Same Threshold, Different Outcomes: SEBI's New AIF Consent Rules

[Mridul and Rijul are students at Gujarat National Law University.]

On 30 June 2026, the Securities and Exchange Board of India (SEBI) released a consultation paper seeking comments on standardising how Alternative Investment Funds (AIFs) obtain investor consent, and on widening which transactions require such consent on account of a conflict of interest. Comments were invited until 21 July 2026. Through this paper, SEBI aims to replace a decade of divergent market practice with one predictable framework for investor decision-making, applicable uniformly to every Category I, II and III AIF in India.

This post examines the proposals, looks at their practical effect on fund managers and investors, and points to gaps that remain even if the proposals go through as drafted. For over a decade, the SEBI (Alternative Investment Funds) Regulations 2012 (AIF Regulations) have required investor consent for a range of material decisions without prescribing how that consent should be obtained or counted. Some managers have adopted deemed consent, where a non-response is treated as approval; others have relied on actual voting, where only investors who respond are counted and a few SEBI notes, have applied both methods within the same scheme depending on which investor was being approached. Approval thresholds across the AIF Regulations and circulars also vary between two-thirds and 75% of investors by value, with no clear link between the threshold and the decision it governs. The result has been inconsistent investor treatment and real uncertainty for managers running a compliant consent process.

A related problem concerns the definition of an associate, which triggers consent for conflicted transactions only where a director, trustee, partner, sponsor or manager holds more than 15% of the counterparty's equity. SEBI's own illustrations show how easily this is sidestepped: an investment in a company controlled by a manager's relative, or one under common control with the manager through a majority shareholder, escapes the consent requirement altogether. Hence the paper proposes two connected reforms: a standard consent methodology, and a broader, relationship-based test for conflicted transactions.

Standardising Investor Consent: The Three Proposed Methodologies

The paper proposes that every AIF adopt one of three consent methodologies and apply it consistently across the scheme. Under deemed consent, silence counts as approval, and only active dissent counts against a proposal. Under present and voting, the threshold is measured only against investors who actually respond, excluding non-respondents altogether. Under express voting, only affirmative votes count, measured against the entire investor base, so a non-response works against a proposal rather than for it.

The difference is easiest to see with numbers. Take a fund with 100 equally sized investors, where 30 vote yes, 10 vote no, and 60 say nothing. Deemed consent calls that 90% approval. Present and voting calls it 75%, measured against the 40 who responded. Express voting calls it 30%, measured against all 100. The facts never change; only the counting rule does, and the paper leaves the choice of rule entirely to the manager, subject to disclosure and consistent use.

To limit the arbitrage this flexibility could invite, SEBI has added a disclosure safeguard: the chosen methodology must appear in the fund's governing documents upfront, apply uniformly to all investors, and cannot change mid-life without fresh disclosure. Sensible, even if it does not resolve the concerns below.

Implications of the Proposals for Fund Managers and Investors

For fund managers, the proposals bring welcome certainty. A manager may pick whichever methodology suits its investor base, provided it applies consistently and discloses it upfront, removing ambiguity that has long surrounded consent for events such as tenure extensions or related-party investments. The cost is a heavier drafting burden: private placement memoranda (PPMs) will need to spell out the chosen methodology and how non-responses are tracked, since SEBI is likely to expect managers to show, if asked, that a consent outcome was calculated correctly.

For investors, the proposals offer predictability that has been missing so far. An investor can find out, before committing capital, exactly how future votes will be counted, rather than discovering the manager's preferred method only when a contentious decision arises. Whether this adds up to meaningfully stronger protection depends entirely on which of the three methodologies a given fund picks, a point the paper does not address.

Redefining Conflicted Transactions: From Associate to Related Party

On conflicted transactions, SEBI proposes retiring the narrow associate test and replacing it with the related party definition under Section 2(76) of the Companies Act 2013, adapted to the AIF context, a real improvement on its own terms. Section 2(76) catches relatives, key managerial personnel, and entities under common control, none of which the 15% shareholding test could reach, and SEBI has rightly kept a fund's trustees and board members out of the wider definition, since they ordinarily have no role in day-to-day investment decisions.

Critical Gaps Requiring Further SEBI Clarification

First, the paper treats the shift from two-thirds to 75% as a uniform investor-protection upgrade, but that holds only for express voting. Under deemed consent, where silence counts as agreement, the figure that decides an outcome is not the approval percentage but the blocking percentage, the active dissent needed to defeat a proposal. Raising the threshold from two-thirds to 75% lowers the blocking requirement from roughly 33% to roughly 25% dissent, a genuine tightening for investors. Under express voting, though, the same 75% figure demands affirmative support from three-quarters of the entire base rather than two-thirds, which could make routine matters harder to pass for funds with a large or historically unresponsive investor base.

International practice largely sidesteps this problem. Institutional Limited Partners Association, calculates consent on affirmative votes measured against total committed capital, generally requiring 75% for amendments, and does not lean on deemed consent for anything of consequence. SEBI should either state plainly that 75% carries a different real meaning depending on the methodology chosen, or require funds to disclose, in plain terms, what blocking percentage and passing percentage their chosen method implies.

Second, the transition provisions leave existing schemes in an odd spot. The paper lets existing schemes keep their current consent method, with the new framework applying only from a future date, but says nothing about a fund midway through its term whose PPM hardwires the old two-thirds threshold for a specific matter, an associate-party investment, say, rather than leaving it to a policy document the manager can update unilaterally. A fund four or five years into a ten-year term, with thresholds already negotiated with its investors, needs a direct answer on whether those figures carry over unchanged or require a fresh amendment resolution.

A workable fix would be for SEBI to state that any threshold already fixed in a fund's governing documents for a specific matter continues to apply on its own terms, and is not displaced by the new default methodology unless the fund amends its own documents through whatever process its investors already agreed to for making such changes. 

Third, reliance on Section 2(76) does not appear fully adapted for the fund context. The provision extends the related party definition to anyone on whose advice, directions or instructions a director or manager is accustomed to act, excluding only advice given professionally. That language was written for operating companies, where a shareholder informally running the board is a real governance risk. AIFs work differently: large institutional investors in Indian private equity and venture capital funds routinely hold board observer seats, veto rights over defined categories of decisions, and consultation rights, all disclosed and negotiated in side letters. On a literal reading, an investor exercising such a veto arguably gives the manager instructions it is accustomed to act on, pulling every transaction touching a portfolio company where that investor has an advisory seat into the related party net, even though the arrangement was disclosed upfront. It is unclear whether SEBI intends this. The ILPA Principles 3.0 route conflicted transactions through a smaller Limited Partner Advisory Committee instead of treating disclosed governance rights as a conflict in themselves, and SEBI would do well to clarify that customary, disclosed investor rights do not by themselves make an investor a related party.

SEBI should address these gaps before finalizing the proposals. Left unclarified, a reform meant to standardise investor protection could produce outcomes that vary across funds almost as much as the inconsistent practices it is meant to replace, while pulling routine, disclosed governance arrangements into an unintended compliance net.

Conclusion

Standardising the consent methodology and widening the definition of conflicted transactions are, in principle, both worth doing. A fund running two different consent systems for two sets of investors in the same scheme was never defensible, and a 15% shareholding test was always going to miss real conflicts. SEBI is right to fix both problems.

That said, three practical questions still need answers before the framework can work as intended.

SEBI should clarify that 75% does not mean the same thing under every consent methodology, and should require funds to disclose the actual blocking and passing percentages their chosen method implies.

It should also be confirmed that thresholds already fixed in an existing fund's governing documents for a specific matter continue to apply unless the fund itself amends those documents, so investors who negotiated those figures do not have them overridden by a new default they never agreed to.

Further, SEBI should confirm that disclosed, negotiated investor rights, such as board seats and veto right, do not by themselves turn an investor into a related party. 

Fix these three points and the reform delivers exactly what it sets out to do: one predictable, comparable standard for investor consent across the AIF industry. Leave them open, and SEBI risks a rule that looks uniform on paper but plays out very differently from fund to fund, which is the very problem this consultation paper set out to solve.