Khushi Tanwar-3rd year B.A. LL.B. student at Maharashtra National Law University, Mumbai , Keshav Jain-3rd year B.A. LL.B. student at Symbiosis Law School, Pune
Introduction
In its consultation paper dated June 30, 2026, the Securities and Exchange Board of India (‘SEBI’) proposed a set of recommendations made by the Alternative Investment Policy Advisory Committee, constituted by SEBI with respect to Alternative Investment Funds (‘AIF’). The proposals represent a significant attempt to rationalize how investor consent operates within AIFs, and have drawn close attention from the industry, given their bearing on deal timelines and fund governance.
An AIF is a privately pooled investment vehicle raising capital from sophisticated investors regulated under SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’). Since investors cede day-to-day control to the fund manager, the AIF Regulations require investor consent on specified matters, such as changes to investment strategy, tenure extension, or conflicted transactions, functioning as a check on managerial discretion. Under the current framework, however, the manner of obtaining and calculating investor consent varies without consistent basis: some matters require 75 percent approval by value, others two-thirds, with no standardized method for counting votes. Against this backdrop, SEBI’s recommendations include a standardized method of counting the votes cast by investors; a three-quarter percent approval rate, in place of the varying rate which existed earlier; and a broadening of the scope of conflicts of interest transactions from “associate” to “related party.”
For existing AIF schemes, the consultation paper proposes grandfathering the current consent methodologies, with the new framework applying only prospectively. Individually, each of the above-mentioned recommendations seems to be part of a routine carried out by the regulator, but when read together along with the operational behavior of private equity and venture capital funds, these recommendations represent a paradigm shift from the discretionary control of the managers, or the General Partners (‘GPs’) who run the fund and make its day-to-day investment decisions; to a consent approach involving Limited Partners (‘LPs’) or the capital-contributing investors on whose behalf the fund is managed, with different implications across various stakeholders. It is argued that the deemed consent mechanism, despite being easy to implement, serves as an instrument that transfers decision-making power from the LPs to the GPs by using investor indifference as a tool to vote. Moreover, the requirement for a uniform consent threshold across all decisions disregards differences in transaction materiality, while the broader definition of “related parties” imposes additional upfront due diligence and compliance obligations upon fund managers.
When silence counts as consent
The consent-methodology proposal deals with the manner of obtaining and calculating consent. In this regard, SEBI provides three alternatives to AIFs: deemed consent, where silence constitutes consent; present and voting, where the vote is measured according to the votes received; and express voting, where the measure of approval is against all investors. SEBI’s rationale for proposing deemed consent rests on its diagnosis that investors of AIFs are usually high net-worth individuals who are presumed to be sophisticated enough to know when to take part in the voting process; deemed consent, in this view, merely formalizes what was already in practice. The question of whether the remedy suggested is appropriate is a matter distinct from this.
Referring to the calculation provided by SEBI: for a fund with one hundred investors, thirty vote in favour, ten against, and sixty do not answer at all. Under deemed consent, the sixty non-respondents are treated as supporting the motion, rather than being excluded from the calculation. The motion therefore records ninety votes in favour out of a total of one hundred, producing ninety percent approval, a percentage which reflects the lack of opposition rather than active support. Deemed consent thus preserves the speed of execution that is a must-have competitive advantage in deal-making, in a financing round, the fund that can close fastest often wins the allocation. This, in turn, frees the GPs’ attention from chasing LPs’ approvals, and channels it into more value-adding work such as deal sourcing, identifying and securing new investment opportunities ahead of rival funds and portfolio company value creation: working with portfolio companies’ management to improve revenue growth and operating efficiency during the holding period, which private equity investors see as their core driver of returns.
For LPs, deemed consent raises significant concerns. It is argued that it is an overstatement to assume that being a high-net-worth investor or institutional investor guarantees active engagement with every consent request. Sophistication and capital do not, by themselves, translate into the bandwidth to respond to every vote, particularly for institutional investors holding positions across multiple funds simultaneously. Deemed consent reduces oversight since passive LPs, whose lack of participation is viewed as approval, can systematically overrule active LPs, who are vigilant and reject value-destructive deals. It also aggravates the collective action problems faced by funds with many investors since non-participating LPs become part of the majority that agrees while active LPs have their voting capacity undermined, and would be forced to mount expensive opposition campaigns. A failure to meet deadlines internally no longer results in mere abstention, but rather is converted into assent, and thus shifts the administrative costs of the GPs on to the LPs.
The downstream impact on portfolio companies is difficult to perceive, but remains no less material. A founder trying to secure an investment from a fund has no way of knowing which consent mechanism the fund has adopted internally, and it is this mechanism that determines how quickly the fund can obtain internal approval for any conflicts of interest elements of the deal.
Where deemed consent ensures approval when the notice period ends automatically, express voting entails securing approval proactively from 75 percent of investors, and in many instances, this may involve several follow-ups to a widely dispersed LP base. Within a competitive investment round, the difference in speed could be a decisive factor that determines which of the competing funds wins the allocation, thus providing a motivation to adopt the non-deliberative procedure simply because it is quicker than its deliberative competitor.
Notably, SEBI itself is not blind to this risk, and acknowledges that investors may overlook communications or simply fail to respond within the stipulated timeframe, leading to approval being obtained without any real participation on their part. Further, in the absence of a specific written-down norm, the timeframe for response is left to the manager’s discretion and may, at times, be insufficient for an investor to arrive at an informed decision.
One threshold, many clocks
The threshold-related proposal, which establishes a seventy-five percent value threshold for all matters requiring investor approval, may serve to address the problem of inconsistency in the current framework. The provisions of the existing framework require either seventy-five percent or two-thirds approval of investors, which SEBI acknowledges follows no reasoned rationale. A consistent threshold is therefore justified on this ground, but fails to take into account the reality that there exists variation in the tolerance levels for procedural delay among AIF transactions. Some investment matters may tolerate extended deliberations, while others are bound within constricted commercial timelines.
The application of one procedural bar irrespective of this differential makes the process a relatively more cumbersome one, for time-sensitive transactions as compared to long-haul ones, although both are governed by the same regulations. A higher uniform bar does confer an advantage on LPs because the three-quarter percent is a materially harder threshold to clear than a two-third majority. On the other hand it correspondingly reduces a GP’s ability to implement a material change without securing broad-based investor support. This, however, also depends crucially on the voting process through which the bar is met – the voting requirement met through deemed consent, or consent obtained via active voting.
Another point worth noting is that governing all actions through a single threshold eliminates any standard of proportionality. Under the current framework, a routine extension of a close-ended fund’s tenure under Regulation 13(5) of the AIF Regulations requires two-thirds approval, which is a largely procedural matter of limited consequence to investors. Along with this, a material alteration to the fund’s investment strategy under Regulation 9(2) of the AIF Regulations – that is what the fund actually does with an investor’s capital – currently sits at the same two-third threshold, despite arguably carrying greater consequences. Under SEBI’s proposal, both would be raised to an identical seventy-five percent bar, alongside matters such as investment in an associate of the fund’s manager or sponsor under Regulation 15(1)(e) of the AIF Regulations, erasing the distinction the current framework contains. It is argued that a routine tenure extension does not warrant the same threshold as a related-party transaction, yet the proposal holds both to an identical standard.
Redrawing the conflict line
The SEBI’s proposal of drawing a new conflict line moves the focus onto a completely new axis. Instead of changing the method of computing or modifying the threshold for consent, the definition is broadened to capture more transactions within the ambit of the consent rule for conflicts of interest transactions. It makes a substantial improvement to the current framework as it plugs a loophole that may have been working as a way to avoid investor oversight. As a result of replacing the term “associate” as defined underRegulation 2(1)(c) of the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’) with “related party” as defined insection 2(76) of the Companies Act, 2013 (‘Companies Act’) with respect to conflicts of interest transactions, SEBI has managed to bring within its ambit the transactions which were initially outside the purview of the consent requirements: for instance, an investment in a company where the relative of the fund manager has a controlling interest, or where a director serves on the board of both the AIF manager and the investee company.
From an operational perspective, the primary effect of this proposal will be on the fund managers. If this proposal is accepted, conflict of interest detection would be made an integral part of the due diligence process prior to investing, rather than being an afterthought. Although the compliance effort would become more intensive, the risk of discovering the conflict after negotiations would be mitigated. For the LPs, the expanded definition fills the gap for the transactions that can affect the interests of investors.
Recommendations
Before such suggestions take the form of formal regulations, some changes can be made to preserve the goals of investor protection that SEBI aims for while preventing potential negative repercussions.
Firstly, the process of deemed consent should have a requirement of a certain participation threshold. One possible way is for deemed consent to apply only in cases where there is a response rate of at least 25 percent from investors by value, otherwise the voting process will automatically convert into a present-and-voting method. Secondly, rather than being set at a uniform seventy-five percent level, the standard must apply in three levels: procedural matters such as extensions of tenure shall have the existing two-thirds standard and deemed consent allowed; consequential matters such as changes to investment strategy shall need 75 percent with present-and-voting method but counted solely based on those who respond; and conflicted or related party matters such as associate investments, investment committee appointment shall satisfy the required threshold through express voting based on total unconflicted base with deemed consent totally prohibited. Deemed consent should be limited to procedural issues only, where investor non-objection may plausibly amount to informed consent, but related party transactions should be subject to either present-and-vote or voting consent to ensure assent, rather than inaction, is the basis of approval.
Conclusion
SEBI has appropriately recognized the underlying problems that exist in the current framework – lack of a uniform consent methodology, voting threshold differences, and the narrow scope of “associate” as the basis for identifying conflicts of interest transactions. If the deemed consent method is formalized, it would accord legitimacy to meeting the 75 percent threshold quickly and easily, while meeting the same threshold would need active investor participation via the proposed present-and-voting or express voting methods. This would mean that the incentive lies in choosing the least deliberative process, i.e., deemed consent; since obtaining consent via investor silence is faster. However, imposing a single, uniform consent threshold does not take into account the difference in the significance of one issue vis-à-vis another for the fund. Ultimately, the question of effectiveness of the said proposals will depend less on their codification, and instead on whether the adopted mechanisms will result in protecting investors in substance, or only on paper.
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