Sebi Proposes Uniform Investor Approval Norms, Tighter Conflict Rules for AIFs

The Securities and Exchange Board of India (Sebi) has proposed a uniform framework for obtaining investor consent in Alternative Investment Funds (AIFs), along with broader safeguards for transactions involving related parties. The proposals seek to streamline approval processes, while improving investor protection and standards of governance.

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Common Approval Threshold Proposed

In a consultation paper released on Tuesday, Sebi proposed replacing the existing approval structure with a single investor consent threshold of 75% by value for all matters that require investor approval. At present, different provisions require either two-thirds or 75% approval, creating inconsistencies across AIF schemes.

The regulator said a standardised approach would provide greater clarity for fund managers and investors while reducing operational complexity.

Standard Voting Methods for Investors

To bring consistency to the voting process, Sebi has proposed allowing AIFs to adopt one of three recognised voting mechanisms, deemed consent, present-and-voting, or express voting. The selected methodology would need to be disclosed in the placement memorandum and applied uniformly to all investors within a scheme.

According to Sebi, differing industry practices relating to voting processes, treatment of non-responses and approval thresholds have resulted in uncertainty and implementation challenges. The proposed framework seeks to establish a transparent and predictable process across the industry.

The regulator has also suggested that investors should receive complete information before voting, including the purpose of the proposal, applicable regulatory provisions, the required approval threshold and the treatment of non-responses under the chosen voting method.

Expanded Scope for Conflict-Related Transactions

Sebi has also proposed expanding the categories of transactions that require investor approval by introducing the concept of “related party” into the AIF framework. The proposed definition would be based on the Companies Act, 2013, with modifications suitable for alternative investment funds.

The regulator noted that the current definition of “associate” may not capture every transaction involving potential conflicts of interest. Under the proposal, transactions involving related parties of an AIF’s manager or sponsor would require investor approval before execution.

However, related parties of trustees and the AIF itself have been excluded from this requirement, as Sebi observed that they generally do not participate in the day-to-day management of investment decisions.

Record-Keeping and Transition Plan

Sebi has proposed mandatory record maintenance for all investor communications, notices, reminders, and voting outcomes. Fund managers would also be expected to respond to investor queries within a reasonable period.

Under the current AIF framework, however, the regulator has recommended that the methods of obtaining consent in existence be carried forward as per the grandfathering provision, while the modified framework will apply prospectively.

It is clear from the consultation paper that the proposal has been made to enhance transparency and conflict management mechanisms as well as maintain consistency in the operational framework without disturbing normal functioning of the funds.