Summary: On June 30, 2026, SEBI released a consultation paper proposing a standardised consent mechanism and an expanded conflict-of-interest framework for Alternative Investment Funds.

The AIF Regulations mandate investor consent for material decisions but are silent on methodology, resulting in inconsistent market practices. SEBI now proposes a framework offering AIFs a choice among three voting methods – Deemed Consent, Present and Voting, and Express Voting. Further, the current “associate” definition, anchored to a 15% shareholding threshold, fails to capture transactions where conflict is self-evident. SEBI proposes introducing a “related party” definition adapted from Section 2(76) of the Companies Act, 2013, deployed specifically within conflict provisions. This widens the net of transactions requiring 75% investor approval.

Standardising the Consent Mechanism: Structure Without Rigidity

The AIF Regulations mandate investor consent for material decisions and conflicted transactions. However, it has been silent on the methodology for obtaining that consent. This lack of regulatory guidance has resulted in varying market practices causing identical approval thresholds, producing different outcomes, depending on a fund’s chosen methodology. SEBI’s consultation paper acknowledges this operational challenge and, rather than imposing a one-size-fits-all solution, proposes a framework that preserves manager discretion within defined guardrails.

The Framework: Three Methods, One Consistent Application

The proposed framework offers AIFs a choice among three voting methodologies, each with distinct operational implications. The chosen method must be disclosed in the private placement memorandum (PPM), supported by a written policy covering communication protocols, notice periods, voting timelines and reminders, and, critically, applied uniformly across all investors within a scheme. Existing schemes benefit from grandfathering, with the new norms applying prospectively.

The three options are:

1. Deemed Consent: Non-response within prescribed timelines are treated as approval. Operationally efficient and widely adopted in the industry, given the sophisticated nature of AIF investors.
2. Present and Voting: Only votes actively cast (for or against) are counted; abstentions are excluded. Aligned with practices in mutual funds, REITs and InvITs, this method rewards active participation.
3. Express Voting: Approval requires affirmative votes meeting the threshold, calculated against total fund value; non-responses carry no weight. The most conservative method, offering the highest degree of investor protection.

Alongside the methodology framework, SEBI proposes harmonising approval thresholds. Specifically, where a two-thirds consent is required (currently applicable for extension of tenure of a close-ended fund and material alteration investment strategy), the threshold would be raised to 75% of unitholders by value. The rationale is that a uniform, slightly higher threshold will strengthen minority protection while eliminating the operational complexity of tracking different thresholds for different activities.

Illustrative Comparison

Using a base scenario of 100 equal investors (30 voting in favour, 10 against, 60 abstaining), the illustration below demonstrates how each method produces a materially different outcome:

Voting Method	Votes in Favour	Votes Against	Abstentions	How votes cast in favour are calculated
Method I: Deemed Consent	30	10	60	30 (in favour) + 60 (deemed to have consented)) / 100 (total value) = 90%
Method II: Present and Voting	30	10	60	30 (in favour) / 40 (value of votes cast) = 75%
Method III: Express Voting	30	10	60	30 (in favour) / 100 (total value) = 30%

Redefining “Conflict”: From Associate to Related Party

The consultation paper also addresses a definitional gap that has long been apparent to market participants. The current definition of “associate”[1], anchored to a 15% shareholding threshold, fails to capture several categories of transactions where conflict is self-evident.

SEBI’s proposed solution is to introduce a “related party” definition adapted from Section 2(76) of the Companies Act, 2013[2], and deploy it specifically within the conflict-of-interest provisions. The existing definition of “associate” is proposed to be retained for non-conflict contexts where broader coverage is unnecessary. For managers, this means a materially wider net of transactions will require 75% investor approval making early mapping of related party relationships and robust compliance infrastructure essential.

Takeaways

Together, the proposals signal a decisive shift. Standardised consent mechanism will require upfront methodology choices deployed scheme-wide, while the expanded “related party” definition will cast a materially wider net over transactions requiring 75% investor approval. For fund managers, the interval between consultation and codification is the window to act reviewing PPM disclosures, stress-testing voting frameworks, and mapping related-party exposures before the regulatory architecture is finalised.

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[1] “associate” means a company or a limited liability partnership or a body corporate in which a director or trustee or partner or Sponsor or Manager of the Alternative Investment Fund or a director or partner of the Manager or Sponsor holds, either individually  or  collectively,  more  than  fifteen  percent  of  its  paid-up  equity  share capital or partnership interest, as the case may.

[2] “related party” in relation to manager or sponsor of an Alternative Investment Fund, means – (i) a relative; (ii) a director, partner or his relative; (iii) a key management personnel or his relative; (iv) a firm, in which a director, partner, manager or his relative is a partner; (v) a private company in which a director, partner or manager or his relative is a member or director; (vi) a public company in which a director, partner or manager is a director or holds along with his relatives, more than two per cent. of its paid-up share capital; (vii) any body corporate or entity whose board of directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director, partner or manager; (viii) any person on whose advice, directions or instructions a director, partner or manager is accustomed to act: Provided that nothing in sub-clauses (vii) and (viii) shall apply to the advice, directions or instructions given in a professional capacity; (ix) any body corporate which is—(A) a holding, subsidiary or an associate company of the sponsor or manager of Alternative Investment Fund; or (B) a subsidiary of a holding company to which the sponsor or manager of Alternative Investment Fund is also a subsidiary; (C) an investing company or the venturer of the sponsor or manager of Alternative Investment Fund; (x) a director, other than an independent director, or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party. (xi) such other person as may be specified by the Board. For the purpose of this regulation, unless the context otherwise requires, the terms defined herein shall bear the meanings assigned to them under the Companies Act, 2013, or any statutory modification or re-enactment thereto, as the case may be”.