Emerging Trends in AIFs: Key Regulatory Developments in FY 2025–26

The Alternative Investment Fund (AIF)ecosystem is moving towards greater institutionalisation and regulatory maturity. SEBI’s notifications and amendments in FY 2025–26 is set to impact fund operations, governance, and structuring in FY 2026–27, reflecting a shift towards differentiated regulation, stronger governance, and professionalised fund management

Key regulatory developments include:

·       Introduction of Accredited Investors (AI) only schemes and enhanced flexibilities for Large Value Funds (LVFs)

·       Formalisation of co-investment structures within the AIF framework

·       Mandatory onboarding of Accredited Investors for Angel Funds

·       Strengthening of compliance capability at the Fund manager level

·       Mandatory digital accessibility requirements for regulated entities

1) Introduction of Accredited Investors (AI) only schemes and enhanced flexibilities for Large Value Funds (LVFs):

SEBI has strengthened the AIF framework by permitting AI-only schemes exclusively for Accredited Investors and within which Large Value Funds (LVFs) operate as a specialised subset. An AI-only fund is one where all investors (other than the manager/sponsor and their employees or directors) are Accredited Investors, while an LVF is an AI-only AIF in which each investor commits at least ₹25 crore, reflecting higher investor sophistication and risk appetite.

·       Reduced investor-protection compliance: AI-only schemes benefit from lighter regulatory requirements due to investor sophistication.

·       Key team qualification relaxed: Professional certification under Regulation 4(g)(i) not required for AI-only funds.

·       Pari-passu flexibility: Exemption from strict pari-passu norms extended to all AI-only funds, enablingdifferential rights via side letters.

·       Investor count relief: Accredited Investors excluded from the 1,000-investor cap for all AIF schemes.

·       Extended tenure: AI-only funds permitted tenure extension of up to 5 years, inclusive of pre-conversion extensions.

·       Continuity of AI status: Accredited Investor status at onboarding continues for the entire scheme tenure.

·       Governance simplification: Trustee obligations shifted to the manager for AI-only funds.

Further, SEBI has exempted LVFs from the standard Placement Memorandum (PPM) template and the annual auditof PPM terms, without requiring specific investor waivers, significantly easing compliance requirements.

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2) Formalisation of Co-investment Structures

Another key development is the formalisation of co-investment structures within the AIF framework.

AIFs frequently participate in transactions where certain LPs wish to invest additional capital alongside the fund. Historically, such co-investmentswere executed outside the AIF structure—typically through separate vehicles or Portfolio Management Services (PMS) accounts—due to regulatory limitations.

To address this, regulators now permit Category I and Category IIAIFs to facilitate co-investments through a dedicated Co-Investment Vehicle (CIV) within the AIF framework itself. This facility is available only to accredited investors of the same AIF scheme.

Further, an investor’s co-investment in an investee company through CIV sis capped at three times the investor’s contribution made through the main AIF scheme in that investee company.

3) Overhaul of Angel Fund Regulations

Angel Funds have also undergone a comprehensive regulatory over haulaimed at improving governance, reducing ambiguity and strengthening investorprotection. Key changes include:

1.     Accredited Investors only: Angel Funds restricted to onboarding Accredited Investors.

2.     Deal size flexibility: Investment per company allowed from ₹10 lakh to₹25 crore.

3.     First close threshold: Minimum 5 Accredited Investors required within 12 months of SEBI approval.

4.     Entry barriers lowered: Minimum corpus and minimum investor commitment removed (Sept 2025).

5.     Structural simplification: No separate schemes per investment; SEBI term sheet filing removed (internal records to be maintained).

6.     Skin-in-the-game revised: Sponsor/manager to invest 0.5% per deal or ₹50,000 whichever is higher, shifting from fund-level to deal-level alignment.

7.     PPM audit relief: Annual audit required only if total investments exceed ₹100 crore.

4) Strengthening Governance and Compliance Capability

Alongside fund structuring reforms, the Securities and Exchange Board of India (SEBI) has strengthened governance expectation sat the AIF manager level by mandating that Compliance Officers obtain the NISM Series III-C (Securities Intermediaries Compliance – Fund) Certification. The requirement becomes effective January 1, 2027, requiring managers to either upskill existing personnel or onboard certified professionals.

5) Digital Accessibility Requirements

SEBI has mandated digital accessibility compliance for all regulated entities under the Rights of Persons with Disabilities framework. Managers must identify investor-facing digital platforms and shall submit a status of their readiness and compliance to the accessibility requirements for each of their digital platforms latest by March 31, 2026.

The REs reporting to SEBI shall share the status on the email id digital_acc@sebi.gov.in.

Below is the format in which reporting to be made:

Conclusion:

Taken together, these reforms signal a maturing regulatory environment that balance sinvestor protection with operational flexibility. Over the medium term, thesemeasures should enhance investor confidence and support the sustainable growthof India’s alternative investment ecosystem.