Risk, Reward and Responsibility in a More Flexible LVF Framework

When SEBI proposes easing rules, the reaction is often split. Fund managers cheer the operational freedom; some policymakers and commentators warn of regulatory dilution. The recent proposal to lower the Large Value Fund (LVF) minimum from ₹70 crore to ₹25 crore, remove the 1,000-investor cap, and relax compliance requirements is no exception.

It’s easy to focus on the upside, including more domestic institutions in alternatives, stronger private capital formation, and a closer alignment with global norms. But flexibility without guardrails can lead to excesses. The challenge is to strike a balance where sophisticated investors get the autonomy they deserve without opening cracks for misuse or market instability.

The Safeguard That Remains: Accreditation

The biggest comfort in SEBI’s proposal is that LVFs remain restricted to accredited investors.

• The ₹25 crore minimum per investor is still well above the ₹1 crore entry point for standard Category II AIFs.
• Accredited status implies either high net worth, relevant experience, or institutional capability, theoretically filtering out unsophisticated participants.

But theory and practice can diverge. Accreditation criteria assess capacity, not always capability. Having the money to invest doesn’t guarantee the expertise to understand complex, illiquid strategies. That’s where governance, transparency, and market discipline matter.

Where Oversight Is Being Relaxed

SEBI’s proposal eases several requirements:

1. No standard PPM template — removing prescriptive disclosures that are designed for less experienced investors.
2. No NISM certification for key investment personnel — removing a minimum qualification requirement for managers of LVF-only AIFs.
3. Investor cap removal — allowing unlimited accredited investors per LVF scheme.

Each of these relaxations has a logic: accredited investors can negotiate bespoke terms, do their own due diligence, and hire advisors. But they also rely on the assumption that all investors will exercise these rights effectively.

The Operational Risk

With more investors, even if all are accredited, comes operational complexity:

• Onboarding and suitability checks: Managers will need robust KYC and accreditation verification processes.
• Investor communication: Bespoke agreements can lead to a patchwork of side letters and customised rights, increasing legal and administrative overhead.
• Conflict resolution: With a more diverse LP base, aligning on key fund decisions (e.g., tenure extensions, strategy shifts) can be harder.

The removal of the 1,000-investor cap is an enabler for scale, but scale without operational readiness can quickly become a governance headache.

The Reputational Risk

Private market mishaps tend to have an outsized reputational impact. In a retail product, investor losses are often framed as part of market risk. In alternatives, especially when linked to regulatory easing, they can trigger calls for re-tightening rules.

If even one high-profile LVF blows up due to mismanagement, concentration risk, or valuation mismatches, the narrative could shift from “SEBI modernises” to “SEBI deregulates recklessly.” That could set the entire industry back.

Risks Specific to the Indian Context

1. Concentration in Illiquid Assets
   • Domestic institutions new to alternatives could over-concentrate in illiquid strategies, creating asset-liability mismatches.
2. Manager Quality Dispersion
   • Lower compliance thresholds could make it easier for less experienced managers to enter the LVF space, increasing variance in performance and governance quality.
3. Regulatory Arbitrage
   • Fund structures might be designed to qualify as LVFs primarily to avoid certain compliance obligations, rather than because they genuinely cater to large, sophisticated investors.

Mitigating the Downsides

If SEBI wants to preserve flexibility without fuelling excesses, a few guardrails could help:

• Accreditation Verification Framework: A standardised process or registry for confirming accredited investor status, reducing reliance on self-certification.
• Manager Track Record Disclosure: Even without a standard PPM template, a baseline disclosure on manager experience, prior fund performance, and governance setup could be mandated.
• Periodic Reporting to Investors: Simplified but mandatory quarterly reporting on NAV, portfolio composition, and material events.
• Alignment of Interest Requirements: Maintaining minimum sponsor commitments to ensure managers have skin in the game.

These are light-touch measures, not full retail-style oversight, but they can help prevent the kind of governance lapses that invite overregulation later.

The Risk-Reward Equation

For LVFs, the reward side is compelling:

• Broader domestic institutional participation.
• Lower fundraising friction.
• Greater scalability of fund structures.

The risk side is more about execution risk, which pertains to ensuring that as the LP base expands, the standards of due diligence, governance, and portfolio discipline rise to match. This is where the industry has to self-regulate, because SEBI is signalling trust in the accredited investor framework.

A Privilege That Needs to Be Earned

The LVF reforms are not a free-for-all. They’re an invitation to the market but you need to be an accredited investor, which means that if you want flexibility, you need to prove you can handle it.

For fund managers, that means treating governance not as a compliance cost, but as a competitive differentiator. For investors, it means exercising the negotiating power and due diligence that accredited status implies.

If the industry gets this balance right, LVFs could become a model for how India can blend regulatory trust with market sophistication. If it doesn’t, the inevitable backlash will not just close the LVF window, it could tighten the screws across the entire AIF ecosystem.

The rewards are tangible, but so are the responsibilities.