (iii) the threshold investment commitment does not necessarily prevent investors from concentrating too much of their wealth in inherently riskier AIF products.
Exemption from Pari Passu Rights
Presently, Regulation 20 (22) of SEBI AIF Regulations provides that the rights of investors of a scheme of an AIF is required to be pari-passu in all aspects. Therefore, differential rights offered to select investors of a scheme of an AIF should not affect the interest of other investors of the scheme. This condition is exempted for LVFs on the ground that LVF constituents are AIs with minimum INR 70 crore commitment amount, and these AIs are highly risk sophisticated, have necessary risk appetite, capability and a full-fledged system to carry out independent due-diligence and monitoring of the investments. This principle is sought to be extended to AI-only Schemes where the requirement of maintaining pari-passu rights among AIs is sought to be exempted, provided, a waiver is issued by each AI to this effect.
Extension of Fund Tenure
Currently, Regulation 13(5) of the SEBI AIF Regulations allows close-ended AIFs to extend their tenure by upto two years subject to approval of two-thirds of the investors by value of their investment. The CP on AI-only Schemes seeks to allow AI-only schemes to extend its tenure by up to five years, subject to receipt of consent from at least two-thirds of AIs by value of their investment in the 'AI-only AIF'.
Exemption from SEBI-specified Certification
Extant SEBI AIF Regulations mandates that at least one key investment team member of the Investment Manager5 of the AIF should hold certification issued by the National Institute of Securities Markets ("NISM"), a SEBI-established education institution that trains and certifies professionals to operate in the securities market6 . The CP on AI-only Schemes proposes to waive this requirement for managers of 'AI-only AIFs', reasoning that AIs can themselves assess managerial competence and conduct due diligence on such 'AI-only AIFs'.
Removal of Investor Participation Cap
The total number of investors that can be onboarded by an AIF scheme is currently restricted to 1,000 investors.7 Through this CP on AI-only Schemes, SEBI is considering waiving this limit on the number of investors that can be onboarded by an AI-only AIF. As such schemes are proposed to comprise only AIs, the restriction on number of participating investors in such schemes is considered irrelevant.
Reallocation of Trustee Responsibilities
In AIFs that are structured as trusts, the extant SEBI AIF Regulations require oversight of the AIF by the Trustee and the Investment Manager.8 For AI-only schemes, the CP on AI-only Schemes proposes that these responsibilities for oversight of the AIF rest solely with the Investment Manager, while the Trustee is left to undertake their fiduciary responsibilities under the Indian Trusts Act, 1882, provided, necessary contractual terms to such effect are incorporated in the fund documents and in the agreement with the Trustee.
Consultation Paper on Flexibilities for Large Value Funds
The CP on LVFs seeks to recalibrate the existing framework for LVFs, which were first introduced in 2021 as schemes exclusively catering to AIs with a minimum commitment requirement of INR 70 crores by each AI. There are certain regulatory relaxations that are already enjoyed by LVFs, but industry feedback indicates that further relaxations are required, which are enumerated in the CP on LVFs. Key proposals under the CP on LVFs are discussed below.
Revision of Minimum Investment Threshold from INR 70 crores to INR 25 crores
The minimum investment per AI in an LVF scheme is proposed to be reduced from INR 70 crore to INR 25 crore, thereby widening the eligible investor pool. This responds directly to concerns raised about the current threshold being too restrictive for domestic institutional investors who are required to maintain mandated diversification limits in their portfolios according to other domestic regulatory frameworks. The revised threshold of INR 25 crores per AI is also introduced with the intention of reducing the difference of the threshold limit of INR 10 crores per large value investor, as mandated under the SEBI (Portfolio Managers) Regulations, 20209 and the threshold commitment of INR 70 crores per investor in LVFs as mandated in the SEBI AIF Regulations.10
Exemption from SEBI-specified certification for operating Large Value Funds
Even in LVFs, SEBI AIF Regulations requires at least one key personnel in the Investment Manager's investment team to hold a SEBI-specified certification, which in this case is the NISM certification. Similar to the CP on AI-only Schemes, the CP on LVFs proposes that this requirement be waived for LVFs, on the basis that AIs are capable of independently evaluating managerial competence of the LVFs.
Exemption from following the Private Placement Memorandum template and undertaking Annual Audit of Private Placement Memorandum
It is also proposed that LVFs be exempt from using SEBI's standard template for Private Placement Memorandum ("PPM") and from the requirement of undertaking annual audit of PPM terms. The reasoning behind this proposal is the understanding that that AIs do not require the same degree of regulatory oversight as retail or semi-sophisticated investors, as they are capable of undertaking their own diligence.
Removal of Investor Participation Cap in LVFs
Extant SEBI AIF Regulations imposes an upper limit of 1,000 investors per AIF scheme.11 The CP on LVFs proposes that this cap be removed entirely for LVFs, as they cater exclusively to AIs, with a minimum proposed threshold investment of INR 25 crores. Removal of the cap on number of participating investors in LVFs is envisaged to allow LVFs greater flexibility in fund structuring.
Exemption of Investment Committee Members from Responsibility
Regulation 20(8) of the SEBI AIF Regulations places a duty on the members of the Investment Committee12 of the AIF to ensure that all decisions of the Investment Committee of the AIF, are in compliance with the AIF's policies and procedures that AIFs are required to adopt by law.13 Essentially, an Investment Committee of an AIF undertakes additional oversight of the investment decisions undertaken by the Investment Manager of the AIF. The proviso to Regulation 20(8) of the SEBI AIF Regulations exempts requirement for additional oversight by Investment Committee of those AIFs where (i) each investor has committed at least INR 70 crore; and (ii) has furnished a waiver to the AIF regarding requirement for oversight by the Investment Committee of the AIF.
In the CP on LVFs, it is proposed that the Investment Committee members of LVFs also be exempt from the requirement of ensuring that LVFs comply with the policies and procedures AIFs are required to adopt and follow by law. In these circumstances, the investment decision of the LVFs would lie with the Investment Manager of the LVF and their key managerial personnel. This requirement for oversight by the Investment Committee of the LVF is sought to be waived as AIs investing in LVFs are considered to be sophisticated investors who have at their disposal a robust team of advisors who can effectively advise them on the risks of any investment in an LVF.
Conversion of Existing AIF Schemes into LVFs
The CP on LVFs proposes to permit existing AIF schemes to convert into LVFs. However, to achieve this, the extant AIF schemes are required to obtain consent from all investors and each investor is required to: (i) already be accredited as an AI; and (ii) meet the minimum threshold amount of investment specified for LVFs. This would allow Investment Managers of ongoing AIFs to avail the flexibilities that would be enjoyed by LVFs.
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Footnotes
2. https://www.sebi.gov.in/reports-and-statistics/reports/aug2025/consultation-paper-on-providing-flexibilities-to-large-value-fundsfor-accredited-investors-lvfs-under-sebi-aif-regulations_95957.htm
3. egulation 10(c) of the SEBI AIF Regulations 2012. Please note that for employees or directors of the AIF or its Manager, the minimum investment threshold is lowered to INR 25 Lakh.
4. Regulation 2(1)(pa) of the SEBI AIF Regulations 2021
5. Regulation 2(1)(q) defines a 'manager' as any person or entity who is appointed by the AIF to manage its investments (by whatever name called) and may also be same as the sponsor of the Fund. For purpose of clarity 'Sponsor' is defined as any person or persons who set up the AIF and includes promoter in case of a company and designated partner in case of a limited liability partnership.
6. See Regulation 4(g)(i) of SEBI AIF Regulations
7. Regulation 10(f) of SEBI AIF Regulations.
8. Under Regulation 20 of the SEBI AIF Regulations, trustees in AIFs structured as trusts are subject to various oversight and fiduciary obligations. These provisions are scattered across multiple subregulations of Regulation 20 and include duties relating to monitoring, compliance, and safeguarding investor interests.
9. Regulation 2(1)(la) of the SEBI (Portfolio Managers) Regulations, 2020 define 'large value accredited investor' as an accredited investor who has entered into an agreement with the portfolio manager for a minimum investment amount of ten crore rupees.
10. Regulation 2(1)(pa) of the SEBI AIF Regulations 2021.
11. Regulation 10(f) of the SEBI AIF Regulations.
12. As per Regulation 20(7) of the SEBI (Alternative Investment Funds) Regulations, 2012, the manager may constitute an investment committee (by whatever name called) to approve investment decisions of the AIF. The constitution and functioning of such committees are subject to the conditions set out in Chapter 14 of the SEBI Master Circular for Alternative Investment Funds dated May 7, 2024.
13. See Regulation 20(3) of the SEBI AIF Regulations, which mandates that all AIFs are required to adopt detailed policies and procedures, that are approved by the Investment Manager and the trustee/board of directors/designated partner of the AIF to ensure that all decisions of the AIF are in compliance with the terms of the SEBI AIF Regulations, the PPM, the agreements with the Investment Manager, fund documents and other applicable laws.
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