[Vanshika Sharma and Divyanshu Kumar are 4th year B.A., LL.B. (Hons.) students at NALSAR University of Law, Hyderabad]
The Securities and Exchange Board of India (SEBI) has put forward a consultation paper that aims to create a new breed of Alternative Investment Fund (AIF) schemes restricted to Accredited Investors (AIs) and governed by a lighter-touch regulatory framework. The proposal published in August 2025 does not dismantle existing protections wholesale but seeks to recalibrate which investor-protection rules should apply when all participants are objectively sophisticated. SEBI’s idea is straightforward: replace, over time and carefully, the blunt proxy of “minimum commitment” with a measured accreditation system based on income, net worth and financial assets. The change would allow fund designers more freedom (for example, differentiated investor rights, longer tenures, fewer certification obligations), while expecting accredited investors to shoulder more of the due-diligence burden themselves. SEBI’s draft, and commentary from industry experts, frames this as a gradual, consultative move to make India’s private markets more competitive without compromising market integrity.
SEBI’s case rests on two pragmatic observations. First, the current ₹1 crore minimum commitment rule (the traditional proxy for “sophistication”) can be gamed: contractual commitments do not always translate into real drawdowns, and they do not reflect an investor’s broader financial health. SEBI’s consultation paper points out that commitments can overstate the actual capital available or the investor’s ability to bear losses, so accreditation anchored to income and net worth thresholds may be a better indicator of capacity to assume risk. Second, a lighter regime for genuinely sophisticated investors should reduce compliance costs and promote product innovation, enabling bespoke fund structures that better serve market needs. SEBI therefore proposes a co-existence model that initially retains minimum commitment AIFs while allowing AI-only schemes to operate under specified relaxations.
The policy also ties to SEBI’s prior accreditation reforms. Since introducing an accreditation framework in 2021, SEBI has continued to refine onboarding processes, integrate accreditation with existing KYC systems, and expand the network of authorized agencies, steps intended to make accredited status easier to obtain and verify. By linking the future AIF universe to accreditation instead of minimum ticket size, SEBI is signalling a real shift in its approach by treating investor sophistication as a primary regulatory factor rather than simply inferring it from how much someone invests.
Global standards and comparative jurisdictions
To judge India’s turn towards accreditation, it helps to compare how other jurisdictions define and manage “accredited” or “sophisticated” investors. The U.S. model is perhaps the most influential. Under Rule 501 of Regulation D under the Securities Act of 1933, the Securities and Exchange Commission (SEC) defines an accredited investor primarily by income and net-worth thresholds: individuals with a net worth over USD 1 million (excluding primary residence) or income over USD 200,000 (USD 300,000 with spouse) qualify, and this also includes certain professional certifications and categories of entities. Accredited status enables investors’ access to private placements under Reg D with relatively limited disclosure, reflecting a presumption that wealthy individuals and institutions can fend for themselves. The SEC has also in 2020 expanded the definition of “accredited investors” to include holders of certain professional credentials and “knowledgeable employees.”
The UK’s Financial Conduct Authority (FCA) historically allowed High Net Worth Individuals and Self-Certified Sophisticated Investors to be treated under a lighter-touch promotional regime as provided under Section 48 and Section 50A of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, but it moved to tighten these exemptions around 2023-2024 to curb misuse and ensure clarity around financial promotions. Reforms include removing some self-certification waivers and introducing a Financial Promotion Gateway under the Financial Services and Markets Act 2023 to tighten controls on who can approve financial promotions. The FCA’s changes reflect caution that wealthy investors can be allowed into complex products, but only if the checks and safeguards around them are genuinely robust.
Singapore’s Monetary Authority (MAS) uses an opt-in accredited framework, in which investors must actively elect accredited status and meet thresholds (income, financial assets or net personal assets) (Section 4A of the Securities and Futures Act 2001), and intermediaries are required to ensure investors understand which protections they are giving up (Section 4A(4) of the Securities and Futures Act 2001). Singapore’s model privileges informed choice and places a compliance burden on managers to obtain explicit opt-ins.
India’s proposed AI Funds framework borrows from these models but differs in emphasis. The U.S. model is wealth-centric and permissive; the UK has moved to constrain promotional exemptions; Singapore insists on explicit opt-in and clearer intermediary duties. SEBI’s proposal sits somewhere between these: it recognizes financial capacity via objective thresholds and intends to simplify accreditation processes, while also retaining broader market-integrity duties (like anti-fraud, conflict mitigation and systemic risk safeguards). Where India should pay heed is to Singapore’s opt-in discipline and the FCA’s experience in tightening when exemptions are misused, the lesson being that lighter rules require stronger processes around consent, verification and ongoing oversight.
Risks, trade-offs, and implications for India’s private capital markets
AI Funds are attractive because they cut compliance costs for managers, speed up product launches and allow more customised structures, all of which could help grow India’s private-capital market and attract more cross-border investments. Yet three interlocking risks demand deliberate mitigation: accreditation reliability, regulatory arbitrage, and governance concentration and accountability.
Accreditation Reliability: The proposed SEBI policy assumes that the ability to bear financial loss (wealth/income) equates to the ability to evaluate complex structures. That correlation is imperfect. Wealthy investors are heterogeneous in capability; some possess the financial literacy and advisory networks to evaluate opaque strategies, while others may not. SEBI mitigates this by requiring accredited investors to provide undertakings acknowledging limited oversight, but such disclaimers are a weak substitute for real evaluative capacity. A better guardrail would be a two-tier accreditation that factors in demonstrable investing experience or requires periodic reassessments, and an opt-in protocol (like Singapore’s) where intermediaries must document that clients understood the trade-offs.
Regulatory Arbitrage: If AI Funds become the default route for managers seeking relaxed rules, the standard AIF regime could atrophy. Managers may re-label schemes or design structures to attract accredited investors in name while still selling complex risk to those who do not fully grasp it. The transitional coexistence of commitment-based and accreditation-based schemes may exacerbate this risk, producing migration flows that erode investor protections. The current regime shows how easily thresholds can be gamed through inflated commitments, revealing the fragility of such benchmarks. To contain arbitrage, SEBI should make the benefits of AI-only status proportionate to genuine sophistication.
Governance Concentration and Accountability: Allowing managers to assume trustee-like responsibilities streamlines operations but concentrates power. Trustees often serve as an independent check; if those duties are shifted, contractual and enforcement safeguards must be ironclad. Exempting National Institute of Securities Markets certification for investment teams reduces an entry barrier but removes a standardized assurance of competence. SEBI could tie such exemptions to investor composition, for example, allow certification waivers only for funds whose entire investor base consists of institutional AIs or regulated entities that themselves have fiduciary oversight capabilities. Otherwise, the market risks weaker oversight with fewer external checks.
Economically, AI Funds could unlock new capital flows, especially if India aligns its accreditation framework with global norms. Institutional and family-office capital that today prefers Singapore or the U.S. might find India more accessible if fund terms are negotiable and compliance costs lower. But there are real reputational risks: a couple of high-profile governance failures in lightly regulated AI Funds could scare off foreign capital and stall the industry’s growth. SEBI will need to strike a balance on transparency, with focused disclosures, solid accreditation-checks and quick, decisive action on breaches.
Finally, there is a normative question: do we endorse an “exclusivity club” of wealthy investors? Markets benefit from depth, but depth should not come at the cost of concentrated opportunity. Policymakers must balance market efficiency with equitable access. One practical approach is phased liberalization tied to expanding the accredited pool through financial education, reducing accreditation friction, and enabling co-investment vehicles that allow non-AIs limited, supervised participation in certain growth segments.
Way Forward
SEBI’s AI Funds proposal is a consequential pivot toward a sophistication-based regulatory design. It promises big upsides like more innovation, efficiency and closer alignment with global fund hubs, but also brings risks like weak accreditation, regulatory arbitrage and too much power concentrated in a few hands. The smart path is the cautious one SEBI has proposed: gradualism, clear opt-in and verification protocols, conditional relaxations, and a strong supervisory backstop. If SEBI combines liberalisation with disciplined oversight by borrowing Singapore’s opt-in clarity, the FCA’s lessons on tightening misuse, and the U.S.’s experience on wealth-based access, India could have a mature AI Fund regime that fosters capital formation without sacrificing investor protection. The consultation period is the test: how stakeholders respond, and how SEBI integrates those responses into enforceable design, will decide whether AI Funds become a milestone of market maturity or a blueprint for regulatory regret.
– Vanshika Sharma & Divyanshu Kumar