SEBI's Landmark Proposals on Investor Consent and Conflicted Transactions in AIFs: What Investors and Fund Managers Need to Know
By Parth Gala, Shriraj Dusane & Vidhi Talesara · 2026-07-03
On 30 June 2026, the Securities and Exchange Board of India ("SEBI") issued a comprehensive consultation paper proposing significant changes to the framework governing investor consent and conflicted transactions in Alternative Investment Funds ("AIFs"). Rather than introducing new compliance obligations, the regulator seeks to rationalise how investor consent should be obtained and redefine which conflicted transactions require investor approval.
The Current Landscape: Investor Consent Challenges and Bottlenecks
Although the SEBI (Alternative Investment Funds) Regulations, 2012 ("AIF Regulations") provide thresholds for investor consent in material decisions, they remain silent on the manner and methodology of obtaining that consent. This gap has created interpretational uncertainty and operational inconsistency that AIF managers and investors have flagged for some time, leading to:
- Inconsistent market practices for soliciting and calculating investor consent
- Disputes arising from investor non-responsiveness, particularly in funds with large investor bases
- Selective non-voting by investors seeking to extract concessions such as reduced fees or favourable terms
- Differential treatment within the same scheme, where some investors are subject to deemed consent and others insist on explicit approval
- Inconsistent approval thresholds — two-thirds versus seventy-five percent — across different provisions, without any principle-based rationale
- A narrow definition of "associate" that excludes many transactions carrying comparable, and sometimes greater, conflict-of-interest risk
Key Proposals: A Three-Way Approach to Investor Consent Reform
1. Bringing Consistency in Approval Thresholds
| Current Limitation | SEBI's Proposal |
|---|---|
| Provisions such as material alteration of fund strategy (under Regulation 9(2)), tenure extension of close-ended schemes (under Regulation 13(5)), and migrated venture capital fund tenure extensions (under Regulation 19AF(2)) currently require only two-thirds consent, creating inconsistency with the seventy-five percent threshold applicable elsewhere in the regulations. | SEBI proposes to replace the existing two-thirds threshold, wherever it currently applies, with a uniform seventy-five percent (by value) threshold for unitholder consent across all provisions of the AIF Regulations. |
2. Standardising the Process of Obtaining Investor Consent
| Current Limitation | SEBI's Proposal |
|---|---|
| There is no uniform methodology for obtaining investor consent. Consequently, identical approval thresholds can produce entirely different outcomes depending on the methodology adopted by the fund. | SEBI proposes to give AIFs the flexibility to adopt one of three methodologies for calculating investor consent, applied consistently at the fund level. |
The three methodologies — illustrated using a hypothetical AIF with 100 investors (30 in favour, 10 against, 60 abstaining) — are:
- Deemed Consent: Non-response within a specified timeline is treated as approval. Abstentions are counted in favour, producing 90% approval in the illustration.
- Present and Voting: Only investors who actually cast a vote are counted; abstentions are excluded. The same example yields 75% approval, calculated against the 40 investors who participated.
- Express Voting for Approval: Only affirmative votes are counted against the total value of the fund, regardless of participation levels. The same example yields just 30% approval.
Once the methodology is selected, it must be applied consistently. Fund managers are required to disclose the chosen methodology, voting timelines, and treatment of non-response in the fund's Private Placement Memorandum ("PPM"), and must maintain records of all communications, reminders, meetings, and votes.
Note: Existing schemes will be grandfathered under their current consent methodologies; the new framework applies prospectively, ensuring that the transition does not disrupt ongoing fund operations.
3. Rationalising the Ambit of Conflicted Transactions
| Current Limitation | SEBI's Proposal |
|---|---|
| The existing definition of "associate" is confined to entities where a director, trustee, partner, Sponsor, or Manager holds more than 15% of paid-up equity or partnership interest. This narrow scope means several inherently conflicted transactions — such as investments in a company whose director overlaps with the AIF's manager or sponsor, or transactions with a relative of a manager's director — escape the investor consent requirement. | SEBI proposes to replace the term "associate" with a more comprehensive term "related party", closely modelled on Section 2(76) of the Companies Act, 2013, specifically for provisions dealing with conflicts of interest and conflicted transactions. |
The proposed definition of "related party" under Regulation 2(1) of the AIF Regulations includes relatives; directors, partners, and their relatives; key management personnel and their relatives; firms in which a director, partner, or manager or their relative is a partner; private companies in which a director, partner, manager, or their relative is a member or director; public companies in which a director or partner holds, along with relatives, more than two percent of paid-up share capital; body corporates whose board or management is accustomed to acting on the advice or instructions of a director, partner, or manager; holding, subsidiary, associate, or investing companies of the AIF's sponsor or manager; and such other persons as may be specified by SEBI.
Note: The "related party" definition applies only to conflict-of-interest and conflicted-transaction provisions under Regulations 15(1)(e), 15(1)(ea), and 22(b). The term "associate" is retained elsewhere in the regulations where the broader scope is not warranted.
Navigate AIF's Comments on the Proposed Changes
On the Uniform 75% Threshold for Investor Consent
This change offers greater minority protection — a higher threshold ensures that a broader base of investors supports material decisions, reducing the risk of minority stakeholders being dragged along by a bare majority. It also enhances regulatory predictability, allowing investors and managers to apply one consistent standard across all consent requirements.
On Consent Mechanisms
SEBI has consciously resisted adopting a one-size-fits-all approach. Rather than mandating a single rigid methodology, the proposed changes allow AIFs to choose from three well-defined options, provided the choice is disclosed transparently and applied consistently.
1. Deemed Consent
The proposed deemed consent mechanism is a practical and welcome addition to the AIF framework. In practice, investors — particularly in funds with a large and dispersed investor base — do not always respond to consent requests, whether due to unavailability, competing commitments, or because they consider a particular proposal insufficiently significant to warrant a response. The absence of a response nevertheless leaves fund managers in a difficult position: expected to take timely decisions in the interest of the fund but unable to proceed simply because investors have remained silent rather than actively objecting.
By treating silence as consent — subject to clear prior notice, adequate disclosure, and a reasonable opportunity to respond — the proposed mechanism addresses this practical challenge without compromising investor protection. Investors who disagree retain the opportunity to record their dissent, while fund managers are no longer navigating prolonged uncertainty caused by investor inaction. Given the predominantly sophisticated investor base of the AIF industry, this strikes an appropriate balance between operational efficiency and investor autonomy.
2. Present and Voting
The "present and voting" mechanism is conceptually sound and gives investors who actively participate a meaningful opportunity to influence fund decisions. However, the proposal leaves the manner of conducting virtual and hybrid meetings largely undefined, despite this mechanism's likely reliance on such modes of participation.
SEBI may consider drawing guidance from the framework already prescribed under the Companies Act, 2013. Section 173(2), read with Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014, lays down a detailed procedure for meetings conducted through video conferencing or audio-visual means, including verification of participants' identities, simultaneous audio-visual access, recording and preservation of proceedings, and specification of a deemed venue. Incorporating similar safeguards into the AIF framework would strengthen the credibility of investor meetings and minimise disputes regarding their validity.
3. Express Voting
The express voting mechanism offers the highest level of certainty from an investor protection standpoint: a proposal is approved only when it receives affirmative support from the prescribed percentage of total investor value, ensuring that important decisions rest on clear and demonstrable approval rather than assumptions arising from silence or limited participation.
At the same time, the mechanism may present practical challenges for funds with a large or historically inactive investor base. Even where there is little or no opposition to a proposal, obtaining affirmative votes from the required threshold may prove difficult, potentially delaying legitimate and time-sensitive decisions. The suitability of this mechanism will therefore depend on the size, composition, and engagement levels of a fund's investor base. In that regard, SEBI's decision to include express voting as one available option — rather than prescribing it as the mandatory standard — appears balanced and pragmatic.
On Investor Consent in Conflicted Transactions
Rather than prohibiting related-party transactions altogether, SEBI has proposed investor approval where material conflicts arise. This reflects SEBI's broader regulatory philosophy of enhancing transparency and governance while preserving operational flexibility — a proportionate and commercially realistic approach.
Industry Impact and Strategic Implications
For fund managers, the framework delivers several benefits:
- Clearer compliance roadmap — a defined menu of consent methodologies and a single approval threshold reduce ambiguity in structuring consent processes
- Reduced disputes — standardised treatment of non-response and abstentions minimises disagreements with investors over voting outcomes
- Documentation discipline — managers will need to update PPMs and internal policies to reflect the chosen consent methodology and the expanded related-party framework
For investors, the impact is equally significant:
- Greater transparency — upfront PPM disclosures specify exactly how consent will be sought and calculated
- Fairer treatment — a single methodology applied uniformly across a scheme ensures no investor is treated differently from another
- Wider protection against conflicts — the related-party definition captures a broader set of transactions previously outside the ambit of mandatory investor consent
Conclusion
SEBI's consultation paper is not merely an exercise in procedural reform. It is a thoughtful attempt to modernise India's AIF governance architecture by standardising investor consent mechanisms, harmonising approval thresholds, broadening the scope of conflicted transactions, and introducing a more comprehensive related-party framework.
This analysis is based on the SEBI Consultation Paper dated 30 June 2026 on rationalising the requirement of obtaining investor consent and the ambit of conflicted transactions requiring investor consent under the AIF Regulations. It reflects Navigate AIF's comments submitted during the public consultation period and is intended for informational purposes only. It should not be construed as legal or compliance advice. Fund managers should consult their legal advisors regarding the implications of any regulatory amendments that follow from this consultation process.
Have questions about how these proposed changes could affect your fund's consent processes or conflicted-transaction framework? Contact Navigate AIF to understand how these regulatory changes may impact your AIF's governance and compliance approach.
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