Meet broad-based rules while serving AIFs, Sebi clarifies

Synopsis

In a push to tighten regulations, Sebi has laid down fresh guidelines for asset management companies overseeing alternative investment funds. Each scheme is now required to include at least 20 investors, ensuring that no individual investor exceeds a 25% stake in the fund's total corpus.

The Securities and Exchange Board of India (Sebi) clarified that asset management companies and their subsidiaries must comply with stringent, broad-based fund norms when providing management or advisory services to alternative investment funds (AIFs).

The regulator said compliance must be assessed at the scheme level, not at the overall fund level. Each AIF scheme is treated as a distinct investment vehicle and must independently meet the diversification criteria, reflecting its actual investor mix, Sebi said.

In an informal guidance letter issued to UTI Alternatives, Sebi said AIFs qualify as pooled assets under mutual fund regulations, thereby triggering the requirement that such funds must have at least 20 investors, with no single investor holding more than 25% of the corpus.

Securities lawyers said Sebi ought to have defined 'pooled assets' in its new Mutual Funds regulations. "The informal guidance issued by Sebi offers an interpretation which is actually a new rule. If UTI had taken the view that 'pooled assets', aka an AIF managed by UTI AMC, need not be broad-based and the matter ended up in court, it is possible that a judge would have said that, on a literal reading of the new MF regulations 2026, 'pooled assets' do not have to be broad-based," said a senior lawyer advising AIFs.

The guidance also removes the flexibility in master-feeder structures, a commonly used investment arrangement. Sebi clarified that even if feeder funds do not undertake independent investment decisions, both master and feeder funds must individually satisfy the broad-based requirement.

Further, Sebi denied extension of exemptions available to certain foreign portfolio investors (FPIs) to domestic entities such as banks, insurance companies and provident fund trusts. These entities, it said, operate under separate domestic regulatory frameworks and cannot claim FPI-related carve-outs on a look-through basis.

The clarification provides a stricter regulatory stance, ensuring that AMCs do not bypass investor diversification norms through layered structures or institutional participation.

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