SEBI approves proposal to amend Regulation 25 to offer its protection to investors in all types of AIFs

SEBI’s Board, at its meeting held on 24 September 2026, approved a proposal to amend SEBI (Alternative Investment Funds) Regulations, 2012 to extend the protection currently available only to investors of alternative investment funds (‘AIF’) set up as a trust, to investors of all forms of AIFs. The aforementioned proposal had been placed in the public domain by SEBI vide a consultation paper issued on July 23, 2026. 

Regulation 25 – A brief history

Currently, Regulation 25 of the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’) states as follows:

All claims, differences or disputes between investors and the Alternative Investment Fund or the Manager arising out of or in relation to the activities of the Alternative Investment Fund or the Manager in the securities market shall be submitted to a dispute resolution mechanism that includes mediation and/or conciliation and/or arbitration, in accordance with the procedure specified by the Board:

Provided that if the Alternative Investment Fund has been established as a trust, then no loss or damage or expenses incurred by the Manager or officers of the Manager, including those in relation to resolution of claims or disputes of investors, shall be met out of the trust property.

The current version of Regulation 25 is the result of the Securities and Exchange Board of India (Alternative Dispute Resolution Mechanism) (Amendment) Regulations, 2023, which amended Regulation 25 with effect from 4 July 2023. Prior to its substitution, the regulation read as follows:

‘An Alternative Investment Fund, by itself or through the Manager or Sponsor, shall lay down procedure for resolution of disputes between the investors, Alternative Investment Fund, Manager or Sponsor through arbitration or any such mechanism as mutually decided between the investors and the Alternative Investment Fund.’

After amending Regulation 25 with effect from 4 July 2023, SEBI issued a circular dated 31 July 2023 on ‘Online Resolution of Disputes in the Indian Securities Market’ which established a common Online Dispute Resolution Portal (‘ODR Portal’) to facilitate online conciliation and online arbitration for the resolution of disputes arising in the Indian Securities Market. Schedule A to the aforementioned circular provided a list of securities market intermediaries / regulated entities against whom investors may invoke the ODR process and alternative investment funds are listed in the aforementioned Schedule A.

Impact of Regulation 25

In case of any AIF set up in the form of a trust, the proviso to Regulation 25 contains a statutory prohibition against the investment manager of the AIF or its officers using the trust's assets to pay for their own losses, damages, or expenses including costs of resolving investor disputes. Due to the specific wording of this proviso, it will apply only to AIFs that are set up in the form of a trust. The amendment approved by SEBI’s board on 24 September 2026, now extends the same protection to AIF which may be in the form of a limited liability partnership (‘LLP’) or a company.

Rationale for the amendment of Regulation 25

It is unclear why, when Regulation 25 was amended on 4 July 203, the statutory prohibition against the investment manager of the AIF or its officers using the trust's assets to pay for their own losses, damages, or expenses including costs of resolving investor disputes, applied only to AIFs set up in the form of trusts.

The amendment is likely part of wider effort to encourage AIFs to be set up as LLPs, an effort also reflected in the Corporate Laws (Amendment) Bill, 2026, introduced in the Lok Sabha on 23 March 2026, which proposed various amendments to the Companies Act, 2013 and the Limited Liability Partnership Act, 2008 (‘LLP Act’). Extending the Regulation 25 protection to LLPs is consistent with this effort by ensuring that investors in an LLP AIF have the same safeguard as investor in a trust AIF.

SEBI’s press release containing the key decisions taken at the meeting of its Board held on 24 September 2026, can be found here.

[The authors are Partner and Principal Associate, respectively, in Corporate and M&A practice in Lakshmikumaran & Sridharan Attorneys]