How to Set Up an Accredited Investors Only AIF Under SEBI Regulations in India

Kaustav Chowdhury

Aug 14

10 min read

Updated: 5 days ago

The Securities and Exchange Board of India (SEBI) has progressively refined the regulatory framework governing Alternative Investment Funds (AIFs) to attract sophisticated capital while maintaining investor protection. One of the most significant developments in this space is the introduction of the Accredited Investors Only AIF (AI-Only AIF) framework, formalised through the SEBI (AIF) (Third Amendment) Regulations, 2025, notified on November 18, 2025. This framework enables fund managers to establish AIFs exclusively for accredited investors, offering significant regulatory relaxations in exchange for dealing with a more sophisticated investor base. For fund managers, legal advisors, and compliance professionals looking to leverage this structure, understanding every step of the setup process, from accreditation to ongoing compliance, is essential.

What Is an AI-Only AIF?

An Accredited Investors Only AIF, commonly referred to as an AI-Only AIF, is an Alternative Investment Fund (or a scheme of an AIF) where each investor, other than the sponsor, manager, and their employees or directors, is an accredited investor as defined under the SEBI (AIF) Regulations, 2012 (as amended). The concept was introduced to create a lighter-touch regulatory environment for funds that cater exclusively to investors who possess the financial sophistication and risk-bearing capacity to make informed investment decisions without the full suite of retail-oriented protections.

The regulatory basis for AI-Only AIFs lies in the amended SEBI (AIF) Regulations, 2012, supplemented by SEBI circulars issued on December 8, 2025 (procedure for converting existing schemes) and January 9, 2026 (simplified onboarding of accredited investors). This framework applies across all three categories of AIFs: Category I (venture capital, social venture, infrastructure, and SME funds), Category II (private equity, debt, and fund of funds), and Category III (hedge funds and other complex strategies).

Accredited Investor Eligibility Criteria

Before setting up an AI-Only AIF, it is critical to understand who qualifies as an accredited investor. The SEBI (AIF) Regulations, 2012 prescribe separate thresholds for individuals and for body corporates, and both are expressed in rupees. Accreditation is granted by a recognised accreditation agency: CDSL Ventures Limited and NSDL Database Management Limited. Under the SEBI circular dated December 18, 2023, the certificate is valid for two years where the applicant met the eligibility criteria for the preceding financial year, and for three years where it met them in each of the preceding two financial years.

For Individuals

An individual qualifies as an accredited investor if they satisfy any one of the following criteria:

Net worth of at least Rs 7.5 crore, with at least Rs 3.75 crore held in financial assets
Annual income of at least Rs 2 crore
Annual income above Rs 1 crore combined with a net worth of at least Rs 5 crore (with at least half in financial assets)

For Corporates

A body corporate qualifies as an accredited investor if it has a net worth of at least Rs 50 crore.

For Non-Residents

The Regulations prescribe no separate dollar denominated test for a non-resident investor. The thresholds set out above are the ones that apply, and they are expressed in rupees.

Benefits of the AI-Only AIF Structure

The AI-Only AIF structure offers several meaningful regulatory relaxations that make it an attractive proposition for fund managers. These benefits include:

NISM Certification Exemption: Key investment team members of AI-Only AIFs are exempt from the NISM certification requirement that otherwise applies to AIF personnel. Note, however, that the compliance officer must still obtain NISM certification by January 1, 2027, as this requirement operates independently of the AI-Only exemption.
No Investor Cap Per Scheme: Accredited investors are excluded when computing the number of investors in a scheme under Regulation 10(f), so the limit of 1,000 investors per scheme does not constrain an AI-Only fund.
Manager as Trustee: The fund manager may also act as the trustee, eliminating the need to appoint a separate trustee entity and reducing both costs and governance complexity.
Exemption from Pari-Passu Rights: AI-Only AIFs are exempt under Regulation 20(22) from the requirement to provide pari-passu rights to all investors, which permits investor specific terms and side letters, provided they are not detrimental to the interests of the other investors.
Reduced LVF Threshold: For Large Value Funds (LVFs) with accredited investors, the minimum investment threshold has been reduced from Rs 70 crore to Rs 25 crore, making it significantly easier for accredited investors to access LVF structures.
Fast-Track Scheme Launch via GARUDA: Under the GARUDA mechanism introduced by the SEBI circular dated July 31, 2026, an AI-Only fund may launch a scheme immediately on registration or on filing the placement memorandum, and without routing the filing through a merchant banker. A regular scheme waits 10 working days from filing.

Registration Process with SEBI

Setting up an AI-Only AIF involves a structured registration process with SEBI. The following steps outline the typical pathway from incorporation to fund launch:

Step 1: Establish the Fund Vehicle

The fund must be set up as a trust, company, limited liability partnership (LLP), or body corporate. Most AIFs in India are structured as trusts, with a trust deed governing the fund's operations. The trust deed must contain provisions consistent with the SEBI (AIF) Regulations, 2012, including the fund's investment objective, target corpus, tenure, and investor eligibility criteria (specifying the AI-Only nature of the fund).

Step 2: Appoint Key Personnel

Appoint a fund manager, compliance officer, and (if the manager is not acting as trustee) a trustee. While key investment team members of AI-Only AIFs are exempt from NISM certification, the compliance officer must still obtain NISM certification by January 1, 2027. For AI-Only AIFs, the manager may act as trustee, simplifying this step.

Step 3: File the Application (Form A)

Submit the application for registration in Form A through the SEBI Intermediary Portal (SI Portal). The application must specify the AIF category (I, II, or III) and clearly indicate that the fund or scheme is intended to operate as an AI-Only AIF. The application fee is Rs 1 lakh plus applicable GST.

Step 4: Pay the Registration Fee

Upon SEBI's in-principle approval, the applicant must pay the registration fee, which varies by category:

Category I AIF: Rs 5 lakh
Category II AIF: Rs 10 lakh
Category III AIF: Rs 15 lakh

Step 5: Obtain the Certificate of Registration

Once the registration fee is paid and all conditions are satisfied, SEBI issues the certificate of registration. The AIF is then permitted to commence fundraising activities.

Step 6: Onboard Accredited Investors

Each investor (other than the sponsor, manager, and their employees or directors) must hold a valid accreditation certificate issued by CDSL Ventures Limited or NSDL Database Management Limited. The SEBI circular dated January 9, 2026 simplified the mechanics: the contribution agreement may be finalised and executed before the certificate is received, and a net worth certificate need not carry a breakdown or the amount so long as it confirms that the threshold is met. Capital contribution may not be accepted until the accreditation has been obtained.

Placement Memorandum Requirements

Every SEBI-registered AIF is required to prepare a Private Placement Memorandum (PPM) that serves as the primary offering document for prospective investors. The PPM must disclose, among other things:

Investment strategy and objective
Fee structure (management fees, performance fees, hurdle rates)
Risk factors specific to the fund's strategy
Key personnel and their track records
Conflict of interest policies

Large Value Funds for accredited investors carry two standing exemptions under the SEBI circular dated December 8, 2025: they need not follow the standard PPM template, and they are exempt from the annual PPM audit. Both now apply without investor approval. Separately, under the GARUDA mechanism an AI-Only fund may launch a scheme immediately on registration or on filing the placement memorandum, where a regular scheme waits 10 working days from filing.

Operational Compliance: Differences from Regular AIFs

While AI-Only AIFs enjoy certain regulatory relaxations, they remain subject to the core compliance framework applicable to all AIFs. The following table summarises the key operational differences:

Investor limit per scheme: Regular AIFs are capped at 1,000 investors per scheme; AI-Only AIFs have no such cap.
Trustee requirement: Regular AIFs require a separate trustee; AI-Only AIFs permit the manager to serve as trustee.
NISM certification for investment team: Required for regular AIFs; exempt for AI-Only AIFs (compliance officer must still be certified).
Pari-passu rights: Mandatory for regular AIFs; AI-Only AIFs are exempt, allowing differential treatment of investors.
LVF minimum investment: Reduced from Rs 70 crore to Rs 25 crore per accredited investor.
PPM template and audit for LVFs: Large Value Funds for accredited investors are exempt from the standard PPM template and from the annual PPM audit.

Fund managers considering the AI-Only structure should note that while these relaxations reduce administrative burden, the fundamental obligations relating to anti-money laundering, KYC, investment restrictions, leverage limits (for Category III), and valuation norms continue to apply in full.

Ongoing Reporting and Disclosure Obligations

AI-Only AIFs are subject to the same reporting obligations as regular AIFs in most respects. Key ongoing compliance requirements include:

NAV Reporting: AIFs are required to upload Net Asset Value (NAV) data to depositories in accordance with the SEBI circular dated February 6, 2026. This applies to all AIFs, including AI-Only structures.
Quarterly and Annual Reporting: AIFs must file quarterly reports with SEBI and provide annual audited financial statements to both investors and the regulator.
Change in Control or Key Personnel: Any material change in the management, control, or key investment team of the AIF must be reported to SEBI.
Investor Communication: Fund managers must provide regular updates to investors on portfolio performance, valuation, and material events affecting the fund.
Accreditation at Onboarding: Under the SEBI circular dated January 9, 2026 the contribution agreement may be executed before the accreditation certificate is in hand, but no capital contribution may be accepted until the investor has been accredited by a recognised agency. The record of that check belongs on the file.

For insights on how SEBI's evolving disclosure regime intersects with fund management obligations, our article on SEBI's BRSR Value Chain Reporting mandates provides useful context on SEBI's broader push toward enhanced transparency.

Key Restrictions and Limitations

While the AI-Only AIF framework offers significant flexibility, fund managers must remain mindful of several restrictions and limitations:

Accreditation Is Tested at Onboarding: Under the SEBI circular dated December 8, 2025, an investor who is an accredited investor when onboarded is reckoned as one through the life of the scheme, even if that status is lost in the interim. The fund does not forfeit its AI-Only status because a certificate lapses, so the diligence that matters is the check made before capital is accepted.
Conversion Procedure: Existing AIF schemes seeking to convert to AI-Only status must follow the procedure set out in SEBI's circular dated December 8, 2025. This requires obtaining consent from all existing investors and ensuring that every investor holds valid accreditation.
Category-Specific Restrictions: AI-Only AIFs remain subject to category-specific investment restrictions. For instance, Category I AIFs must invest in specified sectors (infrastructure, social ventures, SMEs, or early-stage ventures), while Category III AIFs must comply with leverage and hedging norms.
No Relaxation on AML/KYC: Despite the simplified onboarding process, all AML and KYC obligations continue to apply with full rigour to AI-Only AIFs.
Minimum Corpus and Investment Size: The minimum corpus requirement of Rs 20 crore per scheme continues to apply. The minimum investment amount of Rs 1 crore does not: the proviso to Regulation 10(c) provides that the clause shall not apply to an accredited investor, so it does not bind the investors of an AI-Only fund.

Fund managers structuring investments through AIFs may also find it helpful to review the mechanics of structuring private investments in Indian companies. Our detailed guide on structuring CCPS investments in Indian startups covers the regulatory and commercial considerations relevant to AIF portfolio investments.

Compliance Checklist for Setting Up an AI-Only AIF

The following checklist consolidates the key action items for fund managers and legal advisors setting up an AI-Only AIF:

Determine the appropriate AIF category (I, II, or III) based on the fund's investment strategy
Incorporate the fund vehicle (trust, LLP, or company) and execute the trust deed or constitutive documents
Appoint the fund manager, compliance officer, and trustee (or decide whether the manager will act as trustee)
Ensure the compliance officer has obtained (or is on track to obtain) NISM certification by January 1, 2027
File Form A through the SEBI SI Portal with the application fee of Rs 1 lakh plus GST
Pay the category-specific registration fee upon receiving in-principle approval
Prepare the Private Placement Memorandum with all required disclosures
File or intimate the PPM through the GARUDA platform for fast-track scheme launch
Verify that each prospective investor holds a valid accreditation certificate from CDSL Ventures Limited or NSDL Database Management Limited
Complete KYC and AML verification for all investors
Set up NAV reporting infrastructure for uploading to depositories per SEBI's February 6, 2026 circular
Accept no capital contribution from an investor until the accreditation certificate has been issued by a recognised agency
Establish quarterly and annual reporting workflows for SEBI filings and investor communications

Conclusion

The AI-Only AIF framework represents a significant step by SEBI toward creating a proportionate regulatory environment that recognises the sophistication of accredited investors while maintaining essential investor safeguards. For fund managers, the structure offers meaningful advantages: the ability to bypass the 1,000 investor per scheme cap, the flexibility to allow the manager to act as trustee, exemptions from NISM certification for the key investment team, and faster time to market through the GARUDA fast-track mechanism.

However, fund managers must approach this structure with a clear understanding of both its benefits and its limitations. Accreditation is tested when an investor is onboarded rather than policed afterwards, so the discipline that matters is the check made before capital is accepted and the record kept of it. While the relaxations are real, the core obligations around AML and KYC, investment restrictions, valuation, and reporting remain fully applicable.

For fund managers, legal counsel, and compliance teams considering the AI-Only AIF route, the key to success lies in careful planning: selecting the right AIF category, structuring the trust deed to accommodate the AI-Only framework, building systems for accreditation tracking and renewal, and ensuring that the PPM and operational processes are aligned with SEBI's expectations. With the regulatory infrastructure now firmly in place following the 2025 amendments and the 2026 circulars, the AI-Only AIF has emerged as a viable and attractive structure for fund managers seeking to serve India's growing community of sophisticated institutional and high-net-worth investors.

Sources and References

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.