SEBI AIF Regulations: Proposed Changes to Investor Consent and Related-Party Transaction Framework

Posted On - 5 November, 2026 • By - Puneet Bhatia

Introduction

The regulatory framework governing Alternative Investment Funds (AIFs) in India places considerable importance on investor participation, transparency and the management of conflicts of interest. As the AIF market continues to develop, the Securities and Exchange Board of India (SEBI) has been examining ways to bring greater consistency to investor-consent mechanisms and strengthen safeguards governing conflicted transactions.

On 30 June 2026, SEBI issued a consultation paper proposing changes to the investor-consent framework under the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations). The proposals seek to standardise the manner in which investor approval is obtained, rationalise the approval thresholds prescribed across the regulatory framework, and broaden the scope of transactions requiring investor consent by introducing an AIF-specific definition of “related party”.

These proposals are significant for AIF managers, sponsors, trustees and investors, particularly in the context of private equity and venture capital fund management, related-party investments and fund governance. However, they must be distinguished from the requirements already in force. The consultation paper is not, by itself, an amendment to the AIF Regulations. Accordingly, fund managers should continue to comply with the existing regulatory requirements while assessing the potential implications of the proposed changes for their fund documentation and internal compliance processes.

The existing AIF framework prescribes different investor-approval thresholds for different matters. For instance, Regulation 9(2) requires the consent of at least two-thirds of unit holders by value for a material alteration to the fund strategy. Similarly, Regulation 13(5) prescribes a two-thirds approval threshold for extension of the tenure of a close-ended AIF, subject to the applicable conditions.

In contrast, certain transactions under Regulation 15(1)(e) and Regulation 15(1)(ea), including specified investments in associates and certain purchases or sales of investments involving connected entities, already require approval from 75% of investors by value.

SEBI’s June 2026 consultation paper proposes to rationalise these varying thresholds by extending the 75% approval requirement to provisions where a two-thirds threshold is currently prescribed. The objective is to establish a more consistent approach to investor approvals across the AIF regulatory framework.

The proposal is intended to reduce interpretational uncertainty and provide greater uniformity in fund governance. However, until the relevant regulatory provisions are amended and notified, the existing approval thresholds will continue to apply.

In addition to the approval threshold, SEBI has proposed standardising the methodology through which AIF managers seek and calculate investor consent. The consultation paper identifies three possible methods:

Under this method, investors who do not respond within the specified voting period would be treated as having approved the proposal. The votes in favour would include both affirmative votes and non-responses, calculated against the total investor value of the fund or scheme.

b. Present and voting

Under this method, only investors participating in the voting process would be considered for calculating the approval threshold. The value of votes in favour would be assessed against the total value of votes cast by participating investors. Non-participation would not be counted as approval or dissent.

c. Express voting

Under this method, only affirmative votes would count towards the approval threshold. The value of votes in favour would be calculated against the total investor value of the fund or scheme, irrespective of the level of participation.

SEBI has proposed allowing AIFs to select one of these methodologies, subject to appropriate disclosures and a consistent approach at the fund or scheme level. The chosen methodology, along with the relevant procedures, voting timelines and treatment of non-responses, would be disclosed in the Private Placement Memorandum (PPM).

The proposal also contemplates that all investors should have an opportunity to vote on matters requiring their consent and that managers should maintain records of communications, reminders, meetings and voting outcomes. Existing schemes would be subject to the proposed framework prospectively, with their existing consent methodologies proposed to be grandfathered.

If implemented, these changes could have a direct bearing on investor-consent provisions in AIF documentation, including PPMs, contribution agreements and side letters. Fund managers may therefore consider reviewing their existing voting procedures and investor communication mechanisms in anticipation of any final regulatory changes.

The existing AIF Regulations use the term “associate” to identify certain entities connected with an AIF, its sponsor or manager. The definition broadly covers a company, limited liability partnership or body corporate in which specified persons, including the sponsor or manager and certain directors or partners, hold more than 15% of the paid-up equity share capital or partnership interest, individually or collectively. SEBI’s consultation paper identifies limitations in this definition. Certain transactions involving significant relationships or potential conflicts may not trigger investor-consent requirements because the relevant connection does not satisfy the existing ownership threshold.

For example, the consultation paper refers to situations involving investments in companies whose directors are also directors of the AIF’s manager or sponsor, companies controlled by immediate relatives of relevant persons, and transactions involving relatives of the manager or sponsor. These examples illustrate circumstances in which a transaction may involve a material conflict even where the existing definition of “associate” is not attracted.

To address this concern, SEBI has proposed introducing an AIF-specific definition of “related party”, drawing from the definition under Section 2(76) of the Companies Act, 2013, with modifications to suit the AIF regulatory framework. The proposed definition covers specified relationships involving relatives, directors, partners and key managerial personnel, as well as certain firms, companies and entities connected through ownership, control or management relationships.

Importantly, SEBI has not proposed replacing the term “associate” throughout the AIF Regulations. Instead, the consultation paper proposes using “related party” for provisions concerning conflicts of interest and conflicted transactions, while retaining the existing reference to “associate” in other provisions where the broader definition may not be necessary.

The proposed change is intended to improve the identification of connected-party transactions and reduce the possibility of transactions involving material conflicts falling outside the investor-approval framework merely because they do not meet the existing ownership-based definition.

For AIF managers and sponsors, this may require a more comprehensive approach to conflict identification, including reviewing corporate affiliations, directorships, management relationships and relevant familial connections before undertaking investments or related transactions. A structured conflict-identification process and periodic declarations may help managers identify potential issues at an early stage.

3. Investor Approval for Related-Party and Inter-Scheme Transactions

The existing framework under Regulation 15(1)(e) and Regulation 15(1)(ea) regulates specified transactions involving associates and certain AIFs managed or sponsored by the manager, sponsor or their associates. Regulation 15(1)(e) requires approval from 75% of investors by value for specified investments by an AIF in associates or in units of AIFs managed or sponsored by its manager, sponsor or their associates.

Regulation 15(1)(ea) separately addresses specified purchases and sales of investments by an AIF scheme involving associates, certain schemes managed or sponsored by connected persons, and investors who have committed at least 50% of the scheme’s corpus, subject to the prescribed conditions and approval requirements.

SEBI has proposed replacing the reference to “associate” with “related party” in provisions concerning conflicted transactions. If implemented, the change would broaden the range of relationships requiring scrutiny and investor approval. This may have implications for transactions involving multiple funds managed by the same investment manager, investments in entities connected with the sponsor or manager, and purchases or sales of portfolio investments involving connected persons.

For fund managers, the practical challenge will be to identify potential conflicts before executing a transaction and determine whether the proposed transaction requires investor approval under the applicable regulatory framework. Maintaining documented conflict assessments, valuation support, allocation rationale and investor disclosures can help demonstrate that investment decisions have been taken through a transparent and consistent process.

4. Co-Investment Vehicles and Existing Conflict Controls

The AIF framework also regulates co-investment arrangements through Regulation 17A, which provides for co-investment by investors of Category I and Category II AIFs through a separate Co-Investment Vehicle (CIV) scheme or through the permitted portfolio-management route.

The CIV framework is subject to specific conditions, including investor eligibility, separate scheme-level arrangements and restrictions on borrowing and leverage. The framework also contains safeguards concerning investors who have been excused or excluded from, or have defaulted in relation to, the main AIF’s investment.

Although the June 2026 consultation paper primarily addresses investor consent and conflicted transactions, its proposed expansion of the related-party framework may have broader implications for the identification and management of conflicts across AIF structures. Fund managers should therefore consider the interaction between their existing conflict-of-interest policies, inter-scheme transaction procedures and co-investment arrangements. The applicable requirements must, however, be assessed separately under the relevant provisions and circulars.

5. Borrowing and Leverage Restrictions for Category I and Category II AIFs

The borrowing framework for Category I and Category II AIFs is governed by Regulations 16(1)(c) and 17(c) of the AIF Regulations. These categories are generally prohibited from borrowing funds, directly or indirectly, or engaging in leverage, except to meet specified temporary funding requirements.

SEBI’s circular dated 19 August 2024 clarified the conditions governing such borrowing. The permitted borrowing is intended to address a shortfall in the drawdown amount called for from investors and is subject to the following limits:

  • The borrowing period must not exceed 30 days.
  • Borrowing may be undertaken on not more than four occasions in a year.
  • The amount borrowed must not exceed 10% of the investable funds.
  • A cooling-off period of 30 days must be maintained between two borrowing periods.

The manager must also ensure compliance with the applicable disclosure and reporting requirements concerning the borrowing and its repayment. Separately, SEBI’s April 2024 framework permits Category I and Category II AIFs to create an encumbrance over their equity holdings in qualifying infrastructure-sector investee companies, subject to prescribed conditions. This is a limited arrangement intended to facilitate borrowing by the investee company, rather than a general relaxation of the prohibition on borrowing by the AIF itself.

These requirements remain relevant to AIF structuring and fund compliance. Managers should ensure that borrowing arrangements, investment documentation and disclosures in the PPM accurately reflect the applicable regulatory conditions.

6. Implications for AIF Documentation and Governance

The proposed changes to investor consent and conflicted transactions may require AIF managers to revisit their governance and documentation practices if the proposals are implemented. The PPM should accurately describe the fund’s investment strategy, governance framework, conflict-management policies, investor-consent requirements and applicable risk disclosures. Contribution agreements and side letters should be reviewed to ensure that contractual voting rights and approval procedures remain consistent with the applicable regulatory requirements and the terms offered to investors.

Fund managers may also consider strengthening their internal conflict-identification procedures through periodic declarations, centralised records of relevant relationships and documented transaction-level assessments. Where an investment or transaction involves a potential conflict, the manager should assess the applicable disclosure, approval, valuation and allocation requirements before proceeding.

The role and authority of a Limited Partner Advisory Committee (LPAC), where constituted, should be clearly defined in the fund documents. Its powers may include reviewing specified conflicts or providing approvals in accordance with the contractual framework. Any indemnification, exculpation or insurance arrangements for LPAC members should also be carefully drafted, with due regard to applicable law and the agreed limits of protection.

For existing funds, a review of PPMs, contribution agreements, side letters and internal compliance policies may help identify provisions that could require modification if SEBI adopts the proposed framework.

Conclusion

SEBI’s June 2026 consultation paper signals a potential shift towards greater standardisation of investor-consent procedures and a broader approach to identifying conflicted transactions under the AIF Regulations. The proposed 75% approval threshold and the introduction of an AIF-specific related-party definition could materially influence how fund managers structure investor approvals and manage connected-party transactions.

However, these proposals must not be treated as operative regulatory requirements until the relevant amendments and directions are formally notified. In the meantime, AIF managers, sponsors and investors should continue to apply the existing regulatory framework while reviewing their fund documentation and governance processes for potential areas of impact. A well-documented approach to investor consent, conflict identification and transaction approvals will remain central to effective AIF governance and regulatory compliance in India, including the legal considerations routinely addressed by private equity law firms in India when advising on fund governance and investment transactions.

Last Updated on 5 November, 2026

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