The Illusion of Standardisation: Why SEBI’s New AIF Voting Rules Miss the Mark

[Saransh is a student at Rajiv Gandhi National University of Law].

In the case of an alternative investment fund (AIF), a regime governing pooled investment vehicles such as private equity funds, venture capital funds, and hedge funds which come under the purview of the Securities and Exchange Board of India (SEBI) (Alternative Investment Funds) Regulations 2012, we have a scenario where the members of the fund are the ones to determine where the investment will go, with 100 of them on the cap table. Out of those 100, 30 voted in favour, 10 against and 60 did not respond at all. Depending on the method which the fund chooses to count the votes, it can have 90% approval, 75% approval, or just 30% approval. Same set of investors, same outcome but three different numbers which are all legal.

SEBI’s consultation paper dated 30 June 2026 on rationalizing investor consent (consultation paper) intends to fix this major issue. It makes a positive move by replacing the narrow “associate” test with a broader “related party” test. This closes the gap which earlier allowed genuinely conflicted deals to bypass consent requirements. However, the paper’s headline fix, a uniform 75% consent threshold, allows AIF managers to choose from three voting methods, including the one that counts non-responsive investors as an automatic approval. SEBI has successfully expanded the net for conflict of interest, but by allowing investors silence to be an automatic “yes,” it undermines the very purpose of the voting mechanism. This blog examines how these changes interplay with each other and proposes reforms to fix this contradiction between the two proposals.

What is Being Proposed

SEBI’s consultation paper swaps calibration for uniformity. The old 66.6% (two-thirds) and 75% approval thresholds are collapsed into a single and flat 75% threshold (by unit value), which makes a related-party asset sale and a related-party fee waiver now clear the same bar, regardless of how different their risk is. Additionally, the paper introduces a new procedural layer, where AIFs must choose one of the three consent methods at the outset: deemed consent, present-and-voting, or express voting. This choice then must be disclosed in the private Placement memorandum (PPM) and applied consistently across the scheme. This seems fine, as it only covers how the consent gets recorded, but it says nothing about what level of investor engagement should count as real consent.

SEBI is proposing to replace the narrow “associate” test with Section 2(76) of the Companies Act 2013’s “related party” test. It is done to catch the conflicted deals that before used to slip past the old 15% sharing threshold. The problem with the related party test is that it was not built for AIFs, which are trust based contractual structures but was initially built for corporate hierarchies like subsidiaries, key management personnel and holding chains.

By doing this, SEBI has widened the definition of who counts as a “related party” but has also given the fund managers a system where an investor’s silence can be counted as an approval. This adds no value as it still gives the fund managers a loophole to pass those conflicted deals without active investor consent. The consultation paper fails to address this interplay between the two proposals and leaves investor protection in a dangerous spot.

Problem with the Consultation Paper

SEBI’s own proposals have created an issue by working against each other and have formed a completely broken two-step mechanism. Adopting the “related party” test in proposal 7 initially seems like a positive step. It acts as a necessary trap, which aims to close the gaps that allow conflicted deals to move past investor scrutiny. Specifically, at how it stops the old tactic where managers would intentionally keep their ownership stake just under 15% to avoid being considered as an “associate”. However, proposal 1 acts as a trapdoor and negates this progress by giving fund managers the power to choose “deemed consent” permanently, for any and every vote including those under the related party ones. This power enables managers to successfully pass conflicted deals for which proposal 7 was designed to prevent.

While SEBI does require funds to indicate their chosen voting method in the PPM, it does not guarantee protection, as once a manager picks the deemed consent system, that decision remains unchanged, giving the manager a significant advantage every time a vote takes place.

Paragraph 3.10.4 of the consultation paper itself states that a proposal can pass with a lot of active “no” votes and zero active “yes” votes. This situation could easily be understood by an example where a manager is trying to buy an asset from a connected business under the deemed consent voting system:

0% of the investors voted “yes”, 20% actively voted “no” and the remaining 80% did not respond in time, because the AIF investors are usually large institutional entities like pension funds, they must pass through layers of internal discussion which require a considerable amount of time before a vote can be cast. Rationally, this simply means that the deal got rejected, but under the deemed consent voting system, the remaining 80% is deemed to have approved the proposal, allowing a deal to pass despite 1/5^th of the investors actively objecting to it and none actively supporting it, just because of the voting system which was chosen.

Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) are both SEBI’s own frameworks, which also use the “related party” test, but they have an actual safeguard for the same. In their voting process, a related party cannot vote at all in a deal where they are involved. Their votes are simply not counted, which makes sure that the deal only gets approved by the investors which do not gain any profit from it, keeping the decision unbiased and fair.

In contrast, AIFs have no such protection and under deemed consent, silence is counted as approval, including of an investor who might be connected to the manager or the conflicted deal. SEBI borrowed the related party rule but left the actual safeguard behind, which makes the “related party” test weaker without its safeguards.

Reforms Proposed

Bar conflicted parties from voting

Like REITs and InvITs, SEBI should mandate active voting in AIFs for any conflicted deal and prohibit investors with a direct link to the deal from voting on it. This would ensure that only deals that do not secretly profit specific investors are approved. 

Bifurcating the consent regime

Deemed consent is an effective tool when it comes to low-risk routine matters like minor reporting changes or extending a fund’s term. Having to make hundreds of investors actively vote on every small operational task would just slow down the process without any real benefit. A better alternative would be to split the two methods: active voting for related party deals and deemed consent for the day-to-day tasks.

Removing manager discretion in classifying deals

The very reason for the reforms would not be fulfilled if the power to classify deals is given to the fund managers, as they would simply classify a conflicted deal as “routine” just to push it through the deemed consent path. To counter this, SEBI needs to release a clear list of what counts as “related party” transactions  and a broad “catch all provision” for anything where the manager or anyone connected to the deal could benefit. However, even this broad “catch all provision” would be of no use if the manager themselves is the one applying it. To make it work, SEBI should mandate an independent third party such as a statutory compliance officer to act as a gatekeeper. This officer should be the one with the power to review ambiguous deals and decide if the “catch all” applies. This would help prevent managers from restructuring deals on paper to dodge it. 

Set a minimum notice period

Finally, investors should get enough time to think and vote on a deal, which presently is not guaranteed as a manager can send a related party voting notice right before a long weekend, relying on the fact that most investors will not check it on time and miss it. To fix this, SEBI should prescribe a minimum notice period for such voting notices, so the voting window is a genuine opportunity for investors to cast their vote.

Conclusion

SEBI’s attempt at fixing the conflict-of-interest problem in the AIFs is commendable but it still lacks the right voting system. Allowing fund managers to rely on deemed consent for deals that personally benefit them undermines the whole purpose of the reform. It leads to investors being left unprotected as their silence can just be treated as a “yes” on deals they never actually agreed to.

The AIF industry is quite significant and permitting a system that allows conflicted manager to influence deals for their own profit is detrimental. SEBI can easily avoid this by applying the existing rules which govern REITs and InvITs to AIFs alongside the other reforms proposed in this blog. This would ensure that the changes proposed in the consultation paper are genuinely beneficial and would strengthen SEBI’s efforts to make this process more transparent and accountable.