Description

SEBI introduces operational flexibilities for Alternative Investment Funds through AI-only schemes for accredited investors and additional relaxations for Large Value Funds, including migration procedures and compliance exemptions.

Summary

SEBI has issued guidelines for the migration of existing Alternative Investment Funds (AIFs) to AI-only schemes (exclusively for Accredited Investors) and provided additional relaxations for Large Value Funds (LVFs). These changes follow the Third Amendment to AIF Regulations notified on November 19, 2025, aimed at enhancing ease of doing business by offering scheme-specific regulatory flexibilities and reduced compliance requirements for investor protection.

Key Points

  • New category of AIF schemes limited exclusively to Accredited Investors (AI-only schemes) with reduced compliance around investor protection
  • Additional operational flexibilities extended to Large Value Funds for accredited investors
  • Existing AIFs/schemes can migrate to AI-only or LVF schemes with positive consent from all investors
  • Mandatory naming convention: schemes must add ‘AI only fund’ or ‘LVF’ at the end of scheme name
  • LVFs exempted from standard placement memorandum template and annual audit requirements
  • Once an investor qualifies as an Accredited Investor at on-boarding, the status is maintained through the life of the scheme
  • Maximum extension for AI-only schemes capped at five years inclusive of any prior extensions

Regulatory Changes

Amendment to AIF Regulations:

  • Securities and Exchange Board of India (Alternative Investment Funds) (Third Amendment) Regulations, 2025 notified on November 19, 2025
  • New definitions introduced: Regulation 2(1)(ac) and 2(1)(pa) covering AI-only schemes and LVF conversion provisions

Exemptions for Large Value Funds:

  • LVFs no longer required to follow standard placement memorandum template
  • LVFs exempted from annual audit of placement memorandum terms without requiring specific waivers from investors
  • Amendment to SEBI circular SEBI/HO/IMD/DF6/CIR/P/2020/24 dated February 05, 2020 (Master Circular Chapter 2.4.4)

Compliance Requirements

For Scheme Conversion/Migration:

  1. Obtain positive consent from all existing investors before conversion
  2. Meet respective eligibility conditions for AI-only or LVF schemes
  3. Change scheme name to incorporate ‘AI only fund’ or ‘LVF’ as applicable
  4. Report conversion and name change to SEBI via email to aifreporting@sebi.gov.in within 15 days
  5. Report name change to depositories for system updates within 15 days of conversion

For New Schemes:

  • All new AI-only schemes or LVFs must include ‘AI only fund’ or ‘LVF’ in the scheme name at the end (e.g., ‘Xyz AI only fund’ or ‘Abc LVF’)

Ongoing Compliance:

  • Trustee/sponsor must ensure Compliance Test Report (per Chapter 15 of Master Circular for AIFs) includes compliance with this circular’s provisions
  • Maintain AI status documentation: investor’s AI status at on-boarding is preserved throughout scheme life
  • Maximum tenure extension for AI-only schemes: five years total (including any extensions prior to conversion)

Important Dates

  • November 19, 2025: Third Amendment to AIF Regulations notified
  • December 08, 2025: Circular issued
  • Immediate Effect: Circular comes into force immediately
  • 15 days from conversion: Deadline to report conversion to SEBI and depositories

Impact Assessment

Positive Impacts:

  • Enhanced ease of doing business for AIFs through reduced compliance burden
  • Greater operational flexibility for fund managers targeting sophisticated/accredited investors
  • Streamlined migration path for existing schemes to access regulatory relaxations
  • Reduced documentation requirements for LVFs (no standard template or annual audit mandates)
  • Administrative efficiency through simplified reporting requirements

Considerations:

  • Migration requires unanimous consent from all investors, which may be challenging for schemes with diverse investor bases
  • Reduced investor protection compliance applicable only to accredited investors
  • Five-year maximum extension cap on AI-only schemes may affect long-term investment strategies
  • Fund managers must ensure proper tracking of AI status from on-boarding
  • Name changes require coordination with depositories and system updates

Affected Parties:

  • Alternative Investment Fund managers and trustees/sponsors
  • Accredited Investors participating in AIFs
  • Large Value Funds seeking operational flexibilities
  • Depositories maintaining AIF scheme records

Impact Justification

Introduces operational flexibilities and reduced compliance burden for AIFs targeting accredited investors and LVFs, affecting fund managers and high-value investors but not broad market participants