The article is co-authored by Muskan, a fifth-year law student at Gujarat National Law University, Gandhinagar, and Lovish Loona, a fourth-year law student at Rajiv Gandhi National University of Law, Punjab.
This post has been divided into two parts. The second part can be accessed here.
Introduction
The Alternative Investment Funds (“AIF”) industry is expected to surpass the USD 1 trillion mark by 2030, and thus, AIFs are no longer a niche investment vehicle but a crucial pillar of the capital market ecosystem. This rapid growth has required a re-examination of the AIFs regulatory framework, particularly with regard to investor protection, risk allocation and regulatory oversight. In response to this, the regime of the Alternative Investment Fund has been going through a rapid overhaul by the amendments, circulars and consultation papers brought by the Securities and Exchange Board of India (“SEBI”). These reforms of 2025 show a shift away from the “Minimum Commitment Threshold Model to the Accreditation Model”. The objective of the reforms is to introduce a lighter-touch regulatory framework for sophisticated investors, reflecting SEBI’s intention to align India’s Alternative Investment Law with global legal practices.
Globally, the principle of regulatory differentiation is well mentioned, under the legal frameworks of the European Union (“EU”) and the United States of America (“USA”). But Indian jurisprudence does not clearly define the notion of “sophisticated investors”. The definition of the “sophisticated investors” can be inferred from the USA, as they make a reference to this concept in Rule 506 of Regulation D of the Securities and Exchange Act, 1933, which includes either an individual or an institution with significant market experience, knowledge and financial resources.
The 2025 reforms in AIF Regulations are with regard to the Accredited Investors, which were introduced by SEBI in 2021, and are premised on the assumption that those investors who have the requisite experience and have the risk-taking ability, and hence, don’t need strict regulatory measures, to safeguard their interests.
What is an Accredited Investor? An accredited investor is defined in Regulation 2(ab) of AIF Regulations, which says that it is an investor who has been granted a certificate by the recognised accreditation agencies. The certificate is granted to the investor if they fulfil the eligibility criteria, such as annual income, net worth, and financial assets. This financial and quantifiable benchmark, while providing a clear and administratively simple threshold, forms the central point of the discussion in this blog. It raises a fundamental concern that does a high net worth automatically equate to the ability to understand the investment risk, fund structures, and evaluate the manager’s competence?
Against this backdrop, this paper discusses these recent overhauls and sheds light on the new regulatory regime, its challenges and plausible solutions, keeping in view the global practices. The global practices regarding the regulatory compliance of Accredited Investors have been in place in the EU Law and the law of the USA, and the authors have delved into their practices to present a comparative analysis with the Indian jurisprudence and have taken cues from the problems faced by them to curate appropriate measures in the new Indian AIF regime.
Regulatory Shift towards Accreditation: Decoding the 2025 Reforms
The Securities and Exchange Board of India (SEBI), in 2025, has undertaken a series of reforms to reinforce a pro- investor regulatory ecosystem within the Alternative Investment Fund (AIF) framework. There are mainly 4 changes that are introduced by these reforms.
First, the Board has strengthened the pro-investor approach through Regulation 17A of the AIF Regulations, by introducing co-investment within the AIF regulatory framework, in addition to the pre-existing route mentioned under the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020 (PMS Regulations). Before this amendment, there was an absence of a co-investment scheme within the AIF Regulations, coupled with the requirement of a separate portfolio manager license, which resulted in co- investment channelled through the PMS framework. This gap resulted in a structural mismatch because co-investments were substantively aligned with the AIF’s investment strategies. By coming up with this reform, SEBI ensured greater regulatory coherence and strengthened investor protection.
The second reform came through the amendments to Regulations 19A-19H in the AIF regulations, which specially govern the Angel Funds, a sub-category of Category 1 AIF. This amendment narrows the definition of angel investors by restricting it to Accredited Investors exclusively, ensuring that only financially sophisticated investors with knowledge, understanding, and adequate risk-bearing capacity participate in early-stage, high-risk investments. Simultaneously, the minimum investment threshold has now been increased from INR 10 Lakh to INR 25 crore, the requirement of a minimum 5 accredited investors to declare first close is introduced, and the maximum investor limit, i.e., 200, is removed. Now, Angel Funds can directly invest in start-ups, without the requirement of any scheme. This increase in the investment threshold and the restriction to the accredited investors only effectively professionalises the angel investment landscape. It moves angel funding from a high-net-worth retail activity to an institutional-grade activity, which hopefully brings more disciplined capital to the start-up ecosystem, but also limits the pool of available capital for early-stage ventures.
The third reform relates to the long-awaited liberalisation of the LVF regulatory regime through the third amendment in AIF Regulations. Since the introduction of LVFs, investor commitments have crossed INR 1.34 lakh crore, which shows a clear demand for a more supportive regulatory regime. In response to the demand, the Board has substantially lowered the minimum investment requirement from INR 70 crore to INR 25 crore, removed the ceiling on the number of investors in LVFs, and removed the investment committee’s decision compliance with the policies approved by the Manager or Sponsor, as mentioned in Regulation 20(8) of AIF Regulations.
The last significant reform relates to the introduction of an Accredited Investor-only fund and the structural framework related to it, which was introduced to move towards a lighter-touch regulatory framework.
Accredited Investor Only Fund: Concept, Structure and Exemptions
The last but not least reform, which is the introduction of an Accredited investor only fund, is one of the most significant reforms introduced by SEBI in the AIF regime. SEBI approved this proposal at its Board meeting on 12th September, 2025, which is incorporated through the third amendment in AIF Regulation, which introduced the definition of Accredited Investor Only Fund through Regulation 2(ac). This category also encompasses Large Value Funds. The AI- only Fund are introduced to obtain a lighter-touch regulatory framework, premised on the assumption that the accredited investors possess the knowledge, understanding and risk-assessment capability necessary to engage in the investment structures, which means they can conduct the due diligence by themselves.
Exemptions Given to Accredited Investor-Only Fund
An Accredited Investor is assumed to possess knowledge and understanding of investments and can conduct due diligence by themselves. So, in consequence of this, SEBI has given several regulatory exemptions to this fund. The approach of the SEBI to provide various exemptions to the Accredited Investor-only Fund, as they can conduct their own due diligence, can be traced to Section 708 of the Australia Corporations Act, which provides an exemption to sophisticated investors from meeting various disclosure requirements.
First, the fund is exempted from Regulation 20(22) of AIF Regulations, i.e., mandatory maintenance of pari-passu rights among different investors in a scheme, subject to the consent of investors mentioned in the AIF Regulations. It means they can now offer customised terms, differential or special rights to selective investors, hence departing from the existing norms.
The second exemption is that they removed the existing cap of a maximum of 1000 investors, which is mentioned in Regulation 10(f). It means that now the limit is relaxed for Accredited Investors.
The third benefit, as per Regulation 13(5), is the extension of tenure of the funds, increased from 2 years to 5 years, subject to the approval of two-thirds of investors by value. This change brings the AI- only funds in alignment with the tenure framework provided to LVFs.
The fourth benefit, exemption from the requirement of NISM certification for the Key Investment Team Member, is mentioned in Regulation 4(g)(i) of the AIF Regulations. This exemption is particularly important as it removes a layer of regulatory oversight on the competence of the Fund Manager. The intention for the exemption was that the fund is intended for accredited investors, who are assumed to have an understanding of every risk in the investment, thereby assumed to have the capability of assessing the manager’s quality themselves. However, these assumptions place a huge onus on the investor to conduct a thorough background and competency check on the Fund Management Team Members.
The fifth benefit, giving all the responsibilities of the Trustee to the Manager, means from now onwards, all the responsibilities of the Trustee for holding, managing and administering the fund property of the AIF trust would be given to the Manager. This structural change aims to streamline fund governance and reduce regulatory and operational redundancies. The consolidation of powers in the Manager represents a fundamental shift in the fund governance architecture. The trustee, traditionally considered an independent guardian of investor interests, is now removed from the equation for AI- only funds, placing immense trust in the manager’s ability to self- regulate and avoid conflicts of interest.
The last benefit is only for LVF funds, which mentions that they are exempt from the investment committee compliance, provided in Regulation 20(8) of the AIF Regulations, which says that the investment committee’s members ensure that decisions are in compliance with the policies approved by the Manager or Sponsor.