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

– SEBI notifies 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

This version: 20th November, 2025

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. Another Consultation Paper dated 8th August 2025 (‘AI CP’) proposed to bring light-touch regulations for AIF schemes seeking investments from only AIs, including extension of various exemptions to such schemes, that are currently available to Large Value Funds (LVFs).

Further, vide another Consultation Paper (‘LVF CP’), some relaxations were also proposed to be extended to Large Value Funds (LVFs) for AIs. Note that the LVFs are available only for AIs, and hence, the Amendment Regulations define the AIs-only schemes to include LVF.

The SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025 has been notified on 18th November, 2025, thus introducing the concept of AI-only schemes in the regulatory framework. Note that, vide the 2nd Amendment Regulations, the angel funds have also been exclusively restricted to Accredited Investors only. See an article on the Angel Funds 2.0: Navigating the New Regulatory Landscape.

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.

Flexibility for AIs-only schemes vis-a-vis other AIFs

The following relaxations have been extended to AIs-only schemes, in order to provide for 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:

Topic	Regulatory requirement	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	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	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	The investors, being accredited, the reliance on key investment team of the Manager is comparatively low.

Further, in case of AIs-only Funds, the responsibilities of Trustee as specified in Reg 20 r/w the Fourth Schedule shall be fulfilled by the Manager itself. This is based on the premise that, the investors, being accredited, the reliance on Trustee for investor protection is comparatively low.

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.

Since an LVF is included within the meaning of an AIs-only scheme, all exemptions as available to an AIs only scheme, are naturally available with an LVF, although the converse is not true.

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

In addition to the relaxations 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

Reduction in minimum investment size for LVFs

The minimum investment threshold for investors in LVF has been reduced 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 extant regulations permitted that 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.

The requirement of specific waiver has been omitted for LVFs considering 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 of 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.

Limit on maximum number of investors

Reg 10(f) puts a cap on the maximum number of investors in a scheme. Pursuant to the Amendment Regulations, the cap of 1000 investors shall not include the AIs.

In practice, the number of investors in an AIF is much lower than 1000, and hence, the amendment may not have much of a practical relevance. 

Conclusion

The amendments are a step towards providing a lighter regulatory regime for AIFs, meant for sophisticated investors, capable of making well-informed decisions. The move is expected to witness more schemes focussed on AIs only, and thus, bring 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
5. Angel Funds 2.0: Navigating the New Regulatory Landscape.