Executive Summary

SEBI has notified the Alternative Investment Funds (Third Amendment) Regulations, 2026. This amendment modifies operational guidelines, investment valuation norms, and the regulatory framework for AIFs, aiming to enhance transparency, protect limited partners (LPs), and streamline the compliance obligations of fund managers.

Background

The Alternative Investment Fund (AIF) industry in India has seen exponential growth. However, concerns emerged regarding subjective valuation of unlisted portfolio companies, potential conflicts of interest, and the bypassing of core regulatory limits through complex fund structures. SEBI introduced the Third Amendment to tighten governance and ensure portfolio valuations reflect true market realities.

What Has Changed

Portfolio Valuation: The Third Amendment introduces mandatory standardised and independent valuation frameworks, replacing flexible, internally managed valuation models to improve consistency and transparency.

Governance: The revised framework strengthens governance requirements through enhanced conflict-of-interest disclosures and greater rights and protections for Limited Partners (LPs).

Key Provisions

• Independent Valuation: Mandates stricter independence criteria for registered valuers assessing unlisted portfolio investments, reducing fund manager bias.

• Conflict of Interest: Introduces stringent disclosure requirements regarding related-party transactions and co-investments to protect LP capital.

• Material Changes: Clarifies the exact threshold and process for obtaining LP consent when a fund alters its fundamental investment strategy.

Applicability

• Covered Entities: All SEBI-registered Alternative Investment Funds (Category I, II, and III), their Sponsors, Investment Managers, and Trustees.

Practical Implications

• Fund Operations: AIF managers face increased compliance and audit costs due to the mandate for frequent, rigorous independent valuations.

• Investor Confidence: Limited Partners (institutional investors and family offices) gain greater visibility into the true performance and risk metrics of their capital commitments.

What Should We Do

• Update Valuation Policies: Fund managers must overhaul internal valuation manuals and onboard independent registered valuers meeting the new SEBI criteria.

• Review Private Placement Memorandums (PPMs): Ensure all new fund launches reflect the updated governance and disclosure covenants.

KGS Perspective

SEBI is systematically institutionalizing the AIF space. While the Third Amendment increases the operational burden on fund managers, it is a necessary evolution to align Indian private market regulations with global LP expectations and fiduciary standards.

Conclusion

The AIF Third Amendment enforces a new era of transparency and rigorous valuation discipline, safeguarding the integrity of India's private capital markets.

Regulatory Reference

• Regulator: Securities and Exchange Board of India (SEBI)

• Notification / Circular / Regulatory Reference: SEBI AIF (Third Amendment) Regulations [Dated 15 October 2026]

• Official Document Link: [https://www.sebi.gov.in](https://www.sebi.gov.in)