SEBI's accredited-investor-only AIF schemes: the light-touch route built for large-value investors

On 8 December 2025 the Securities and Exchange Board of India issued circular HO/19/34/11(5)2025-AFD-POD1/I/188/2025, setting out how an existing alternative investment fund can move itself onto a lighter rulebook. It is the operating manual for a change made three weeks earlier: the SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025 took effect on 19 November 2025 and created a scheme category open only to accredited investors.

One label needs clearing up first. SEBI requires every new scheme in this category to end its name with the words "AI only fund", and the large-value variant to end with "LVF". Here AI is SEBI's shorthand for Accredited Investor — a person or entity that has cleared the income or net-worth tests in Regulation 2(1)(ab) of the AIF Regulations and holds a certificate of accreditation from a recognised accreditation agency. Nothing in the December 2025 circular concerns technology; the two letters are a category name.

India now runs two parallel rulebooks for the same product. A standard scheme of an alternative investment fund cannot accept an investment below Rs 1 crore under Regulation 10(c), nor carry more than 1,000 investors under Regulation 10(f). A scheme in which every investor is accredited is released from both limits, and from a list of investor-protection requirements written for people who had never sat an accreditation test.

What SEBI counts as an Accredited Investor

Regulation 2(1)(ab) sets the qualifying tests, and they are purely financial. The certificate is issued by an accreditation agency recognised by the Board, and the thresholds differ by applicant type.

A second group is accredited by status rather than certificate. The proviso to Regulation 2(1)(ab) deems the Central and State Governments, developmental agencies and government-established funds, qualified institutional buyers under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, Category I foreign portfolio investors, sovereign wealth funds and multilateral agencies to be accredited investors without a certificate.

Paragraph 5 of the December 2025 circular adds a durability rule. If an investor is accredited when on-boarded, that status is reckoned through the life of the scheme even if it lapses in the interim. A promoter who qualifies on a Rs 2 crore income in the year of commitment does not cost the scheme its lighter treatment if that income falls in year four.

Side-by-Side Comparison: the accredited-investor-only route against a standard AIF scheme

The Third Amendment changed six provisions. Read with the reliefs Large Value Funds already had, the routes now diverge on entry size, investor count, tenure, concentration and governance.

The largest change of 19 November 2025 sits in a one-word substitution. In Regulation 2(1)(pa) the word "seventy" was replaced by "twenty-five", cutting the per-investor commitment that defines a Large Value Fund from Rs 70 crore to Rs 25 crore. A structure that previously needed a Rs 70 crore ticket from every investor now needs Rs 25 crore, bringing the lightest-touch category in the AIF rulebook within reach of family offices that could never have written the older cheque.

The governance trade deserves slow reading. Regulation 20(24), inserted by the Third Amendment, moves the trustee's responsibilities and obligations onto the manager for an Accredited-Investor-only fund. The trustee's job is to sit between the manager and the investors, so folding those duties into the manager removes an independent check, not merely a filing. Regulation 20(8), making investment committee members responsible for compliance with the fund's own policies, also stops applying to a Large Value Fund.

Two further reliefs come from the circular itself. Paragraph 7 exempts Large Value Funds from the standard placement memorandum template and the annual audit of its terms, without any investor waiver, by inserting clause 2.4.4(iii) into Chapter 2 of the Master Circular for AIFs dated 7 May 2024. Paragraph 8 keeps one thread of oversight: the Compliance Test Report prepared under Chapter 15 of that Master Circular must now cover this circular too.

How an existing scheme migrates

A fund launched before 19 November 2025 is not converted automatically. Paragraph 4 permits eligible existing schemes to migrate only after positive consent from all the investors. That is unanimity, not a majority, and it is a real hurdle for a scheme with dozens of limited partners.

Three mechanical steps follow. The scheme name must carry "AI only fund" or "LVF"; the conversion and name change must reach SEBI's AIF reporting desk by email within 15 days; and the name change must reach the depositories within 15 days. Paragraph 6 closes a tenure loophole: the maximum extension for an Accredited-Investor-only scheme is five years inclusive of any extension taken before conversion, so a fund cannot bank two years then convert for five more.

The circular came into force with immediate effect on 8 December 2025, issued under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with Regulations 2(1)(ac), 2(1)(pa) and 36 of the AIF Regulations.

Tax Treatment

Accreditation changes SEBI's rulebook. It changes nothing in the Income-tax Act, 1961, and that is the point most readers get wrong. Tax character still turns on the fund's registration category, not on who is in it.

Section 115UB governs what the Act calls an investment fund. Explanation 1(a) defines that as a fund established in India as a trust, company, limited liability partnership or body corporate granted registration as a Category I or Category II AIF under the SEBI (AIF) Regulations, 2012. Category III schemes fall outside the definition, so the Section 115UB pass-through does not reach them.

Because Section 115UB(3) preserves character, the rates that apply to a direct holding apply to the same gain routed through a Category I or II fund. Listed equity gains held long term are taxed at 12.5 per cent above the Rs 1.25 lakh annual exemption and short-term gains at 20 per cent, both effective from 23 July 2024. Property and gold gains are taxed at 12.5 per cent without indexation, with 20 per cent with indexation grandfathered for assets acquired before 23 July 2024. Our explainers on long-term capital gains and short-term capital gains set out the computation.

Two provisions in Section 115UB(2) cut against the investor. A business loss at fund level is carried forward by the fund under Chapter VI and ignored for pass-through, so it never reaches the unit holder's return. Any other loss is also ignored if it arose on a unit held under twelve months. Section 115UB(6) compounds this: tax can fall due on income the fund retained and never paid out, a cash-flow question any close-ended commitment must answer.

Who Should Pick Which

This section maps the routes against the rules, not against any reader's portfolio, and nothing here is a recommendation to commit money to a particular fund or scheme.

The accredited-investor-only route is built for capital that does not need SEBI's default protections. The bargain is visible in the regulations: the investor gives up the pari-passu guarantee of Regulation 20(22), the independent trustee contemplated before Regulation 20(24), investment committee accountability under Regulation 20(8) in a Large Value Fund, and the certification floor for the manager's key investment team in Regulation 4(g)(i). In exchange the scheme gets a 5-year extension window instead of 2, up to 50 per cent concentration in a single investee company for Category I and II, and no 30-day pre-launch filing.

The standard route keeps every one of those protections and asks for Rs 1 crore. For an investor who will not negotiate side letters or read a bespoke placement memorandum line by line, the Rs 1 crore floor and the 1,000-investor cap are not obstacles but the guardrails that make the product supervisable. An investor below the Regulation 2(1)(ab) thresholds has no choice here, and the Rs 25 crore Large Value Fund ticket is out of reach for all but institutions and the largest family offices.

The gap echoes SEBI's Rs 50 lakh gate on portfolio management services, where an entry threshold stands in as a proxy for sophistication. To model what a Rs 1 crore or Rs 25 crore commitment compounds to over a close-ended tenure, our lumpsum calculator and SIP calculator show the arithmetic before fees, which in an AIF are negotiated in fund documents. The distinction from a portfolio management service matters too: a PMS holds securities in the client's own name, while an AIF unit holder owns units in a pooled vehicle.

FAQ

Does AI in "AI only fund" have anything to do with technology?

No. In the SEBI (Alternative Investment Funds) Regulations, 2012, AI stands for Accredited Investor. Regulation 2(1)(ac), inserted on 19 November 2025, defines an Accredited Investors only fund as an AIF or scheme in which every investor other than the manager, sponsor, and employees or directors of the fund or manager is an accredited investor.

Can an accredited investor commit less than Rs 1 crore to an AIF?

Yes. Regulation 10(c) sets a Rs 1 crore floor, and Rs 25 lakh for employees and directors of the fund or manager, but a proviso states the clause does not apply to an accredited investor. The floor is disapplied by accreditation status, not by the scheme's category.

What is the minimum ticket for a Large Value Fund now?

Rs 25 crore. The Third Amendment replaced "seventy" with "twenty-five" in Regulation 2(1)(pa) with effect from 19 November 2025, so each investor in a Large Value Fund must be an accredited investor and must invest not less than Rs 25 crore.

Can my existing AIF scheme convert without my agreement?

No. Paragraph 4 of circular HO/19/34/11(5)2025-AFD-POD1/I/188/2025 dated 8 December 2025 requires positive consent from all the investors. The manager must then change the scheme name and report the conversion to SEBI and to the depositories within 15 days each.

Does moving to an AI only scheme change my tax bill?

No. Section 115UB applies to a fund registered as a Category I or Category II AIF, and the pass-through in Section 115UB(1) and character preservation in Section 115UB(3) turn on that registration, not on investor accreditation. Withholding under Section 194LBB stays at 10 per cent at credit or payment, whichever is earlier.

What protection do I give up in an accredited-investor-only scheme?

Four, on the face of the regulations: pari-passu rights under Regulation 20(22); trustee duties, shifted to the manager by Regulation 20(24); investment committee accountability under Regulation 20(8) in a Large Value Fund; and key investment team certification under Regulation 4(g)(i). A Large Value Fund also skips the 30-day pre-launch filing under Regulation 12(2).

This report is informational and is not investment advice or a recommendation to commit to any fund or scheme. Figures are drawn from the SEBI circular dated 8 December 2025, the SEBI (Alternative Investment Funds) Regulations, 2012 as last amended on 19 November 2025, and the Income-tax Act, 1961.