From CIV to AI-Only Schemes: Is SEBI’s Lighter-Touch Framework Too Light?

[​Himansh and Harshit are students at Hidayatullah National Law University.]

With the alternative investment fund (AIF) industry expected to surpass the USD 1 trillion mark by 2030, the Securities and Exchange Board of India (SEBI) has adopted a liberal approach in its regulatory practices consistent with the Union Budget 2025-26’s dominant theme of ease of doing business. In furtherance of this, SEBI notified the Co-Investment Scheme (CIV scheme) framework under the SEBI (Alternative Investment Fund) Regulations 2012 (AIF Regulations) on 9 September 2025, allowing Category I and II AIFs to offer co-investment opportunities directly to accredited investors within the AIF regime, in addition to the existing PMS route. The framework, along with the twin consultation papers released by the regulator on  large value funds (LVF) and accredited investors only (AI-only) schemes, highlights the development towards a more flexible and accommodating market for alternative investments. 

Through this article, the author analyzes the liberal regulatory stance of the board in regulating AIF in its recent framework on the CIV scheme and consultation papers on LVF and AI-only schemes. Firstly, the article highlights the major takeaways of the schemes vis-à-vis their legal backdrop. Secondly, it examines the potential shortcomings of the liberal lighter touch approach adopted in the frameworks. Lastly, it puts forth a constructive way forward, informed by global best practices.

Decoding the Recent AIF Reforms

The SEBI, exercising its statutory power under Section 11 of the Securities and Exchange Board of India Act 1992, has introduced a series of regulatory reforms marking a strategic recalibration of the AIF regulatory landscape with the aim of establishing a “lighter-touch regulatory framework” for sophisticated investors. The regulator has realized its liberal regulatory intent by promulgating reforms in relation to three regulatory vehicles amid the rising demand from sophisticated investors. 

Firstly, SEBI has permitted Category I and Category II AIFs to offer co-investment facilities to accredited investors by establishing a separate CIV scheme within the AIF Regulations. The board has expanded its pro-investor approach in Regulation 17A of the AIF Regulations, which allows co-investment under the AIF framework in addition to the existing route outlined in the Securities and Exchange Board of India (Portfolio Managers) Regulations 2020 (PMS Regulations). However, due to the absence of a dedicated scheme under these regulations and a separate portfolio manager licensing requirement, co-investments risked being routed through PMS Regulations. Therefore, this reform implements the regulatory intent behind 17A by creating dedicated operational procedures within the AIF framework, addressing the regulatory gap that previously relied on the PMS route. The move is consistent with global regulatory frameworks such as the US SEC’s Regulation D  and the Investment Company Act 1940, which enable participation of “qualified purchasers” in private investment opportunities. Furthermore, the move aligns with Paragraph 80 of the European Union’s Directive on Alternative Investment Fund Managers, which prioritizes acting in the best interests of the AIFs and employing resources and procedures necessary for the proper performance of their business activities. 

The second was the liberalization of the LVF regulatory framework with long-overdue facilitative reforms, since the launch of LVFs has seen commitments of over INR 1.34 lakh crore, indicating market demand for a more supportive regulatory framework. The regulator has decreased the minimum investment threshold from INR 70 crore to INR 25 crore and removed the cap on the maximum number of investors in LVFs, which brings alignment with the global regulatory trend of easing entry barriers, as seen in the Alternative Investment Fund Managers Directive of the European Union. The UK government also plans to simplify its framework by removing the legislative thresholds that determine whether an alternative investment fund manager is considered “sub-threshold” or “full-scope” to reduce cliff-edge risks.

Lastly, the proposal has been advanced to bring in a separate scheme exclusively for accredited investors with a lighter touch framework. This represents a shift from relying on the "minimum commitment threshold" to using "accreditation status" as the primary indicator of an investor's sophistication. The lighter touch framework notably exempted the requirement of maintaining pari passu rights among investors of a scheme and vested the extant responsibilities of the trustee of the fund solely with the investment manager. The approach of the regulator to reduce the regulatory burden on accredited investors mirrors global regulatory practices, such as Section 708 of Australia’s Corporations Act 2001, which exempts “sophisticated investors” from meeting disclosure requirements. 

Challenges in the Lighter Touch Approach to Framework Formulation 

While the regulator’s lighter touch approach to regulation provides the expanding alternative investment sector with operational flexibility and opportunity to channelize greater capital flows by the increasing sophistication of domestic investors, concerns persist over potential hurdles to its effectiveness that warrant closer scrutiny.

First, the operational modalities outlined in the CIV framework introduced by the regulator are subject to ambiguities. Clause 2.8 of the framework provides for investors to have rights in the investment and distribution of proceeds strictly pro rata to their contribution to the CIV scheme, with carried interest carve-outs to “the sponsor, manager, or the manager’s employees, directors, or partners.” It is pertinent to note that SEBI’s circular dated 13 December 2024, limited carried interest carve-outs only to the sponsor and manager. While the CIV framework marks a progression from the earlier position of the regulator, it does not mention the earlier position in the framework and hence requires clarification to ensure consistency. Furthermore, clause 2.10 of the framework subjects the CIV scheme to implementation standards set by the AIF Forum in consultation with SEBI, aimed at ensuring “bona fide investments” and preventing “misuse” of the framework. Due to the immediate effect of the circular, the AIFs have to function without the implementation standards, which places the onus on the fund managers to direct the conduct of the fund in line with the undefined terms like bona fide and misuse in the interim. This risks exposure of the fund to retrospective compliance risks once the standards are established. 

Hence, to address these ambiguities, the regulator needs to clarify its position with respect to its earlier regulation to ensure consistency. Further, for the effective implementation of the modalities subjecting the AIF to implementation standards, it will be imperative to formulate baseline standards and safe harbour provisions for the AIFs or provide for a transitional period until such standards are formulated and notified.

Second, the proposed reform of a separate scheme exclusively for accredited investors with a lighter touch framework is based on the assumption that accredited investors are considered sufficiently sophisticated to regulate their conduct and assess risks associated with their investments, thereby justifying relaxed compliance obligations. However, this approach must be viewed in light of persistent concerns that a significant portion of investments in AIFs may be misused to bypass laws. Moreover, incidents such as the Madoff Scandal have demonstrated the vulnerability of lighter regulatory oversight, which led to securities fraud in the US securities market. As part of its liberal regulatory approach, the regulator assigned the existing responsibilities of the trustee to the Investment Manager. It is essential to note that the manager is responsible for safeguarding the fund’s interests, which may sometimes lead to prioritizing commercial profits over regulatory compliance. This stands in conflict with the function and role of “trustee,” which the regulator in its Adjudication Order in the matter of India Asset Growth Fund specified as that of a vigilant overseer. Similarly, the apex court in Franklin Templeton Trustee Services v. Amruta Garg highlighted active supervisory function of the trustee.

To mitigate these concerns, it is imperative to institute additional safeguards, most notably through the creation of an independent oversight body tasked with reviewing the decisions of the manager that involve conflicts of interest. Furthermore, the board must clarify the extent of the regulatory functions to be exercised by the manager under the proposed framework. The Indian regulator can take inspiration from its global counterparts, such as Canada’s Ontario Securities Commission, which, in its National Instrument 81-107, provides for the establishment of an Independent Review Committee for Investment Funds to oversee matters involving conflicts of interest. 

Conclusion and Way Forward

The lighter touch approach adopted by the SEBI in regulating the AIF market reflects the proactive attempt to balance the ease of doing business with investor protection. To cater to the growing investor demand in the AIF market, the regulator shifted towards a sophistication-based approach to allow high-net-worth investors to invest easily with less compliance burdens while simultaneously leveraging the increasing sophistication of domestic investors to channel greater capital inflows into the AIF ecosystem. However, the lighter touch framework raises concerns over the potential misuse of such relaxations. Hence, leaving these concerns unaddressed may lead to regulatory arbitrage and erosion of structural foundation of AIF market. Prospectively, the regulator must introduce calibrated safeguards to balance the regulatory flexibility with protective measures such as independent oversight mechanisms and safe harbour clauses. These steps are imperative for the regulator to realize the sector’s targeted growth to the trillion-dollar mark.