SEBI Proposes 'Silence Means Yes' Rule for AIFs, Boosting Operational Efficiency and Governance Standards

SEBI Proposes 'Silence Means Yes' Rule for AIFs, Boosting Operational Efficiency and Governance Standards​

Standardising Investor Consent in Alternative Investment Funds (AIFs)​

The Securities and Exchange Board of India (SEBI) has proposed a significant regulatory shift by suggesting a framework where the silence of an investor is treated as consent in certain matters pertaining to Alternative Investment Funds (AIFs). This proposal aims to standardize and streamline the process of obtaining investor approval, particularly for high-net-worth individuals and institutional investors.

This initiative is part of a consultation paper released on Tuesday. It seeks to strengthen safeguards around conflict-of-interest transactions while making the consent processes more efficient within AIF structures. SEBI noted that this practice is already common in the industry but lacks a unified regulatory structure.

Three Methodologies for Obtaining Deemed Consent​

Under the proposed system, fund managers would be granted flexibility by being allowed to select one of three predefined methodologies for securing investor consent. The first method, termed 'deemed consent,' permits AIFs to treat not only affirmative votes but also non-responses within a stipulated voting period as positive votes on a proposal.

SEBI stated that this framework is intended to improve operational efficiency, especially for funds with a geographically dispersed and large investor base. However, the regulator acknowledged existing governance concerns, noting that critical decisions could theoretically pass without explicit support if non-responses are counted as consent.

Alternative Voting Models Introduced by SEBI​

Beyond 'deemed consent,' SEBI has introduced two other models to provide varied levels of scrutiny over proposal approvals. The second approach, 'present and voting,' mirrors practices in mutual funds and listed companies, where only those investors who actively cast a vote are counted, and abstentions are disregarded.

The third and most stringent model is the 'express voting' approach. This requires that the affirmative votes meet a prescribed approval threshold based on the total value of all investors before a proposal is deemed approved. Crucially, each AIF scheme must consistently apply only one chosen methodology across all its investors to prevent internal discrepancies in voting standards.

Expanding Conflict-of-Interest Definitions​

In another pivotal proposal, SEBI has suggested replacing the current concept of 'associate' with the broader term 'related party' for conflict-of-interest transactions. The regulator indicated that their supervisory experience showed the previous definition was too narrow and could enable certain connected-party deals to bypass investor approval requirements despite having comparable conflicts of interest.

The proposed definition of 'related party,' which is adapted from the Companies Act, 2013, will broaden the scope of transactions necessitating prior investor sign-off. This expansion applies strictly to conflict-of-interest provisions; other regulatory obligations requiring the existing 'associate' definition will remain unchanged to avoid unnecessary compliance complexity.

Standardizing Investor Approval Thresholds​

SEBI has also proposed a move towards greater consistency in approval requirements across the industry. The regulator suggested mandating a uniform standard: that 75 percent of investors, measured by value, must approve all matters where investor consent is required. This proposal replaces the current mixture of two-thirds and 75 percent thresholds currently utilized.

Chirag Shah, Director at BlackSoil Asset Management, welcomed the consultation paper, noting that clearer norms for obtaining investor approvals are crucial in growth investing to reduce delays while maintaining robust governance standards. To ease implementation challenges, SEBI has proposed that existing voting methods adopted by current AIF schemes will be grandfathered, with the new framework applying only prospectively.