Balancing Growth and Regulation: How SEBI Envisions AIF LVF Dynamics

[Suhani and Kavya are students at National Law University Odisha.]

The Securities and Exchange Board of India (SEBI) proposed significant changes to the regulatory framework for large value funds (LVFs) vide its consultation paper (paper) dated 8 August 2025. It was based on the recommendations from the Alternative Investment Policy Advisory Committee and the Ease of Doing Business Working Group.  In pursuant to this, SEBI conducted its 211 board meeting on 12 September 2025 (regulatory update) accepting various proposals related to AIF- LVF dynamics put forth under this paper.

This involves creating a separate category for accredited investors (AI) only schemes or LVF classifications which would be eligible to avail the benefits in the regulatory update. These benefits include reducing the investment threshold from INR 70 crores to INR 25 crores, and removing the 1,000-investor cap. It also exempts them from the private placement memorandum (PPM) and waiver requirements. Additional flexibilities including exemption from pari passu treatment to investors and an extended tenure of up to 5 years have been granted. The blog delves into the potential consequences of these regulatory updates on investor accountability, fund discipline, and the overall credibility of the AIF ecosystem.

Assessing SEBI’s LVF Proposals with Reformative Solutions

Separate category of AIF schemes

AIFs will continue existing investors under recent provisions, whereas a new optional category of AI-only schemes with additional flexibilities is introduced to encourage their adoption, in the regulatory update. SEBI, as specified in The paper, further proposed that existing AIFs with AI meeting the INR 25 crore-cap may opt to convert into LVFs, the governance of which has not been elaborated in precise manner in the regulatory update. 

While intended to ease the transition to accreditation-based eligibility, this provision creates several problems. Primarily, it can cause duplication, because both existing schemes and AI-only schemes may end up having AI. Since the same investor base is spread across overlapping structures, questions may arise about which regulatory framework governs their rights and obligations, leading to jurisdictional confusion. It also risks inconsistent treatment of investor protection standards, conflicting claims over recovery or distribution in case of financial stress. Such overlaps blur legal boundaries, delay enforceability, and complicate dispute resolution, ultimately undermining clarity in the AIF framework.

Moreover, this provision can cause fragmentation within the investor base, as different classes of investors may emerge such as those in regular schemes and those in AI-only schemes consequentially leading to inconsistent governance, competing rights, and uneven treatment. Finally, the absence of clear timelines or processes may lead to gridlock rather than a glide path, which may hamper the overall purpose of smooth transition. 

In order to address the issues in SEBI’s glide path approach, a clear transition model should be laid, comprising of step-by-step procedures and mandatory timelines for converting existing schemes into AI-only schemes. SEBI may consider replacing the unanimity rule proposed in The paper with a value-based simple majority, consistent with the 2/3rd majority requirement such as under mutual fund winding-up regulations. Further, SEBI could integrate investor treatment to avoid duplication, formalize governance norms across all schemes to avoid fragmentation and provide clear sub-guidelines on investor rights, reporting obligations, and exit mechanisms. 

Therefore, the aim is to enable a smooth and gradual transition on an optional basis; however, to realize the intended benefits, it is expected that all participants will eventually shift towards AI-only schemes. Hence, the goal should be to provide greater clarity to the existing AI-only schemes, rather than creating discrepancies between the two categories.

Investment threshold reduced to INR 25 crore from INR 70 crore

Under the SEBI (AIF) (Third Amendment) Regulations 2021, an LVF is a SEBI-regulated AIF wherein each AI commits at least INR 70 crore, enjoying streamlined compliance and greater flexibility. Treated as an elite category, LVFs received relaxations such as a waiver of the INR 1 crore minimum and higher portfolio concentration limits. As per the regulatory update, the board approved lowering the minimum investment threshold for LVFs from INR 70 crores to INR 25 crores. 

It aims to broaden access and attract more investors such as wealthy families, corporate treasuries, and small regulated investors while maintaining quality. A key advantage is that investors previously constrained by the INR 70 crores commitment requirement are now able to participate, thereby expanding the pool of eligible investors. The move has the potential to expand the AIF ecosystem and direct greater capital into sectors such as infrastructure, real estate and growth equity. However, reducing the threshold may lower the level of investor sophistication and derail effective monitoring. 

Smaller regulated companies may allot INR 25 crores, but this causes concentration risks since a huge portion of their funds may get locked into a single AIF. Unlike bigger institutions, this exposure can cause significant losses if the fund underperforms. To address this, AI should mandatorily undergo audits by an independent SEBI- registered adviser. This would ensure that the investors understand the honest risks before investing significant portions of their portfolio.

Moreover, without proper monitoring, investors may enter at lower thresholds, overvalue illiquid assets, and face losses. Such inflated prices reduce returns and hurt overall fund performance. For instance, if a company valued at INR 100 is purchased for INR 130 but later sold at INR 100, the investor incurs a 23% loss on the purchase price (-30 ÷ 130 = −23.08%). An overpriced deal can essentially crumble all the expected gains. When this becomes repetitive across various transactions, it tends to weaken the overall track record and fund’s performance. 

AI-only schemes encounter risks from inexperienced managers, mispriced unlisted assets, and weak oversight, which can shake investor trust. To address this, they should be run by qualified teams such as in US qualified purchaser standard, use mandatory independent valuations with quarterly disclosures, and follow standard audits overseen by an independent director. This would ensure investor protection and transparency. 

Lifting the 1,000 investor cap

Regulation 10(f) of the SEBI (AIF) Regulations 2012 limits the number of investors in a scheme up to 1,000, except for angel funds. The paper proposed whether this bar should be removed altogether for LVFs. Since LVFs are AI and contribute significantly large sums, SEBI believed that the 1,000 investor cap may have only little relevance and thus has decided to approve its removal in the regulatory update. Removal of the 1,000 investor cap may boost participation and liquidity, however, it might weaken investor quality thereby risking long-term performance. 

In regular AIFs, the 1,000-investor cap apply only to non-AIs, while AI-only schemes remove the cap entirely for AIs. Since regular AIFs already also consists of Ais Investors alongside non-AIs, placing the cap threshold in both contexts highlights that AIs are already accommodated under the regular schemes. It may result in confusion over compliance, rights, and investor protections, thus undermining the purpose of having distinct AI-only schemes.

Moreover, the removal of cap altogether can lead to a significantly broader investor base which could increase the compliance and monitoring burden. Reporting and voting requirements also become relatively complex as the number of limited partners (LPs) increases. LPs are the investors in an AIF, such as family offices, corporates, and other AIFs, who contribute capital to the fund. In turn, weak monitoring could open the door to conflicts of interest and misconduct which may have been resolved by a smaller and more vigilant investor pool. 

As per SEBI’s circular dated 19 August 2024 and now the regulatory update, AI-only schemes are granted flexibilities which include firstly, the extension of tenure up to five years as opposed to two years for regular schemes. This indicates that longer tenure means investors’ capital is tied up for a much longer period, which can reduce liquidity, restricts the exit mechanisms for the investors and lead to operational risks. 

Further, the exemption from pari passu treatment, which allows some investors to receive preferential returns over others, can create fairness concerns and even lead to disputes within the fund.  Overall, these relaxations, though intended to incentivize AIs, may fragment the market, create disputes, and raise questions about benefits beyond regular AIFs. Rather than complete removal of the 1,000-investor cap, SEBI could increase the LVF investor limit to about 2500-3000. Drawing from global practice, European Union’s Alternative Investment Fund Managers Directive which permits lighter rules to smaller funds. 

Further, disclosure can be inadequate as the number of LPs increases, requiring stronger governance and compliance for larger investor base. Globally, US private funds allow up to 100 investors under retail exemptions but add stronger governance when they grow larger. In Europe, funds utilize tiered disclosure rules to balance broader participation and proper oversight. Thus, reforms should aim to deepen the market while still maintaining strong governance, transparency, and long-term investor trust in the AIF framework.

Revisiting PPM waiver and proposed NISM certification

The paper suggested exempting LVFs from National Institute of Securities Markets (NISM) certification. This certification tests a manager’s ability to take the investment decisions after evaluating market risks. However, the regulatory update is silent on this proposal which makes it even more unclear about its position. Previously, under Regulation 4(g)(i) of the SEBI (AIF) Regulations 2012 (as amended in 2023), it was compulsory for at least one senior team member to hold such certification. 

This safeguard is essential in illiquid asset classes, wherein the investments are hard to exit and information is not readily accessible. For instance, an LVF takes leveraged exposure in equity derivatives to enhance returns, a manager holding NISM certification could assess if the fund can oversee uncontrolled market risks. Thus, when investors cannot verify every aspect, they require a certified professional to serve as an independent check on the risks involved.

The regulatory update, while recognizing larger investments made by AIFs, approved waiver of PPM audits. SEBI’s exemption of LVFs from the standard PPM template and separate investor waivers aim to reduce paperwork since investors already provide an undertaking acknowledging risks. However, this could reduce accountability. Investors may have limited redressal mechanisms if issues arise as the general undertaking could be treated as a blanket waiver. 

To address the same, replacement of the blanket waiver with a short risk-disclosure checklist should be mandated. Alongside, periodic investor verifications for sensitive transactions should be conducted while maintaining oversight and simplifying compliance ensuring transparency and operational efficiency.

Conclusion

SEBI’s proposals for LVFs aim to unveil more capital and relax compliance requirements which are in line with global fund regimes. The benefit stems from greater flexibility such as a lower threshold, fewer certifications and transitional options. However, if ease of doing business overshadows investor discipline, reforms could end up creating larger pools of money but with weakened safeguards. This would heighten compliance and risk concerns. The path forward lies in calibrated approach rather than dilution through measures like robust accreditation filters and periodic risk confirmations. Enhanced growth, coupled with investor safeguards, LVFs possess the potential to progress into a reliable and globally eminent segment of India’s AIF landscape.