SEBI AIF Consultation Paper 2026 — Investor Consent, 75% Threshold and Related Party Rules
Consultation paper on rationalizing investor consent and conflicted transactions under SEBI (Alternative Investment Funds) Regulations, 2012.
Issued: June 30, 2026. Status: Proposed — not yet in force.
Public comments invited until July 21, 2026 via SEBI's online web-based comment form.
Why SEBI Issued This Consultation Paper
Alternative Investment Funds operate on a governance model that leans heavily on investor consent for material decisions — fund strategy changes, tenure extensions, leverage, and especially transactions involving potential conflicts of interest. The AIF Regulations prescribe different approval thresholds for different matters, but until now have offered no clarity on how that consent should actually be obtained or counted.
Over time, SEBI observed two distinct gaps. First, AIFs across the industry have adopted wildly different voting methodologies — some treat silence as approval, some count only active votes, and some even apply different rules to different investors within the same scheme. This has led to disputes and a lack of comparability between funds claiming the same "75% approval." Second, the definition of "associate" used to flag conflicted transactions is narrow — tied to a 15% shareholding threshold — meaning many genuinely conflicted transactions (such as investments in companies controlled by a director's relatives) currently fall outside the investor-consent requirement entirely.
This consultation paper, recommended by the Alternative Investment Policy Advisory Committee (AIPAC), proposes to fix both problems: standardizing how consent is sought and counted, unifying approval thresholds at 75%, and broadening the conflicted-transaction net by adopting the Companies Act's "related party" definition in place of "associate."
Part A — Standardizing the Investor Consent Process
The Problem: Diverse and Inconsistent Voting Practices
SEBI received industry representations flagging two recurring problems in obtaining investor consent: lack of response from a dispersed investor base making it hard to reach approval thresholds, and selective non-voting, where investors deliberately withhold votes to extract concessions such as reduced fees or favourable co-investment terms. SEBI also found that some funds apply deemed consent to most investors but allow a few specific investors to insist on explicit approval only — creating differential treatment within the same scheme.
A company, LLP, or body corporate in which a director, trustee, partner, Sponsor, or Manager of the AIF — or a director/partner of the Manager or Sponsor — holds, individually or collectively, more than 15% of paid-up equity share capital or partnership interest.
The Three Proposed Consent Methodologies
SEBI proposes letting each AIF choose ONE of the following three methodologies, applied consistently at the fund/scheme level. The illustrative example used throughout the paper assumes an AIF with 100 investors, each holding 1% of the fund by value, where 30 vote in favour, 10 vote against, and 60 abstain.
Non-response within the voting timeline is treated as approval. Only an explicit vote against counts as dissent.
Calculation: 30 (in favour) + 60 (deemed approved) ÷ 100 (total fund value) = 90% approval
SEBI's own paper flags the downside: even if 20% of investors by value explicitly vote against a proposal — and no one else casts an explicit vote — the proposal would still be deemed approved, because the remaining 80% who said nothing count as consent.
Only votes actually cast count. Abstentions are excluded entirely — neither for nor against. Mirrors voting practices in mutual funds, listed companies, REITs, and InvITs.
Calculation: 30 (in favour) ÷ 40 (votes actually cast) = 75% approval
Only explicit votes in favour count, measured against the total investor value of the fund — not just those who voted. The strictest of the three methods.
Calculation: 30 (in favour) ÷ 100 (total fund value) = 30% approval
Comparison of the Same Vote Outcome Under Each Method
Conditions Attached to the Chosen Methodology
- The chosen methodology, along with related policy/procedure and associated risks, must be disclosed in the AIF's PPM
- Disclosure must cover the manner of communication, conduct of meetings/votes, notice period/voting timeline, and reminder process
- The same methodology must be applied consistently at the scheme/fund level — it cannot differ between investors of the same scheme
- All investors must be given the opportunity to vote on every proposal requiring consent
- Disclosures to investors must include the proposal with rationale, the triggering regulatory/fund-document provision, the approval threshold, and the treatment of non-response
- For Deemed Consent specifically, the response timeline must be disclosed and must be uniform across all investors
Manager's Responsibilities
- Ensure transparency, adherence to the laid-down policy, and fair access to all investors in the consent process
- Respond to investor queries regarding any proposal or the consent methodology within a reasonable timeframe
- Maintain records of all communications — notices, reminders, meeting records, and votes
Existing schemes will be allowed to continue with their currently adopted consent methodologies. The proposed framework, once finalized, would take effect prospectively only — it will not be applied retroactively to consent processes already underway or completed.
Part B — Standardizing the Approval Threshold at 75%
AIF Regulations currently prescribe a mix of two-thirds and 75% approval thresholds across different provisions, without any clear principle distinguishing why one matter requires a lower bar than another. SEBI proposes resolving this inconsistency by moving all two-thirds thresholds up to a uniform 75% by value, reasoning that a higher threshold protects minority dissenting investors who might otherwise be outvoted by a bare majority.
Provisions Where the Threshold Is Proposed to Change
A new Regulation 20(25) is also proposed to be inserted under the "General obligations" heading, requiring managers to obtain investor approval "in the manner as may be specified by the Board" — with the detailed methodology conditions (Proposals 1–6) to be issued separately via circular.
Beyond the AIF Regulations provisions listed above, three Master Circular clauses also carry investor consent thresholds that fall within the proposed standardization: Clause 2.5.5 (exit rights for dissenting investors on material changes, currently 75%), Clause 8.2 (AIF investing in units of other AIFs if not disclosed upfront in PPM, currently two-thirds — a candidate for the move to 75%), and Clause 23.2.1 (in-specie distribution outside the mandatory Regulation 29(8) process, currently 75%). The consultation paper confirms that investor consent provisions in circulars will be "modified suitably" in line with the proposed amendments.
Part C — Replacing "Associate" with "Related Party" for Conflicted Transactions
The Gap in the Current Framework
SEBI's supervisory experience identified several genuinely conflicted transactions that escape investor-consent requirements purely because they fall outside the narrow 15%-shareholding "associate" test. The consultation paper specifically calls out four illustrative scenarios that currently slip through:
- AIF investment in a company whose director also directs the AIF's manager/sponsor
- AIF investment in a company controlled by the immediate relatives of a manager/sponsor director, even where the director's own stake is under 15%
- AIF investment in a company whose major shareholder also holds a majority stake in the AIF's manager/sponsor
- AIF buying/selling investments from a relative of the manager/sponsor or their directors/partners
The Proposed Solution: Borrow "Related Party" from the Companies Act
After studying comparable provisions across SEBI (LODR), SEBI (Portfolio Managers), InvIT, REIT, and Mutual Fund Regulations, SEBI found that "related party" — largely tracking the Companies Act, 2013 definition — is the dominant reference point used elsewhere for conflicted/connected-party transactions. SEBI proposes adopting the same approach for AIFs.
In relation to the manager or sponsor of an AIF, "related party" would include: a relative; a director, partner, or key managerial personnel (or their relative); a firm in which such persons are partners; a private company where they are a member/director; a public company where they hold a directorship or, with relatives, more than 2% paid-up capital; any entity habitually acting on their instructions (or vice versa, excluding professional advice); holding/subsidiary/associate companies of the sponsor/manager; and any other person specified by SEBI.
Scope: Where "Related Party" Applies vs. Where "Associate" Stays
- Regulation 15(1)(e) — Investment in associates/related parties of manager/sponsor
- Regulation 15(1)(ea) — Buying/selling investments from/to related parties
- Regulation 19F(4) — Angel Fund prohibition on investing in related parties
- Regulation 19M — Special Situation Fund prohibition on related-party investment
- Regulation 22(b) — Disclosure of fees charged by related parties to AIF/investee company
- PPM disclosure circular requirement — AIFs investing in units of other AIFs must disclose whether investments are made in funds managed/sponsored by related parties of the Manager/Sponsor
- Regulation 15(1)(e) pre-investment approval clarification — explicit confirmation that approval is required prior to every investment in a related party of the manager/sponsor
Provisions not directly tied to conflicted transactions — such as Form A disciplinary history disclosures, custodian independence conditions, merchant banker independence, and independent valuer eligibility — will continue to use "associate" as the broader scope of "related party" is not considered necessary there.
The "related party" test is proposed to apply only to related parties of the manager or sponsor. Related parties of the trustee, Board of Directors, or designated partners of the AIF itself are proposed to be excluded from the conflicted-transaction net, in recognition of their limited day-to-day role in investment decisions.
Summary of All 8 Proposals
Action Checklist for AIF Managers & Compliance Teams
SEBI AIF Consultation Paper — What It Means for Fund Managers and PPM Drafting
The most consequential proposal here is not the threshold harmonization but the "related party" substitution. The 15% "associate" test has long been criticised as easily structured around — a director holding 14.9% in an investee company, or routing an investment through a relative's holding company, currently escapes investor consent entirely. By importing the Companies Act's broader "related party" definition — which captures relatives, key managerial personnel, and entities accustomed to act on a director's instructions — SEBI is effectively closing a loophole that sophisticated sponsors have had years to exploit.
The flexibility to choose among three consent methodologies is a pragmatic response to genuine operational friction, but it also creates a new disclosure burden. Funds adopting Deemed Consent in particular will need airtight documentation of communication timelines and reminder cadence, since the entire validity of "approval" under that method rests on investors having had genuine, demonstrable notice. Annexure D's proposed Regulation 20(25) leaves the detailed methodology conditions — covering notice periods, reminders, and disclosure formats — to be specified separately by SEBI, likely via a follow-up circular. Funds should not wait for that circular to start tightening their own internal communication and record-keeping practices, since Proposal 4's record-keeping requirement is already clearly signalled.
For PPM drafting teams, this consultation paper signals a near-certain near-term redrafting exercise. Even funds that already use a "present and voting" style approach will need explicit PPM language naming the methodology, disclosing the non-response treatment, and committing to applying it consistently — none of which is typically spelled out with this level of granularity in current market-standard PPMs.
Practitioners should also watch for how SEBI treats Category III AIFs' leverage consent under Regulation 18(c), where no fixed percentage currently exists — the proposed change merely substitutes "approval" for "consent" without prescribing a number, leaving room for further clarification. AIPAC's endorsement of all eight proposals signals SEBI is likely to proceed toward formal amendment, though the consultation paper gives no indication of a timeline beyond the July 21, 2026 comment deadline. Funds raising capital or structuring conflicted transactions in the interim should track the comment process closely and build documentation flexibility into current PPMs rather than assume the existing framework will hold indefinitely.
Consultation paper on rationalizing the requirement of obtaining investor consent and ambit of conflicted transactions requiring investor consent under SEBI (Alternative Investment Funds) Regulations, 2012
Issued by: Securities and Exchange Board of India | Issued on: June 30, 2026
Comments to be submitted via: SEBI public comments web form, on or before July 21, 2026
