Proposed Exclusivity Club: Light-touch regulations for AIFs with accredited investors

– SEBI proposes light-touch regulations for AIFs in which only Accredited Investors are investors and flexibilities for Large Value Funds (LVFs)

– Payal Agarwal, Partner | corplaw@vinodkothari.com

Since its introduction in 2021, the concept of Accredited Investors (AIs) has been through some changes. A Consultation Paper was published on 17th June, 2025 to provide for certain flexibilities in the accreditation framework. Now, vide another recent Consultation Paper dated 8th August 2025 (‘AI CP’), SEBI proposes to bring light-touch regulations for AIF schemes seeking investments from only AIs. The CP also proposes to extend various exemptions currently available to Large Value Funds (LVFs) on AIs only scheme. 

Further, vide another Consultation Paper (‘LVF CP’), some relaxations are also proposed to be extended to Large Value Funds (LVFs) for AIs. 

Accredited Investors – who are they?

An AI is considered as an investor having professional expertise and experience of making riskier investments. Reg 2(1)(ab) of AIF Regulations defines an accredited investor as any person who is granted a certificate of accreditation by an accreditation agency, and specifies eligibility criteria. The eligibility criteria is as follows: 

Further, certain categories of investors are deemed to be AIs, that is, certificate of accreditation is not required, such as, Central and State Governments, developmental agencies set up under the aegis of the Central Government or the State Governments, sovereign wealth funds and multilateral agencies, funds set up by the Government, Category I foreign portfolio investors, qualified institutional buyers, etc.

‘Accreditation’ as a measure of risk sophistication

AIFs are investment vehicles pooling funds of sophisticated investors, and not for soliciting money from retail investors. The measure of sophistication, as specified in the AIF Regulations currently, is in the form of the ‘minimum commitment threshold’. Reg 10(c) of the Regulations require a minimum investment of Rs. 1 crore, except in case of investors who are employees or directors of the AIF or of the Manager. 

There are certain shortcomings of considering the minimum commitment threshold as the metric of risk sophistication of an investor, such as: 

• May not necessarily lead to an actual draw-down, thus exposing to the risk of onboarding investors with inflated commitments. As per the data available on SEBI’s website, out of the total commitment of Rs. 13 lac crores for the quarter ended 31st March 2024, only about Rs. 5 lac crores worth of funds were actually drawn down. Similarly, for the quarter ended 31st March 2025, the value of commitment vis-a-vis funds raised 
• Does not consider the investor’s financial health (income, net worth etc), hence, a potential risk of the investor putting majority of its wealth in AIFs, a riskier investment class. 

The concept of AIs, as proposed in February 2021, was to introduce a  class  of investors  who have  an understanding of various  financial products and the risks and returns associated with them and therefore, are able to take informed  decisions  regarding their investments. Accreditation of investors is a way of ensuring that investors are capable of assessing risk responsibly.

The June 2025 CP indicated that it is being examined to move AIFs gradually in an exclusively for AIs approach, starting with investments in angel funds and in framework for co-investing in unlisted securities of investee companies of AIFs. Accordingly, the present CP has proposed a gradual and consultative transition from ‘minimum commitment threshold’ to ‘accreditation status’ as a metric of risk sophistication of an investor.

Proposed flexibilities for AIs-only schemes

The CP also proposes a light-touch regulatory framework, from investor protection viewpoint, considering that the AIs have the necessary knowledge and means to understand the features including risks involved in such investment products. The following relaxations are proposed to be extended to an AIs – only scheme: 

Topic	Applicability on all AIFs	Applicability on LVF	Proposed relaxation for AIs only AIF	Our Comments
Differential rights of investors [reg 20(22)]	Shall be pari-passu, differential rights may be offered to select investors, without affecting the interest of other investors of the scheme in compliance with SEBI Circular dated 13th Dec, 2024 r/w Implementation Standards	Not Applicable	Proposed to be exempted subject to a waiver provided by each investor	This facilitates differential rights to different classes of investors within a scheme.
Extension of tenure of close-ended funds [reg 13(5)]	up to two years subject to approval of two-thirds of the unit holders by value of their investment in AIF	up to five years subject to approval of two-thirds of the unit holders by value of their investment in LVF	Same as LVFs	This facilitates a longer tenure extension to an existing close-ended scheme, if suited to investors.
Certification criteria for key investment team of Manager [reg 4(g)(i)]	Atleast one key personnel with relevant NISM certification	No exemption currently, similar exemption proposed under the LVF CP	Proposed to be exempted	The investors, being accredited, the reliance on key investment team of the Manager is comparatively low.
Maximum number of investors [reg 10(f)]	No scheme can have more than 1000 investors	No exemption currently, similar exemption proposed under the LVF CP	Proposed to be exempted	This may not be very relevant, given that in practice, the number of investors in an AIF is much lower than 1000.
Responsibilities of Trustee [reg 20 r/w Fourth Schedule]	Applicable where the AIF is formed in the form of a trust	No exemption	Proposed to be fulfilled by the manager itself, subject to terms of agreement between the Trustee and the Manager and the fund documents	The investors, being accredited, the reliance on Trustee for investor protection is comparatively low.

The exemptions are also proposed to be extended to LVFs, if not already available. 

Large Value Funds: a sub-category of AIs only scheme 

The concept of LVF was also introduced in 2021, along with the concept of AIs. An LVF, in fact, is an AIs only fund, with a minimum investment threshold. Reg 2(1)(pa) of the AIF Regulations defines LVF as: 

“large value fund for accredited investors” means 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. 

LVFs, thus, are in fact an AIs only scheme. Thus, whatever exemptions are available to an AIs only scheme, will naturally be available with an LVF, although the converse is not true. 

Exemptions available to LVFs (other than as proposed for AIs only scheme)

In addition to the relaxations that are proposed to be extended to an AIs only scheme, there are additional exemptions available to an LVF. These are: 

Regulatory reference	Topic	Exemption for LVF
Reg 12(2)	Filing of placement memorandum through merchant banker	Not applicable
Reg 12(3)	Comments of SEBI on PPM through merchant banker	Not applicable, only filing with SEBI required
Reg 15(1)(c)	Investment concentration for Cat I and Cat II AIFs – cannot invest more than 25% of investable funds in an investee company, directly or through units of other AIFs	May invest upto 50% of investable funds in an investee company, directly or through units of other AIFs
Reg 15(1)(d)	Investment concentration for Cat III AIFs – cannot invest more than 10% of investable funds in an investee company, directly or through units of other AIFs	May invest upto 25% of investable funds in an investee company, directly or through units of other AIFs

Proposed reduction in minimum investment size for AIFs

The LVF CP has proposed a reduction of the minimum investment threshold from Rs. 70 crores to Rs. 25 crores, based on the recommendations of SEBI’s Alternative Investment Policy Advisory Committee (AIPAC). The rationale is to lower entry barriers to facilitate improved fund raising, without compromising on the level of investor sophistication. The reduction of investment thresholds would also facilitate investments by regulated entities having a strict exposure limit, such as insurance companies. 

Exemptions from requiring specific waivers for certain provisions  

The format of PPM is specified under Annexure 1 read with the requirements specified under various other circulars from time to time. Further, in order to ensure that the activities of the AIF are in compliance with the terms of PPM, an annual audit of the terms of PPM is required to be done. The Regulations currently permit waiver of the same for AIFs/ Schemes with each investor having a minimum commitment of Rs. 70 crores (USD 10 mn or equivalent). 

Similarly, the responsibilities of the Investment Committee may be waived by the investors (other than the Manager, Sponsor, and employees/ directors of Manager and AIF), if they have a commitment of at least Rs. 70 crores (USD 10 billion or other equivalent currency), by providing an undertaking to such effect, in the format as provided under Annexure 11 of the AIF Master Circular, including a confirmation that they have the independent ability and mechanism to carry out due diligence of the investments. 

It is proposed that the LVFs continue to be exempt from such requirements even after the proposed reduction in minimum investment size, and without any specific waiver, considering the blanket undertaking they are required to provide. 

The exemption without specific waiver requirement is based on the fact that AIs are already required to provide an undertaking for the purpose of availing benefits of ‘accreditation’. The undertaking, as per the format given in Annexure 8 of the AIF Master Circular states the following: 

(i) The prospective investor ‘consents’ to avail benefits under the AI framework.

(ii) The prospective investor has the necessary knowledge and means to understand the features of the investment Product/service eligible for AIs, including the risks associated with the investment.

(iii) The prospective investor is aware that investments by AIs may not be subject to the same regulatory oversight as applicable to investment by other investors.

(iv) The prospective investor has the ability to bear the financial risks associated with the investment. 

Transition to existing eligible AIFs 

One of the proposals of the LVF CP is to permit eligible AIFs, not formed as an LVF, to convert themselves into an LVF and avail the benefits available to LVF schemes. The conversion shall be subject to obtaining positive consent from all the investors. 

Conclusion

The proposals are a step towards providing a lighter regulatory regime for AIFs, meant for sophisticated investors, capable of making well-informed decisions. LVFs are practically a sub-set of AIs only AIFs, with a larger value of investment from each investor. As such, even if the proposals under the Consultation Papers get approved, LVFs will continue to enjoy more relaxations than an exclusive accredited investor AIF. However, the move is expected to witness more schemes focussed on AIs only, and thus, facilitate the move towards an AIs only regime for AIFs. 

Our resources on the topic-

1. Understanding the Governance & Compliance Framework for AIFs
2. Round-Tripping Reined: RBI Rolls Out Relaxed Rules for Investments in AIF
3. Regulatory landscape for AIFs: what’s new?
4. FAQs on Specific Due Diligence of investors & investments of AIFs