Lack of Protections for Sophistication: An Analysis of SEBI’s Large Value Fund Reform, and the Limits of Accreditation-Based Regulation
Abstract
India’s alternative investment fund (AIF) framework is undergoing a significant shift in its regulatory approach since the AIF Regulation in 2012. Through a series of consultation papers and policy initiatives between 2023 and 2025, the Securities and Exchange Board of India (SEBI) has gradually progressed from a uniform, investment-size driven model of regulation toward a framework that places great emphasis on investor sophistication and contractual autonomy. Central to this transition are Accredited Investor-only schemes and the restructuring of the Large Value Fund (LVF) framework. This article argues that while SEBI’s investor sophistication approach is sound, it relies on an underdeveloped conception of investor accreditation. While, each proposed norms carry defensible sense from regulatory perspective such as reducing investment threshold, exemption of LVFs from audit, and relaxing certification requirement. Viewed together, they create overlapping gaps that cannot be adequately addressed by either accreditation or contractual freedom, such as, secondary market disclosure, systemic risk oversight, and documentary accountability. Upon drawing comparative analysis on framework from United States, United Kingdom, and Singapore, this article concludes that long-term operability of sophistication-based regulation will depend on SEBI’s ability to address gaps arising from their cumulative interaction, not necessarily on internal coherence.
I. Introduction
Alternative Investment Funds were initially envisaged as privately pooled investment vehicles designed to cater to sophisticated investors capable of independently assessing risk. The underlying premise behind SEBI’s recalibration of LVF: sophisticated investors do not require the same level of safeguards as retail participants, and therefore, the regulatory framework should show the difference. This article does not dispute that premise, but assert that SEBI’s implementation has been incomplete. Recent reforms mark a deliberate policy pivot, with SEBI now aiming to calibrate regulatory intensity based on the sophistication of the investor base rather than relying solely on the quantum of investment. While accreditation screens for financial capacity. It does not protect behavioral, informational, and systemic conditions that regulatory safeguards have traditionally served to protect. The AIF framework was not intended to govern retail investors; however SEBI, driven by concerns regarding uniformity, but were at odds with foundational nature of AIF framework; and hence, layered governance, disclosure, and compliance obligations onto it over time. The 2023-25 reforms proposed by SEBI are an attempt to resolve this issue, by relying on accreditation as a substitute across all those multi-dimensions altogether, SEBI risks not simplifying the framework but hollowing it out. The following sections analyse each reform, and discuss comparative practice in the United States, United Kingdom, and Singapore to identify structural gaps and address their proposed targeted interventions.
II. Evolution of the Accredited Investor and LVF Framework
The accredited investor regime, introduced in 2021, was founded on the premise that certain investors possess sufficient financial capacity, expertise, and risk appetite to engage with complex financial products under a comparatively lighter regulatory framework. This carried an implicit presumption that accreditation would capture total range of investor competencies previously protected by regulatory safeguard; being put to test at scale through 2025 reforms. Building on this premise, LVFs were subsequently introduced as a specialised subset of AIFs restricted exclusively to accredited investors committing substantially higher levels of capital. From inception, LVFs benefitted from regulatory flexibility, including relaxed diversification norms and expedited scheme launch timelines. The requirement for a high minimum ticket size served as an additional constraint, allowing only those with substantial financial exposure, and therefore providing a greater incentive for independent due diligence. The 2025 proposals mark a shift in basic structure, previous reforms mostly provided marginal flexibility, while current proposals actively dismantle structural safeguards that provided accountability measures within which LVF operated flexibly.
III. Core Regulatory Reforms
A. Reduction of Minimum Investment Threshold
SEBI’s proposal to lower the minimum investment per investor in an LVF from INR 70 crore to INR 25 crore represents one of the most significant elements of the current reform agenda. The regulator justifies this shift by asserting that investor accreditation, rather than the ticket size of the investment, serves as a more accurate proxy for investor sophistication. By reducing the threshold, the framework is expected to facilitate greater participation by domestic institutional investors, family offices, and corporate treasuries that are constrained by internal exposure limits. While intuitive, this reasoning, warrants scrutiny. Monetary threshold primarily serves two main functions: First, to help screen competent investors capable of investing. Second, to ensure investors have sufficient skin-in-the-game to perform necessary due diligence and make informed investment decisions. Accreditation only serves the former. However, without replacing loss-absorption function of high tickets sizes, when decoupled from accreditation, SEBI faces risk of admitting a class of investors that may be capable of meeting technical requirements for accreditation, but behaviorally dependent on regulatory backstops, exactly the type this framework was designed to exclude. The gap is addressable: a self certification requirement for sub-INR 70 crore commitment positively certify independent due diligence, as required under Rule 506(b) of Regulation D in the United States.
B. Removal of the Investor Cap
The proposal to eliminate the statutory cap on the number of investors in an LVF scheme is justified by SEBI on the basis that this cap is irrelevant when accreditation serves as primary gatekeeping criterion, and SEBI’s broader intention of aligning India’s regulatory framework with global private placement norms. Given that LVFs admit only accredited investors who commit significant capital, SEBI views the numerical cap as functionally redundant. However, this conflates two different regulatory purpose. Investor caps did not simply screen for investor sophistication, but rather ensure they preserve private character of fund by limiting coordination issues, restricting secondary market formation, and prevent regulatory reclassification as a public offering. Their removal risks blurring the distinction between private funds and quasi-public investment products, potentially giving rise to challenges in regulatory oversight as well as in coordinating interests of a larger and more dispersed investor base. Without a definitional reference that differentiate LVFs from quasi-public pooled vehicles, removal of the cap risks resulting in “regulatory drift”, as defined by UK Financial Conduct Authority, where vehicles created initially with intent of “sophisticated” bilateral negotiation gradually developing economic attributes of retail- like products but lack of same level of oversight. SEBI may consider a ceiling in terms of assets under management or requirement of re-accreditation at established intervals, to preserve private fund character of LVFs.
C. Exemptions from PPM Standardisation and Audit
SEBI has further proposed exempting LVFs from compliance with the standardised private placement memorandum template, and the mandatory requirement of conducting annual PPM audit, on basis that sophisticated investors can negotiate bespoke disclosure agreements. This reform underscores a decisive shift from ex ante, disclosure-based regulatory approach toward greater reliance on negotiated contractual arrangements between fund managers and sophisticated investors. Although the exemption may enhance operational efficiency, it raises concerns regarding potential informational asymmetries, particularly in the context of secondary market transactions and dispute resolution. Thus, this exemption is not merely an efficiency measure, but a structural gap capable of implicating secondary market participants at prejudicial disadvantage. SEBI’s 2024 working group report, documents the growth of secondary AIF markets in India, confirming that secondary transfers have become a material feature of LVF investment cycles, hence not just a hypothetical concern. Accordingly, SEBI should either (i) limit PPM exemption to primary subscriptions, or (ii) require standard disclosure document for secondary transfers, as required under Singapore’s MAS framework governing accredited investors for collective investment schemes.
D. Relaxation of Professional Certification Requirements
The proposed exemption of LVF managers from mandatory NISM certification requirements reflects SEBI’s assessment that accredited investors are capable of independently evaluating managerial competence without the need for regulatory inter-mediation. Certification requirements in financial regulation serve a dual function, they extend beyond investor protection, and serving broader systemic objectives by establishing baseline competency standards to protect market integrity independently of any individual investor’s sophistication. The latter function is what regulatory theorists derived the term as “public goods” dimension of professional licensing, which cannot be contracted away by private agreement between fund manager and an accredited investor. The relaxation therefore represents a calculated trade-off between enhancing regulatory efficiency and preserving institutional credibility within the alternative investment ecosystem. SEBI’s proposal focuses on the “private” dimension of certification, but remains silent on “systemic” implications of certification. A more nuanced approach would be to replace NISM certification with demonstration of “threshold of experience”, standard set by UK FCA’s “appropriate experience” under AIFMD implementation, instead of complete abolition of competency requirement.
E. Investment Committee Liability
SEBI’s proposal to dispense the requirement of obtaining investor waivers to limit the statutory liability of investment committee members in LVFs is presented as a governance simplification measure. Although cumbersome, this reform concentrates on accountability of the fund manager and key managerial personnel and their liability, which may contribute to more streamlined governance structures, creating a documented record of informed consent significant in context of subsequent dispute resolution. SEBI aims to concentrate governance on fund manager, while also eliminating one of the more visible form of investor recourse, by removing waiver requirement without alternative form of accountability mechanism. This is especially concerning due to proposal of exclusion of LVFs from mandatory PPM audit, adding together to degradation of documented evidence. SEBI may consider implementing an investment committee charter as a more structural form of accountability, and adopt minority investor protections.
IV. Tenure, Liquidation, and Treatment of Unliquidated Assets
SEBI’s broader reform agenda includes proposals permitting AIFs to transfer unliquidated investments into a successor scheme upon the expiry of a fund’s tenure, subject to investor consent and market-tested valuation. This mechanism seeks to accommodate the realities of long-gestation investments while ensuring that valuation practices and performance disclosures remain credible. Requirement of the bid based price discovery through bidding mechanism indicates that all investors, regardless of their sophistication, cannot negotiate valuation of an investment entirely among themselves, without some minimum floor decided by a regulator. This serves as a direct conflict with the overall reform agenda, in other words, sophistication based regulation may be appropriate at the time of investment, but needs additional mechanisms to ensure they remain credible and sustain over the life of an investment.
V. Conversion of Existing AIFs into LVFs
The proposed opt-in mechanism that permits existing AIF schemes to convert into LVFs, contingent upon unanimous investor consent, is intended to prevent regulatory arbitrage and promote parity within the regulatory framework. However, the unanimity requirement puts a burden on schemes with widely distributed investor bases, and is unlikely to be able to meet it, after all a dissenting investor may block conversion for all investors in the entire scheme.
VI. Unresolved Issues and Regulatory Gaps
Despite the breadth of the proposed reforms, several critical issues remain insufficiently addressed. In particular, SEBI has not clearly delineated the continuing scope of anti-money laundering, reporting, and systemic risk obligations applicable to LVFs following the proposed exemptions. The framework also remains silent on disclosure standards governing secondary transfers of LVF units. Taken together, these omissions suggest that an unqualified reliance on investor sophistication may leave important dimensions of market integrity insufficiently safeguarded. SEBI should explore whether super-majority threshold in addition to disclosure obligations for converting schemes would help strike balance between investor protection and practical utility. The current standard risks making mechanism available for use, but inaccessible in practice. These gaps, when read alongside overlapping accountability gaps identified in section III, imply that these reforms impact on market has not been adequately assessed.
VII. Conclusion
SEBI’s recalibration of the AIF regulatory framework represents a clear and deliberate endorsement of sophistication based regulation. As has been argued by this article, while the direction is sound, the execution remains incomplete. Each proposed reforms when considered in conjunction, leave considerable gaps in secondary markets disclosure, systemic risk oversight, and documentary accountability, that cannot be addressed through accreditation alone. By placing greater emphasis on investor accreditation over prescriptive regulatory safeguards, the regulator aims to deepen private capital markets and align Indian practice with global norms. The long-term viability of this approach, however, will depend on SEBI’s ability to ensure that reduced regulatory oversight does not result in diminished transparency or heightened systemic risk. Sophistication is not a binary concept, but context-specific. While an investor may understand and process entry-level risk, but not possess information in secondary markets. While, manager exempt from certification may still pose systemic risk to overall ecosystem. SEBI therefore must develop additional architecture, secondary level disclosure standards, AUM-based threshold, and investment committee charters, to make sophistication-based regulation more sustainable, since without additional architecture, it does not empower the sophisticated investor, and simply makes them less protected.
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