SEBI Proposes to Rationalise AIF Investor Consent Framework and Conflict Transaction Approval
On 30 June 2026, the Securities and Exchange Board of India issued a consultation paper proposing amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) to rationalise the framework governing investor consent and conflicted transactions in Alternative Investment Funds (“AIFs”).
The consultation paper seeks to address two key areas where SEBI has observed regulatory ambiguity and inconsistent market practice:
- Standardisation of investor consent requirements and voting methodologies; and
- Rationalisation of the ambit of conflicted transactions requiring investor approval.
The proposals aim to improve governance clarity, reduce interpretational uncertainty, and strengthen transparency in AIF operations.
Need for Standardisation of Investor Consent
The AIF Regulations presently require investor consent for several material decisions, including:
- material alteration of fund strategy;
- extension of tenure of close-ended AIFs;
- investments in associates;
- purchase or sale of investments involving associates;
- appointment of external members to investment committees;
- reduction in valuation frequency; and
- in-specie distribution during liquidation.
However, SEBI has identified two major issues in the existing framework.
Inconsistent Approval Thresholds
Different provisions currently prescribe different approval thresholds, primarily:
- two-thirds approval, or
- 75% approval by value of investment.
SEBI notes that there is no clearly articulated principle-based rationale for maintaining different thresholds for similar governance matters.
To address this, SEBI proposes a uniform threshold of 75% investor approval (by value) wherever investor consent is mandated under the AIF Regulations and circulars issued thereunder. According to SEBI, a higher and consistent threshold would improve clarity while ensuring stronger minority investor protection.
1. Lack of Uniform Voting Methodology
While the regulations prescribe approval thresholds, they do not specify the methodology for obtaining consent. As a result, AIFs currently follow varying practices regarding:
- solicitation of investor responses,
- voting timelines,
- treatment of abstentions, and
- treatment of non-responses.
SEBI has observed that such divergence can create inconsistent outcomes even where the prescribed approval threshold remains the same, particularly in matters involving conflicts of interest.
2. Proposed Methodologies for Obtaining Investor Consent
To standardise the consent process while preserving flexibility, SEBI proposes permitting AIFs to adopt one of three recognised methodologies for obtaining investor approval.
Method A – Deemed Consent
Under this approach, an investor’s failure to respond within the specified voting timeline is treated as approval.
For example, if a proposal is circulated and an investor does not expressly dissent within the prescribed period, such investor is deemed to have consented.
SEBI notes that this methodology is widely used in the AIF industry, largely because AIF investors are generally institutional investors or high-net-worth individuals who are presumed to be sophisticated and capable of deciding whether active participation is necessary. However, SEBI also highlights governance concerns, since material decisions may be approved even where active participation is limited.
Method B – Present and Voting
Under this approach, only votes actually cast are counted. Investors who abstain or do not participate are excluded from the denominator for approval calculations.
SEBI notes that this methodology is consistent with voting practices followed across other SEBI-regulated investment structures such as:
- mutual funds,
- listed entities,
- REITs, and
- InvITs.
This model ensures that only participating investors influence the outcome, while non-participation is treated as abstention.
Method C – Express Voting for Approval
Under this approach, only affirmative votes count toward approval, measured against the total value of the fund.
Investors who do not vote are treated as neither consenting nor dissenting.
SEBI notes that this methodology offers the highest degree of investor protection, since approval requires clear and explicit support. However, in funds with dispersed or inactive investors, low participation may make approvals difficult even for necessary operational decisions.
3. Procedural Requirements for Investor Consent
SEBI proposes that AIFs disclose the chosen consent methodology in their Private Placement Memorandum (PPM) along with the associated policy and procedures.
Required disclosures would include:
- voting methodology;
- communication process;
- notice period and voting timelines;
- reminder mechanisms; and
- treatment of non-responses or abstentions.
Importantly, the selected methodology must be applied consistently at the scheme or fund level and cannot differ between investors within the same scheme.
SEBI further proposes that the manager of the AIF shall be responsible for:
- ensuring transparency;
- providing fair access to all investors;
- responding to investor queries; and
- maintaining records of notices, reminders, meetings, and votes.
Existing methodologies adopted by current AIF schemes are proposed to be grandfathered, with the revised framework applying prospectively.
4. Rationalising Conflicted Transactions
The second major proposal concerns the regulation of transactions involving conflicts of interest.
Currently, the AIF Regulations rely on the concept of “associate” to identify transactions that require enhanced scrutiny or investor approval.
Under the existing framework, “associate” is defined primarily through an ownership-based threshold typically involving entities where specified persons hold more than 15% equity share capital or partnership interest.
SEBI has observed that this definition is too narrow and may exclude several transactions involving comparable conflict risks.
5. From “Associate” to “Related Party”
To address this gap, SEBI proposes replacing the term “associate” with “related party” for provisions dealing specifically with conflicted transactions.
The proposed definition draws substantially from Section 2(76) of the Companies Act, 2013, and includes:
- relatives;
- directors and partners;
- key managerial personnel;
- firms and private companies connected to such persons;
- public companies meeting specified thresholds; and
- holding, subsidiary, associate, and controlled entities.
The significance of this proposal lies not merely in terminology, but in the expanded scope of transactions that would now require investor oversight.
SEBI specifically notes that the current definition of “associate,” being largely tied to a shareholding threshold, may fail to capture several economically conflicted transactions.
For instance, an AIF’s investment in a company where a director of the manager’s immediate relative holds a controlling stake, but where the director himself holds less than the qualifying threshold, would not currently trigger investor consent. Similarly, a transaction involving an entity under common control with the manager or sponsor, but without direct qualifying shareholding, may also fall outside the existing definition of associate. Despite the clear conflict potential in such cases, these transactions may presently escape regulatory scrutiny.
By shifting to the broader related party framework, SEBI seeks to capture conflicts arising through:
- control structures,
- familial relationships, and
- indirect economic influence,
rather than relying solely on direct ownership thresholds.
6. Proposed Regulatory Amendments
To operationalise these proposals, SEBI has suggested amendments to the AIF Regulations including:
- insertion of a new provision empowering SEBI to prescribe the methodology for obtaining investor consent;
- revision of approval thresholds to 75% by value, wherever applicable; and
- replacement of references to “associate” with “related party” in conflict-sensitive provisions.
However, SEBI has clarified that the term “associate” will continue to remain in other provisions where broader coverage is not considered necessary.
Public comments on the consultation paper have been invited until 21 July 2026.
Conclusion
SEBI’s consultation paper seeks to bring greater clarity, consistency, and procedural discipline to the AIF regulatory framework. While the standardisation of investor consent mechanisms addresses operational ambiguity, the more significant reform lies in the expansion of conflict governance through the introduction of the “related party” concept. By moving beyond the narrow ownership-based definition of “associate,” SEBI proposes to capture a wider range of materially conflicted transactions that may previously have escaped investor oversight. If implemented, these changes would mark an important refinement of the existing regime, with a sharper focus on informed investor participation, enhanced transparency, and stronger conflict management within AIF structures.
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