This article provides a concise overview of the changes and their practical implications for AIF managers, sponsors and investors.

‘Accredited Investors Only’ AIFs

The amended SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) formally recognise an Accredited Investors only fund (AI-only fund) as an AIF or scheme of an AIF in which each investor, other than the sponsor, manager and their employees or directors, qualifies as an accredited investor. Large Value Fund for accredited investors (LVF) is also included within this definition of AI-only fund.

This recognition has two important consequences:

• Lighter Regulatory Regime: Schemes comprising exclusively accredited investors benefit from certain flexibilities that are not available to regular AIF schemes.
• Conversion of Existing Schemes: SEBI may allow existing AIFs or schemes to convert into an AI-only scheme, subject to compliance with conditions as may be specified. The circular dated December 8, 2025, sets out the procedure for such conversion, including consent, renaming, and reporting requirements.

Regulatory Flexibility for AI-Only Schemes

SEBI has adopted specific regulatory flexibilities in terms of less compliance around investor protection for schemes comprising accredited investors, resulting in the following refinements:

• Qualification Requirements for Key Investment Team: The professional certification requirement under regulation 4(g)(i) does not apply to AI-only funds.
• Exemption from Pari-Passu Norms: The exemption from the strict pari-passu requirement under Regulation 20(22) has been extended from only LVFs to all AI-only funds. This allows managers to offer differential rights (via side letters) to investors in any AI-only fund without being restricted by the standard pari-passu mandate, provided they are not detrimental to the interests of other investors.
• Investor-Count Computation: In a significant relief for the broader market, accredited investors are now excluded when calculating the maximum permissible number of investors (1,000) for any AIF scheme (under Regulation 10(f)), not just those classified as AI-only funds.
• Tenure Extension: Extension of tenure under Regulation 13(5) may be permitted up to 5 years (instead of the earlier 2-year limit), subject to the approval of two-thirds of the unit holders by value of their investment in the AI-only fund. The circular makes it clear that this 5-year limit is inclusive of any extension approved prior to conversion to AI-only or LVF scheme.
• Continuity of Accredited Investor Status: An investor who qualifies as an AI at the time of admission to the scheme shall continue to be treated as an AI for the entire tenure of the scheme, notwithstanding any subsequent change in such investor’s financial position or eligibility, thereby ensuring that the scheme does not lose its AI only status on account of any investor ceasing to meet the accreditation criteria during the life of the scheme.
• Reallocation of Trustee Obligations: In case of AI-only funds, obligations ordinarily assigned to the trustee under the Regulations will, by virtue of the amendment to Regulation 20, be discharged by the manager.

Migration to AI-Only or LVF Schemes

The new circular provides a structured process for transitioning existing AIF schemes into AI-only or LVF schemes. Key features include:

• Scheme Name: New schemes launched as AI-only or LVF schemes should have the words “AI only fund” or “LVF” in the scheme names. Likewise, existing schemes converting into these categories are required to adopt the same nomenclature (For example, ‘Xyz AI only fund’ and ‘Abc LVF’).
• Consent of Investors: Conversion of an existing scheme into an AI-only or LVF structure would require the affirmative consent of all investors.
• Reporting Obligations: Managers must inform SEBI of the conversion and modified name via email within 15 days of conversion. A similar intimation of the change in name must be made to depositories to ensure system-level updates.

LVFs: Revised Investment Threshold and Additional Relaxations

SEBI has substantially revised the minimum investment threshold for LVFs. Under the amended regime, each accredited investor must now commit to a minimum of INR 25 crore, instead of the earlier threshold of INR 70 crore.

This revised threshold expands the pool of eligible accredited investors, without altering the institutional nature and substantial capital commitment requirement of investors, which are fundamental to the LVF regime, thereby encouraging participation from a wider set of accredited investors, including family offices and smaller institutional investors who were earlier unable to allocate INR 70 crore under the previous framework. SEBI has clarified that existing schemes may be permitted to convert into an LVF, subject to specified conditions.

LVFs are further exempted from:

• following the standard private placement memorandum (PPM) template; and
• undergoing the annual audit of compliance with PPM terms,

without needing to obtain individual investor waivers. The AIF Master Circular has been updated accordingly.

Compliance Test Report Alignment

The Compliance Test Report prepared by the manager in terms of Chapter 15 of the Master Circular for AIFs must now expressly cover adherence to this new circular.

Way Forward for Market Participants

The evolving regulatory landscape represents SEBI’s stance of prioritising operational flexibility, addressing the fact that accredited investors are equipped with higher risk tolerance and instead of following extensive prescribed formats, SEBI has permitted an approach where only key material disclosures can be made enabling such accredited investors to evaluate, thereby removing the burden of exhaustive disclosures as part of the compliance requirements. However, this revised framework offers funds and their managers more flexibility, but it also places a greater burden on the quality of documentation, accuracy of disclosures and extent of investor communication. As SEBI moves towards a more contract-driven approach for accredited investors, protections that previously came from prescribed formats will now rest largely on well-drafted fund documents, inter-party agreements.

With a lower LVF threshold, participation is expected from a wider set of accredited investors, and certain specialised investment strategies may gradually shift into AI-only or LVF structures. This could gradually lead to a dual AIF ecosystem under the SEBI framework: flexible structures for accredited investors and a more standardised regime for smaller investors.

The shift from the standardised and regularised PPM format and required disclosures therein makes drafting of such documents a more nuanced and expert-driven task. Core provisions, including valuation, conflicts, liquidity, fees, and investor rights (including disclosures of executed side letters) inter alia, should be retained unambiguously, since SEBI’s broader principles on fairness and investor protection would continue to apply even in the absence of rigid templates.

Conversions of existing schemes will require transparent communication, written consent and updated fund documents reflecting the new tenure extension limits, continuity of accredited status and the shift of certain trustee responsibilities to the manager, as discussed above. Internal processes should also be updated, including incorporating the new framework into the compliance test report and timely reporting to SEBI and depositories of such conversion.

Overall, while the shift to a more customised structure supports innovation and caters to the subjective needs of individual market stakeholders, it simultaneously increases reliance on precise contracts and sound governance. In the absence of prescribed disclosure checklists, strict compliance with PPM terms, investor waiver mandates and pari-passu rights, it becomes inevitable for parties to exercise extensive due diligence and negotiate contract terms carefully before entering into corresponding agreements to avoid future disputes and maintain trust.

Conclusion

SEBI’s new amendments and circular remain aligned with the underlying promise of promoting ease of doing business while ensuring that the intent still rests on investor protection. The introduction of the AI-only scheme regime and refinement of the LVF framework provide managers with greater structuring flexibility while appropriately balancing investor protection requirements with the corresponding risk appetite and sophistication of such investors. The juxtaposition of the reduced LVF threshold with the accompanying relaxations in the framework signals SEBI’s intent to promote and encourage wider market participation from eligible investors.