Summary: The Corporate Laws (Amendment) Bill, 2026 proposes a framework for specified trusts regulated by SEBI and IFSCA to convert into limited liability partnerships, including a proposed Section 57A and Fifth Schedule to the Limited Liability Partnership Act, 2008. The proposed Fifth Schedule, however, requires the consent of three-fourths of the investors without specifying whether the threshold is to be calculated by investor number or investment value. The article argues that this omission creates uncertainty because SEBI’s AIF framework has increasingly used value-based investor consent, including proposals concerning a 75 percent threshold by value. A headcount-based approach could produce materially different outcomes from a value-based approach where a small number of investors hold most of the fund’s capital. The article contrasts this issue with the dual-threshold mechanism under Section 230(6) of the Companies Act, 2013, which combines majority in number with three-fourths in value for schemes of arrangement. It argues that AIFs ordinarily comprise investors participating in a common investment structure and that conversion affects investors according to their economic exposure, making value-based voting more closely aligned with the proposed governance framework. The article therefore suggests that paragraph 4(a)(iv) should expressly require consent from investors holding at least three-fourths of the value of their investment. It also proposes that the value of each investor’s holding should be determined using the most recent SEBI-filed valuation and that non-responses should be addressed consistently with SEBI’s approach to AIF voting. The article concludes that these drafting clarifications could reduce uncertainty while retaining the broader objective of facilitating trust-to-LLP conversions.
Keywords – Alternative Investment Funds (AIFs), Trust-to-LLP Conversion, Investor Consent, SEBI, Corporate Laws (Amendment) Bill, 2026
Introduction
The Corporate Laws (Amendment) Bill, 2026 was introduced in the Lok Sabha on 23 March 2026. It is now being reviewed by a Joint Parliamentary Committee (JPC), which will examine the Bill line by line before sending it back for final approval in Parliament. Section 12 of the Bill provides Securities and Exchange Board of India (SEBI) and International Financial Services Centres Authority (IFSCA) regulated trusts to convert into limited liability partnerships (LLPs) with fewer regulatory hurdles. It also adds a new Section 57A and a Fifth Schedule to the Limited Liability Partnership Act, 2008. This move is widely seen as a positive reform for the Alternative Investment Fund (AIF) industry.
However, Paragraph 4(a)(iv) of the proposed Fifth Schedule requires only the consent of three-fourths of the investors of the trust. It does not say whether that consent should be measured by number or by value. This omission is also inconsistent with India’s broader approach to fund governance. Significantly, SEBI’s Consultation Paper dated 30 June 2026 proposes a uniform 75 percent value-based voting threshold across the AIF consent framework. If Paragraph 4(a)(iv) is not aligned with this standard before SEBI finalises the consultation, the same funds could become subject to two different voting thresholds for comparable structural decisions.
The Consent Default Problem
The Fifth Schedule’s wording omits “by value” entirely, leaving the reader to assume that the default is voting on a one investor, one vote basis. SEBI’s consistent practice is to specify “by value” when it intends to allow or require voting based on the economic substance of the votes, rather than according to the number of unit holders casting a vote. Examples of such requirements include the two-thirds by value for Venture Capital Funds (VCFs) re-registering as AIFs, and the 75 percent by value for an AIF to commence winding up or to make distributions of any unliquidated assets, as proposed in the April 2024 changes to Regulation 29(9). The June 2026 consultation paper proposes that voting decisions on almost all material matters of the AIF should be made by a 75 percent majority of the value of the investments. Paragraph 4(a)(iv) is different, in that it states: “three-fourths of the investors”. It does not specify “by value” or any other language that SEBI typically uses to specify that the value of the subscribed interests, rather than the number of investors, is to be used as the metric for determining a decision. If Parliament did not intend a headcount rule, the failure to include “by value” as SEBI does elsewhere appears to be a drafting issue that should be corrected. This is far from a minor drafting issue. Voting on one of the most important decisions affecting a fund’s legal structure, namely whether it should continue in its current form, should reflect the economic interests of investors in proportion to their investment.
How Vote Counting Changes the Result
Take an example in which there is a Category II AIF with 50 investors: five large investors put in 70 percent of the money, and the other 45 small investors share the remaining 30 percent. Under the headcount method for consent, if each person gets one vote, 38 small investors can approve a change even if the five large investors vote against the proposal, but those 38 together own only about 25.33 percent of the fund. But if votes are counted for consent by how much money each investor put in (by value method), the same 38 votes would fail to meet the threshold because they do not reach the 75 percent value threshold. It indicates that the result is solely dependent on the method used to count the votes.
The majority of Category II debt and private equity funds rely on a lengthy tail of smaller limited partners (LPs) supporting concentrated capital from a small number of major anchor investors. Tax treatment, liability exposure, payout priority, and governance rights are all significantly changed by conversion. Votes in these funds should be weighted according to the value of each asset since investors suffer economic risk proportionate to their capital.
Value Voting, Not a Dual Threshold
Section 230(6) of the Companies Act, 2013, establishes a dual-threshold framework in which a tribunal must approve a scheme of arrangement with both a majority in number and three-quarters in value. This model’s justification is that businesses may have distinct classes with competing interests, such as separate debtors or members with conflicting claims, and the headcount component prevents a large, populous class from being superseded by a wealthy minority. An AIF trust converting under Section 57A is ordinarily different: investors typically form a single, homogeneous class of sophisticated investors on the same terms. While some funds may have distinct unit classes or bespoke terms that could raise class-conflict issues, that is the exception. SEBI is already standardising AIF consent around a single value-weighted measure, so importing a company-law mechanism built for heterogeneous classes would solve a problem that rarely arises in this ecosystem and would undermine the existing, economically sensible governance framework.
For these reasons, paragraph 4(a)(iv) should require consent of investors holding at least three-quarters of the value of their investment, not three-quarters of investors by number. A possible objection is that a value-based voting threshold may allow a small number of large investors to determine the outcome of the conversion, thereby reducing the influence of smaller investors. However, AIFs differ from companies with dispersed public shareholders. They are contractual investment vehicles whose investors voluntarily commit different amounts of capital while pursuing a common commercial objective. Since the legal and economic consequences of conversion affect investors in proportion to their investment, a value-based voting threshold more accurately reflects the allocation of economic risk than a simple headcount.
Conclusion
The Bill is still being reviewed by the JPC, which means there is still an opportunity to correct Paragraph 4(a)(iv) before it becomes law. At the same time, SEBI has proposed a uniform 75 percent value-based voting threshold for AIFs. The same fund may wind up adhering to two distinct voting criteria for comparable structural choices if both continue in their current configuration.
This issue can be avoided with a minor drafting adjustment. Without altering the general goal of facilitating trust-to-LLP conversions, requiring the approval of investors who own at least three-fourths of the value of their investment would bring the proposed provision closer to SEBI’s methodology. Two more explanations would also be beneficial. The value of each investor’s holding should be ascertained using the most recent SEBI-filed valuation, and non-responses should be handled similarly to how SEBI handles them for AIF voting. These are straightforward precautions that might lessen needless arguments without complicating the conversion process.
Uncertainty is expected to surface as soon as the new conversion framework takes effect if Paragraph 4(a)(iv) is left unaltered. It only takes a few words in a Schedule that Parliament hasn’t yet finalized to eliminate that confusion.
