SEBI Accredited Investor Funds Framework: Understanding The New Regulatory Architecture For Sophisticated Capital

Securities and Exchange Board of India's (“SEBI”) “accredited investor” framework in the Alternative Investment Funds (“AIF”) space is built around a simple trade-off: once all investors in a scheme are demonstrably sophisticated, SEBI is prepared to step back from some standardised protections and allow greater freedom of contract. The SEBI (AIFs) (Third Amendment) Regulations, 2025 (“Third Amendment”) crystallise this idea through a new label called the “Accredited Investors only Fund”¹, and a reconfiguration of the existing “Large Value Fund (“LVF”) for Accredited Investors.”²

This article explains what existed under the SEBI (AIFs) Regulations, 2012 before the amendment, what has changed through the Third Amendment, and what these shifts mean in practice for sponsors, managers and investors.

1. Pre-amendment Landscape: AIFs, Accredited Investors and LVFs

1.1 AIFs and investor segmentation

The AIF Regulations, 2012 create a framework for pooled investment vehicles set up as trusts, companies, limited liability partnerships or body corporates, which raise money from investors and invest according to a defined investment policy.³ AIFs are classified into Category I, II and III based on their strategies and use of leverage.⁴

From the outset, AIFs have been positioned as products meant for high net worth and institutional investors rather than the retail public. This is reflected in:

• Minimum investment of at least INR 1,00,00,000 (Indian Rupees One Crore only) per investor, with a reduced threshold for employees and directors of the manager or sponsor;⁵ and;
• A cap of not more than one thousand investors in any scheme of an AIF.⁶

The accredited investor framework adds a finer layer on top of this high-level segmentation.

1.2 Who is an “Accredited Investor”?

The AIF Regulations define an “accredited investor” by reference to financial thresholds and certification by an “accreditation agency”, which are broadly:⁷

• Individuals, Hindu undivided families, family trusts and sole proprietorships are required to meet specified income, and net worth tests and obtain a certificate of accreditation;
• Body corporates and non-family trusts must meet higher net worth thresholds; and
• Certain sovereign and quasi-sovereign entities may be treated as deemed accredited investors, irrespective of the financial thresholds.

An “accreditation agency” is, in turn, defined as a subsidiary of a recognised stock exchange or depository, or any other entity specified by SEBI to carry out accreditation.⁸

Accreditation therefore operates as a formal gatekeeping mechanism: investors who cross this bar are assumed to have the financial capacity and sophistication to participate in more complex or customised products.

1.3 Large Value Funds for Accredited Investors: the First Specialised Product

Before the Third Amendment, SEBI had already used accreditation to create a specialised AIF product, which was the “Large Value Fund for Accredited Investors”. An LVF is defined as an AIF or a scheme of an AIF in which:⁹

• Every investor, other than the manager, sponsor, and employees or directors of the AIF or of the manager, is an accredited investor; and
• Each such accredited investor commits at least a minimum capital amount. Prior to the Third Amendment, this minimum was set at INR 70,00,00,000 (Indian Rupees Seventy Crore only) per investor.

Because LVFs were restricted to accredited investors with very large tickets, SEBI granted them certain flexibilities that ordinary AIF schemes did not enjoy, including:

• Tenure Extensions: Close-ended LVFs could extend their tenure beyond the standard two-year extension available to ordinary AIFs, subject to investor approval and conditions.¹⁰
• Higher Concentration Limits For Category III LVFs: The usual caps on exposure to a single investee company for Category III AIFs were relaxed upwards for LVFs.¹¹

• Bespoke Investor Rights: LVFs were carved out from the general expectation that investors' rights must be substantially pari passu, permitting more flexible differential rights for different investors.¹²

In short, LVFs were already an experiment in lighter-touch regulations. SEBI accepted more tailored structures because the investor base was both accredited and extremely large ticket.

2. The New Construct: Accredited Investors only Funds

The Third Amendment does not create a fourth AIF category. Instead, it adds a cross-cutting label that can be overlaid on any AIF scheme, regardless of whether it is Category I, II or III.

2.1 Definition and Scope

The amendment inserts a new clause defining an “Accredited Investors only Fund” as an AIF or scheme of an AIF in which:¹³

• Every investor, other than the manager, sponsor, employees or directors of the AIF or of the manager, is an accredited investor; and;
• The term expressly includes a “large value fund for accredited investors”.

A key transitional feature is that any AIF or scheme launched prior to commencement of the Third Amendment may be permitted by SEBI to convert into an Accredited Investors only Fund, subject to conditions that SEBI may specify.

2.2 Repositioning LVFs within the New Label

At the same time, the Third Amendment recalibrates the LVF definition in two important ways:¹⁴

• It retains the basic structure of LVFs as accredited-investor-only schemes, but reduces the minimum commitment per accredited investor by substituting the word “seventy” with “twenty-five” in the LVF definition; and
• It allows pre-existing schemes to be permitted by SEBI to convert into LVFs subject to prescribed conditions.

Post-amendment, therefore:

• Every LVF is an Accredited Investors only fund;

• Not every Accredited Investors only fund is an LVF; and
• The LVF ticket size hurdle has fallen sharply from INR 70,00,00,000 (Indian Rupees Seventy Crore only) to INR 25,00,00,000 (Indian Rupees Twenty-Five Crore only) per accredited investor.

This makes LVFs more accessible to a wider pool of accredited investors, while preserving them as the large-ticket sub-category within the broader Accredited Investors only fund universe.

3. What Exactly has Changed: Themes and Specific Regulations

The Third Amendment makes targeted changes across multiple regulations. Conceptually, they can be grouped into four themes: manager eligibility and governance, scale and tenure, conflict management and investor rights.

3.1 Manager Eligibility and Governance

Ordinarily, the AIF Regulations require that at least one key personnel of the manager possess adequate experience, qualification or certification in finance, accountancy, business management or related disciplines, or have relevant experience in portfolio or fund management.¹⁵

The Third Amendment inserts a proviso stating that this specific requirement does not apply in the case of an Accredited Investors only Fund.¹⁶ Other eligibility and fit-and-proper conditions for the sponsor and manager continue to apply, but SEBI is effectively telling the market that, where the entire investor base is accredited, it is prepared to lean more on investor due diligence and negotiation instead of prescribing detailed skill thresholds in the regulations.

A more striking change is the insertion of a new provision dealing with trustee responsibilities. In a trust-structured AIF, the trustee ordinarily carries regulatory obligations under the AIF Regulations – for example, to oversee compliance by the manager and safeguard the interests of unit-holders¹⁷. The Third Amendment now provides that, in the case of an Accredited Investors only Fund, the responsibilities and obligations of the trustee under the AIF Regulations shall be carried out by the manager.¹⁸

This effectively compresses the trustee–manager separation for Accredited Investors only Funds. The manager becomes the primary regulatory counterparty, and governance safeguards are expected to be embedded in the fund documents and negotiated by accredited investors themselves.

3.2 Scale: Investor Caps and Fund Size

The baseline rule is that no scheme of an AIF shall have more than one thousand investors.¹⁹ Before the amendment, this cap applied mechanically, regardless of investor type.

The Third Amendment introduces an important refinement: it provides that accredited investors shall be excluded while computing the number of investors in a scheme.²⁰ The existing carve-out for employees or directors of the AIF, manager or sponsor, who were earlier excluded from this count, is now described as a “further” proviso.²¹

The practical result is that a scheme can now exceed the one-thousand-investor threshold, so long as the additional investors are accredited. This directly rewards schemes that succeed in building an accredited-investor-heavy base with more room to scale within the AIF framework.

On the corpus side, the reduction in minimum commitment for LVFs from INR 70,00,00,000 (Indian Rupees Seventy Crore only) to INR 25,00,00,000 (Indian Rupees Twenty Five Crore only) is also a scale-related intervention. It allows LVFs to aggregate capital from a larger number of accredited investors at lower individual ticket sizes than before, while remaining firmly in the sophisticated end of the market.

3.3 Time: Tenure Extensions

The default position for close-ended AIFs is that they may extend their tenure up to two years, with the approval of two-thirds of investors by value of their investment.²²

Previously, LVFs enjoyed a more liberal extension regime through provisos that referred specifically to “large value funds for accredited investors”²³. The Third Amendment substitutes these references so that the enhanced extension facility now attaches to “Accredited Investors only Funds”.²⁴

This means that the capacity to extend beyond the standard two-year window, subject to investor approval and SEBI-specified conditions, is no longer confined to LVFs. Any scheme that qualifies as an Accredited Investors only Fund can, in principle, benefit from this greater temporal flexibility, which is particularly useful for complex or long-gestation strategies.

3.4 Conflicts of Interest and Investor Rights

The AIF Regulations place explicit restrictions on transactions that may give rise to conflicts of interest, particularly dealings with associates, related schemes and large investors. As a rule, purchases or sales of investments between an AIF and its manager, sponsor, associates or other schemes are either prohibited or permitted only under tightly conditioned circumstances and with investor consent.²⁵

The Third Amendment creates a specific carve-out for LVFs: it adds a proviso stating that this shall not apply to a large value fund for accredited investors.²⁶ In other words, LVFs – and only LVFs, not all Accredited Investors only Funds, enjoy a substantially freer hand to transact with affiliates, related schemes and anchor investors. The underlying assumption is that the combination of accreditation and large individual tickets provides enough bargaining power and monitoring capacity to manage these conflicts contractually.

Separately, the regulations contain a general principle that the terms and conditions of contribution and other rights and obligations of investors in a scheme shall be uniform, subject to limited differential rights that may be granted with proper disclosure.²⁷ Pre-amendment, its second proviso allowed LVFs to depart more substantially from this “broadly pari passu” expectation. The Third Amendment now substitutes “large value fund for accredited investors” with “Accredited Investors only fund” in that proviso.²⁸

This change widens the scope of bespoke structuring, any Accredited Investors only Fund may now design more customised economics, governance and exit terms for different accredited investors, provided that this is transparently set out in the fund documents. LVFs continue to benefit as a subset of this broader group, but the flexibility is no longer confined to them.

4. The Emerging Bargain for Sophisticated Capital

Putting the pre-existing LVF regime and the new Accredited Investors only Fund construct together, a clear pattern emerges.

First, SEBI defines and filters a class of investors who either meet stringent financial thresholds or are institutionally sophisticated and certifies them through accreditation. Secondly, SEBI builds product buckets that are restricted exclusively to this class: LVFs and now Accredited Investors only Funds. Thirdly, within these buckets, SEBI relaxes or reconfigures several guardrails that apply to ordinary AIF schemes:

• Manager qualification requirements are loosened for Accredited Investors only Funds²⁹;
• Investor caps are relaxed by excluding accredited investors from the one-thousand-investor computation;
• Tenure extensions are made more flexible for Accredited Investors only Funds;
• Conflict-of-interest rules are significantly eased for LVFs;
• Differential investor rights can be more freely crafted in Accredited Investors only funds; and
• Trustee responsibilities in trust-structured Accredited Investors only Funds are effectively shifted to the manager.

For sponsors and managers, the message is that, if they are able to assemble an entirely accredited investor base, they can access greater design freedom in terms of structure, tenure, concentration and governance, and can even repurpose existing schemes through conversion routes.

For accredited investors, the bargain is equally clear. They gain access to larger, more flexible and more tailored funds, but in a regulatory environment that assumes they will protect their own interests through negotiation, contractual safeguards and active monitoring, rather than through prescriptive regulatory micromanagement.

Conclusion

SEBI's new architecture for Accredited Investors Only Funds represents a decisive inflection point in India's regulatory journey—one where the sophistication of capital is finally matched by a more nuanced sophistication of regulatory trust and tailored freedom. The future of alternative investment in India may now pivot on a dynamic bargain: the more skilled and resourceful the investor class, the less prescriptive the regulator's hand.

As global capital seeks the most agile and efficient jurisdictions, India's approach stands out for its willingness to let accredited investors—both institutional and ultra-high net worth shape their own destinies, negotiate bespoke rights, and forge innovative fund structures with fewer regulatory guardrails. The move towards differentiated regulation propels India into the vanguard of global thought, with regulators in other emerging and developed markets likely to observe whether this calibrated “hands-off” approach produces both high-performance capital markets and effective investor self-protection.

Ultimately, this is a core shift embodied in the Accredited Investors only Fund regime: a deliberate move by SEBI towards differentiated regulation, where sophistication of capital is matched by sophistication of responsibility.

Footnotes

1. Regulation 2(1)(ac) of the SEBI (AIFs) (Third Amendment) Regulations, 2025.

2. Regulation 2(1)(pa) of the SEBI (AIFs) Regulations, 2012.

3. Regulation 2(1)(b) of the SEBI (AIFs) Regulations, 2012.

4. Regulation 3(4) of the SEBI (AIFs) Regulations, 2012.

5. Regulation 10(c) of the SEBI (AIFs) Regulations, 2012.

6. Regulation 10(f) of the SEBI (AIFs) Regulations, 2012.

7. Regulation 2(1)(ab) of the SEBI (AIFs) Regulations, 2012.

8. Regulation 2(1)(aa) of the SEBI (AIFs) Regulations, 2012.

9. Regulation 2(1)(pa) of the SEBI (AIFs) Regulations, 2012.

10. Regulation 13(5) Provisos of the SEBI (AIFs) Regulations, 2012.

11. Regulation 15(1)(c) Proviso of the SEBI (AIFs) Regulations, 2012.

12. Regulation 20(22) Second Proviso of the SEBI (AIFs) Regulations, 2012.

13. Regulation 2(1)(ac) of the SEBI (AIFs) (Third Amendment) Regulations, 2025.

14. Regulation 2(1)(pa) of the SEBI (AIFs) (Third Amendment) Regulations, 2025.

15. Regulation 4(g)(i) of the of the SEBI (AIFs) Regulations, 2012.

16. Regulation 4(g)(i) Proviso of the SEBI (AIFs) (Third Amendment) Regulations, 2025.

17. Regulation 20 of the of the SEBI (AIFs) Regulations, 2012.

18. Regulation 20(24) of the SEBI (AIFs) (Third Amendment) Regulations, 2025.

19. Regulation 10(f) of the SEBI (AIFs) Regulations, 2012.

20. Regulation 10(f) First Proviso of the SEBI (AIFs) Regulations, 2012.

21. Regulation 10(f) Second Proviso of the SEBI (AIFs) Regulations, 2012.

22. Regulation 13(5) of the SEBI (AIFs) Regulations, 2012.

23. Regulation 13(5) Provisos of the SEBI (AIFs) Regulations, 2012.

24. Regulation 13(5) Provisos of the SEBI (AIFs) (Third Amendment) Regulations, 2025.

25. Regulation 20(8) of the SEBI (AIFs) Regulations, 2012.

26. Regulation 20(8) Second Proviso of the SEBI (AIFs) (Third Amendment) Regulations, 2025.

27. Regulation 20(22) of the SEBI (AIFs) Regulations, 2012.

28. Regulation 20(22) Second Proviso of the SEBI (AIFs) (Third Amendment) Regulations, 2025.

29. Regulation 4(g)(i) Proviso of the SEBI (AIFs) (Third Amendment) Regulations, 2025.

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