Discuss how Alternative Investment Funds can help channel domestic savings into start-ups and high-growth enterprises. What regulatory safeguards are needed?

Alternative Investment Funds (AIFs) are privately pooled vehicles regulated under the SEBI (AIF) Regulations, 2012. They put money into unlisted and high-growth firms. SEBI now wants to grow the pool of eligible accredited investors from about 1 lakh to 4 lakh [4]. AIFs can become a strong domestic source of risk capital, but only if wider access comes with proportionate safeguards.

How AIFs channel domestic savings

• Pooling risk capital: Professional managers direct HNI and institutional savings into unlisted start-ups. This reduces dependence on foreign VC/PE [4].
• Accredited Investor (AI) route: Under Regulation 2(ab), investors with income of ₹2 crore or more, or net worth of ₹7.5 crore or more, can invest below the ₹1 crore minimum [2].
• Large Value Funds (LVFs): SEBI has proposed cutting the threshold from ₹70 crore to ₹25 crore. LVFs already held ₹1,34,752 crore in commitments as of June 2025 [1].
• Easier verification: A proposal would accept eCAS statements as proof for individuals holding ₹5 crore or more in securities [4].
• Untapped base: India had fewer than 1,000 registered AIs against about 72,000 AIF investors, which leaves large headroom [1].

Regulatory safeguards needed

• Knowledge-based accreditation: Wealth does not prove an investor understands risk. In SEBI's consultation, 8 of 20 commenters asked for a skill-based route [1].
• Protect smaller AIs: AI-only schemes may waive pari-passu rights and extend fund life by up to 5 years with consent from two-thirds of investors by value. Both need limits so that large holders do not dominate [1].
• Trustee independence: SEBI itself admits the rules set no independence standard for trustees. One is needed before oversight passes to managers [1].
• Anti-circumvention: RBI's December 2023 curbs stopped banks and NBFCs from using AIFs to evergreen loans [3]. Similar vigilance must continue as the pool grows.
• Phased expansion: SEBI should move in stages, as it has committed to, and publish data on take-up and complaints at each step [1].

In short, AIFs can turn passive domestic wealth into patient capital for innovation. The way forward is calibrated reform: widen eligibility while improving trustee standards, testing investor sophistication and keeping disclosure strong. This balances investor protection with capital formation, as SEBI's mandate requires, and supports Startup India and SDG 8 (decent work and economic growth).