AIF Registration SEBI Circular

SEBI’s Regulatory Framework for AIFs with Accredited Investors

The Alternative Investment Fund (AIF) market in India is expanding, and there is a need to introduce a new framework to meet the needs of investors. In this context, the regulator has put forward a proposal where AIF schemes can be launched only for Accredited Investors, and a relatively light regulatory framework will apply to them.

The main objective of this move is to provide more flexibility to experienced and financially capable investors so that they can take their risks based on their assessment. The proposed framework will relax the rules in several areas—such as the number of investors limit, the possibility of extending the fund tenure, and exemption from certain professional certifications.

If implemented, these changes will increase the scope for fund managers to create new types of products and strategies, and investors will be able to choose more customized options. Overall, this can make India’s alternative investment ecosystem deeper and more competitive.

What are “Accredited Investors” under SEBI’s Framework?

An accredited investor refers to an individual or entity that has a certain minimum financial capacity and investment experience. Typically, to qualify for this recognition, one has to meet certain criteria of net worth, annual income, or financial assets. This proves that they can understand and assess the risks of complex investment products.

This category of investors, which can be both institutional and individual, is considered to require relatively less regulatory protection than general investors. For this reason, the regulator aims to grant them greater freedom in investment methods and the opportunity to participate in contractual terms.

What Changes are Being Proposed for “AI-only” AIF Schemes?

As per the proposal, a separate category will be created where only accredited investors can participate. Some mandatory conditions applicable to general investors in these schemes will be relaxed. For example, while the minimum commitment to invest in AIFs is currently ₹1 crore, in the case of accredited investors, it will be determined only based on their accreditation.

There will be an initial phase of a transition process, where both the minimum investment limit and accreditation will be in force in parallel. As a result, those who are already investing under the current policy will be able to continue without any hindrance, and new investors will also be included in the new framework in a phased manner.

The model aims to make investment opportunities more flexible for high-net-worth and experienced investors and to give freedom to scheme managers to innovate in product design.

Which Relaxations Does SEBI Propose for These Schemes?

The proposed framework provides for certain exemptions for accredited investors—

Exemption from equal rights condition: Generally, equal rights are ensured for all investors, but here investors can waive this right in writing if they wish.

Extension of tenure: The fund tenure can be extended for another five years after the initial period if at least two-thirds of the investors agree.

Exemption from professional certification: Certain NISM certifications may not be mandatory for the core team of fund managers, as accredited investors are assumed to be sufficiently knowledgeable.

Removal of limit on number of investors: Currently, a scheme can have a maximum of 1,000 investors, but this limit will not apply to this category.

Flexibility in Trust Structure: The scheme manager can also take on the role of trustee if required, which will speed up the process.

These changes will create more flexible terms for investors and reduce the cost and time pressure for managers. However, it will also place greater reliance on investors’ risk assessment capabilities.

Why is SEBI Considering this Lighter-Touch Approach?

Accredited investors are considered to be more experienced and skilled in risk assessment than general investors. Due to their financial capacity and market knowledge, the need for strict regulatory protection is relatively less. For this reason, some conditions have been proposed to be relaxed for them in the new framework.

This will make the investment process more flexible and increase the freedom of fund managers to create products and strategies. On the other hand, investors will also be able to set the conditions as per their needs. The primary objective of this move is to offer additional benefits to a mature investor class through a distinct structure. This will help bring innovations and depth to the market.

How Will This Transition Be Managed?

The change will be implemented in a phased manner so that stability is maintained in the market. In the first phase, both the minimum investment limit and recognition will be implemented together. As a result, existing investors will be able to continue investing under the previous rules, and new investors will be gradually included in the recognition-based framework.

This process will give sufficient time for investors and fund managers to get used to the new conditions. In addition, there is a plan to finalize the policy with the opinions of the relevant parties so that all aspects can be verified before it is implemented.

What is The Timeline and Consultation Process?

After the publication of the draft of the proposed framework, a specific time frame has been given, within which industry stakeholders, investors and other stakeholders can express their opinions. Through the collection of this feedback, policymakers will verify the practical aspects of the proposal.

Generally, after the feedback process is completed, the final policy formulation and implementation schedule are announced based on the feedback received. So, all necessary preparations are completed to implement the proposal in practice, not just at the theoretical stage.

Potential Implications for AIF Industry and Investors

A lighter regulatory framework will make it easier for fund managers to operate. Fewer regulations mean lower costs and less time pressure. They will be able to focus on new types of investment products. This freedom will increase the scope for innovation and encourage different strategies in the market.

On the other hand, accredited investors will be able to select schemes according to their needs. They are experienced in assessing risks, so this flexibility is particularly advantageous for them. However, lighter regulation means more responsibility, self-examination and trust in the premises of the fund managers, which will have to be taken as reliability.

Overall, this step could be an important milestone in strengthening and diversifying the AIF ecosystem. New demands, products and investment opportunities could be created in the market. It would help to create a profitable and operational environment in the long run.

Conclusion

The proposed transformation of this lighter regulatory framework could be a game-changer for the AIF sector. It would make the investment process more flexible, faster and customized for accredited investors. This will open up the freedom for fund managers to adopt new ideas and strategies.

However, this success will depend on transparency, awareness, and proper risk assessment. If these factors are properly maintained, it will increase both depth and performance in the market.

To help determine the next steps in your AIF strategy and solution plan, or to learn more about the impact of regulatory changes, contact our Enterslice experts today. We will guide you with commitment and expertise.

To get expert assistance in AIF registration, visit https://enterslice.com/.

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