SEBI’s Accredited Investor AIF Framework: Promises and Pitfalls

[Shivam and Disha are students at Hidayatullah National Law University.]

On 8 August 2025, the Securities and Exchange Board of India (SEBI) released a consultation paper for creating a framework for a distinct Alternative Investment Fund (AIF) scheme for Accredited Investors. Instead of relying solely on a 'minimum investment' threshold, SEBI now seeks to establish an 'accreditation-based' model. The proposals contained therein aim to strengthen the accreditation process and promote investments by AIs in the future. The SEBI approved these proposals at its Board Meeting dated 12 September 2025.

AIFs are privately pooled investment vehicles, meant for investors with a large capital base and a high risk appetite. They essentially connect sophisticated investors with enterprises seeking quick, high-risk capital. Since these funds operate with fewer regulatory safeguards, determining the sophistication of investors and their consequent regulation has been a cause of concern. Accreditation is a mechanism of assessing the risk sophistication of an investor that goes beyond the simplistic criteria of a minimum amount of investment.

In 2021, an accreditation framework was introduced by amending the SEBI (AIF) Regulations 2012 (AIF Regulations), to identify financially sound and well-informed investors specifically. This framework effectively provided a mechanism to continue both the “minimum-investment” model and the “accreditation-based” model. The recent proposals signify a potential shift towards accreditation as the primary regulatory standard.

This article begins by analyzing SEBI's proposed scheme, explaining how it departs from the existing minimum-investment model. Further, it evaluates the market impact and challenges of such proposals, taking cues from other jurisdictions. Finally, it addresses the loopholes and potential challenges in the proposals and suggests a way forward.

Inside SEBI’s Proposal: Accredited Investor-Only AIF Schemes

In its consultation paper, SEBI has revealed its long-term vision of gradually transitioning to “only accreditation status” as the measure of risk sophistication of investors. However, to avoid sudden disruptions, it is provided that both models may exist simultaneously, with an option to provide a separate kind of AIF scheme meant for Accredited Investors, characterized by a rather lenient system of regulatory scrutiny. It provides for some major structural and functional benefits to the ‘Accredited Investors only schemes’.

First, it proposes to exempt the mandatory maintenance of pari passu rights among different investors in a scheme, subject to a waiver provided by an investor, applicable under the AIF Regulations. Therefore, it departs from the existing norm that the special rights of one investor shall not affect the interests of another. However, this move is not unprecedented since Large Value Funds (LVFs) are also provided a similar exemption since they constitute Accredited Investors with a set minimum commitment threshold.

Second, it proposes the extension of tenure of AI Funds up to five years, conditional on the investor consent, from the earlier existing tenure of two years, which also required approval from two-thirds of the investors by value. This proposal, if accepted, will align the framework for AIFs with the LVFs. 

Third, it relaxes the requirement of NSIM certification, provided in Regulation 4(g)(i) of the AIF Regulations, for the AI-only schemes. SEBI has reasoned this proposal on the rationale that AI-only schemes are intended only for those investors who can conduct due diligence before any investments in the AIFs, evaluation of credentials, and regulation of the Manager’s record and its key investment team. 

Fourth, it proposes to remove the existing cap of a maximum of 1000 investors in an AIF scheme, except for angel funds. Presently, in terms of Regulation 10 of the AIF Regulations, any AIF scheme cannot have more than 1000 investors. The only exception is in the case of an AIF incorporated as a company. In such cases, the limitation on the number of investors does not apply. 

Lastly, it suggests entrusting responsibilities to the Manager for holding, managing, and administering the fund property of the AIF trust according to the trust deed, among other fund documents, for the interests of the beneficiaries. These responsibilities were hitherto cast upon the Trustee, who was also empowered to supervise the fund operations and the performance of the Manager. These responsibilities of the Manager will be subject to any agreement between the trustee and the Manager himself.

Challenges and Market Implications of SEBI’s Proposal

While the SEBI’s proposal for AI-only schemes highlights its progressive approach to shift from “minimum investment” threshold to “accreditation model”, they are not without challenges and regulatory gaps, which can have adverse market implications. 

Presently, as per SEBI’s Master Circular dated 7 May 2024, the primary eligibility criterion to be classified as an accredited investor is based only on income or net worth. However, some investors may meet this income threshold, while still not understanding the complex fund structures effectively. It fails to take into account relevant prior investments and prior knowledge of financial markets.

Another challenge lies in the shifting of duties from the Trustee to the Manager. Earlier, the Trustee was empowered to supervise the operations of the fund and the Manager, serving as an independent fiduciary to protect the investor’s interest. However, as per the proposed framework, the Manager can itself carry out the responsibilities of a Trustee, which can directly lead to dilution of investor protection. 

Further, the requirement of pari passu rights, under the current AIF regulations, ensures that there is no discrimination among the investors in a particular scheme and all are treated equally in terms of exit rights, profit distribution, or information access. However, if a waiver of pari passu rights is permitted as per the proposed framework, large institutional Accredited Investors like insurance companies or sovereign funds will likely negotiate preferential rights like exit priority, higher profits, etc. At the same time, smaller accredited investors like High Net Worth Individuals, lacking bargaining power, will be forced to be in a disadvantaged position, despite taking the same risk in investment.

The proposal to remove the cap of 1000 investors can lead to reduced accountability and complicate the fund governance. With an unlimited number of investors, the coordination becomes difficult, and the Manager’s dominance over fragmented investors increases. It can also complicate dispute resolution and increase the systemic risks if a large number of investors exit together or in groups.

Another flaw lies in the reasoning provided by SEBI for relaxing the requirement of NISM certification for a Manager, which is based on the presumption of due diligence by accredited investors investing in AIF schemes. However, in practice, even sophisticated investors rely on the regulatory standards. By removing this criterion for the Manager, issues like conflicts of interest or mismanagement can jeopardize investors’ confidence.

Policy Suggestions for SEBI’s Accredited Investor AIFs

Despite the challenges that exist, SEBI’s vision of an accreditation-based model for AIFs holds a significant promise. By incorporating certain reforms, the proposed framework can be proven to strengthen investor confidence and ensure market growth.

First, SEBI can adopt a dual-criteria accreditation method based on the 2020 amendments made to the US Securities Act. Through these amendments, the SEC incorporated a ‘knowledge-based’ criterion. This allowed individuals with specified professional education or knowledge to qualify as ‘accredited investors’. Similarly, the EU’s MiFID II provides a three-part test for clients who seek ‘professional’ status. Along with monetary thresholds, it requires investors to hold a professional position in the financial sector for at least one year, which necessitates knowledge of transactions or services carried out. 

Second, SEBI can mandate a requirement for some independent third party to monitor the overall AIF schemes and transaction process, similar to Article 21(1) of the Alternative Investment Fund Managers and amending Directives of the EU. It provides for the appointment of a single depositary by the AIFM, and prohibits the Manager from acting as a depositary in any case. The functions of this depositary are to safeguard the assets of the AIF, supervise the cash flows, ensure compliance with the relevant regulations, and maintain the records of all these functions. This depository, being an independent party, is bound by certain duties and liabilities to facilitate sound management of the AIF. 

Third, in the context of exemption from maintenance of pari passu rights, SEBI can incorporate a safeguard similar to Article 12 of the AIFMD, which mandates that no investor shall receive preferential treatment unless such treatment is disclosed in the fund's foundational documents. SEBI could require that all such differential arrangements be explicitly disclosed and sufficiently documented. This would ensure that flexibility for accredited investors does not endanger market confidence. 

Conclusion

The proposed framework by the SEBI on an accreditation-based framework for AIFs reflects its broader vision to depart from a ‘minimum commitment’ threshold to ‘only accreditation’ status as a standard for risk assessment of an investor. This highlights SEBI’s approach to encourage a more dynamic and flexible market. However, the consultation paper also exposes critical gaps like dilution of fiduciary oversight, risks of unequal treatment among investors, and over-reliance on the presumed capacity of accredited investors to self-regulate. If left unaddressed, these challenges can undermine investor confidence and market integrity. Therefore, adopting global safeguards such as dual-criteria for accreditation, independent depositary oversight, and mandatory disclosure of preferential arrangements is recommended. This framework can better serve its potential when certain modifications are made based on these suggestions.