Accredited Investor Only AIFs

A. Executive Summary of Proposals

SEBI's proposals address three pivotal objectives:

1. Introduction of AI-Only Schemes: Create a separate class of AIFs accessible exclusively to Accredited Investors, replacing legacy minimum investment requirements with a robust accreditation standard, thereby signalling a transition to more sophisticated risk profiling.
2. Enhanced Flexibility for Large Value Funds (LVFs): Substantially relax compliance and operational norms for LVFs-AIF schemes with only Accredited Investors — most notably reducing the minimum investment threshold from INR 70 crore to INR 25 crore; and exempting LVFs from stringent PPM requirements, investor committee obligations, and annual audits.
3. Conversion Option for Existing Schemes: Permit eligible existing AIFs to transition into AI-only or LVF structures, subject to stringent investor consent and SEBI-specified conditions, ensuring continuity and robust governance.

B. Industry Impact and Practice Guidance

1. AI-Only Schemes: Elevating the Sophistication Metric

   SEBI's shift from a minimum ticket size to objective accreditation criteria (based on independently verified income/net worth) reflects mature market priorities. Accredited Investors — ranging from high-net-worth individuals to institutional bodies — are recognized for their financial acumen and risk tolerance, enabling lighter regulatory touch on investor protection measures. Notably:

   • Pari-Passu Exemption: AI-only schemes may offer differentiated rights to investors, provided waivers are obtained, enhancing product structuring and tailored solutions.
   • Tenure Extensions: Permissible up to 5 years for close-ended funds, exceeding the standard 2-year rule, with the safeguard of two-thirds investor consent.
2. LVF Relaxations: Deepening Institutional Access

   By lowering LVF minimum investment requirements and removing key process bottlenecks, SEBI aims to democratize access for sophisticated domestic institutions — especially insurers limited by regulatory caps — while preserving investor quality:

   • PPM & Audit Exemptions: LVFs are absolved from standard template requirements and annual audits of placement memoranda, subject to broad investor undertakings.
   • Committee & Trustee Responsibilities: LVFs and AI-only schemes see a shift of fiduciary and oversight duties from trustees to managers, reducing compliance friction and underscoring the principle of self-regulation among the ultra-sophisticated investor pool.
3. Seamless Migration Mechanism

   Existing AIF schemes meeting LVF or AI-only credentials may migrate upon unanimous investor consent, safeguarding investor choice, maintaining market stability, and ensuring all gold-standard governance processes are respected.

C. Next Steps

Upon formal notification, AIF regulations will offer three distinct structures, each with clear regulatory pathways:

For managers, sponsors, and legal advisors, key industry practices should include:

• Rigorous AI Verification: Ensure robust, independently validated accreditation for all investors.
• Investor Consent & Documentation: Secure transparent, granular consents for scheme migration and flexibilities.
• Governance and Disclosure: Maintain high levels of disclosure and governance — even where regulatory oversight is relaxed — to sustain investor trust and market integrity.

D. Conclusion

SEBI's proposals mark a watershed moment for Indian private markets, incentivizing sophistication while enabling fund managers and Accredited Investors to co-create innovative structures within a lighter yet robust regulatory framework. Magic circle clients should leverage these flexibilities to optimize fund products and investor onboarding processes, always upholding international best practices in documentation, risk management, and compliance.