When an Alternative Investment Fund (AIF) makes a material change, such as bringing in a new investment manager or increasing fees, investors who committed on the old terms are entitled to leave. SEBI requires that dissenting investors be offered an exit option. How that exit works depends on whether the scheme is open-ended or close-ended, because the two structures offer very different liquidity to begin with.
This article explains what triggers the exit right, the process for open-ended and close-ended schemes, the valuation rule, the timeline, the allocation of costs, and a checklist for investment managers, sponsors and trustees.
Key points at a glance
- Material changes include a change in sponsor or manager (other than internal group restructuring), a change in control of the sponsor or manager, and a change in fee structure or hurdle rate that may result in higher fees.
- Dissenting investors must get at least one month to express dissent and must be offered an exit.
- In close-ended schemes, dissenting investors are bought out by the manager or a person arranged by it, at a value not less than the average of two independent valuations.
- In open-ended schemes, exit may be through buy-out of units or through redemption funded by sale of underlying investments.
- The exit must be completed within 3 months of the end of the dissent period, and all costs are borne by the manager, sponsor or incoming manager or sponsor, not by investors.
What is a material change in an AIF?
The SEBI Master Circular for AIFs (now dated 3 June 2026, with material changes dealt with in its chapter on material change and change in sponsor or manager) treats as material any change that fundamentally alters the terms on which investors committed. It specifically includes:
- a change in sponsor or manager, other than an internal restructuring within the group;
- a change in control of the sponsor or manager;
- a change in fee structure or hurdle rate that may result in higher fees being charged to investors.
A change in sponsor, manager or control also requires SEBI's prior approval under the AIF Regulations. Where the change is approved by investors holding at least 75% by value, the exit mechanism need not be offered; that exception is discussed in a separate article.
How does the exit option work in an open-ended AIF?
Only Category III AIFs can be open-ended. Since investors in such schemes can already redeem periodically, the exit mechanism builds on existing liquidity:
- Investors are informed of the proposed material change with adequate detail.
- Dissenting investors are given at least one month to express dissent.
- Exit is provided either by buying out the units of dissenting investors, or by redeeming their units through sale of the underlying investments.
- The price reflects the scheme's valuation in line with its disclosed valuation policy, and no exit load or cost is passed to the dissenting investor for this exit.
How does the exit option work in a close-ended AIF?
Close-ended schemes, which include all Category I and II AIFs and many Category III schemes, have no regular redemption. Their investments are often unlisted and illiquid. SEBI therefore requires a buy-out:
- Dissenting investors are identified at the end of the dissent window.
- Their units are bought by the manager or by any other person arranged by the manager.
- The units are valued by two independent valuers, and the exit price must be not less than the average of the two valuations.
- The buy-out is completed within 3 months from the last date of the dissent period.
Comparison: open-ended vs close-ended exit
| Aspect | Open-ended scheme | Close-ended scheme |
|---|---|---|
| Who can be structured this way | Category III AIFs only | Category I, II and III AIFs |
| Exit route | Buy-out of units, or redemption through sale of underlying investments | Buy-out of units by the manager or a person arranged by it |
| Valuation | As per scheme valuation norms | Not less than average of two independent valuations |
| Dissent window | At least one month | At least one month |
| Completion | Within 3 months of end of dissent period | Within 3 months of end of dissent period |
| Costs | Borne by manager, sponsor or incoming manager or sponsor | Borne by manager, sponsor or incoming manager or sponsor |
Worked example: buy-out in a close-ended scheme
Consider a close-ended Category II AIF where control of the investment manager is to be acquired by a new group. The change is not approved by 75% of investors by value, so the exit mechanism applies.
- Notice is sent to all investors on 1 July, with dissent to be expressed by 31 July (one month).
- An investor holding 5,00,000 units dissents.
- Two independent valuers value the units at ₹108 and ₹112 per unit. The average is ₹110.
- The incoming manager arranges a buyer who acquires the units at not less than ₹110 per unit, that is, at least ₹5.50 crore.
- Valuation fees, legal costs and transaction costs are borne by the manager, sponsor or incoming manager, not by the scheme.
- The buy-out is completed by 31 October, within 3 months of the close of the dissent window.
Practical point: In close-ended schemes, the buyer must be lined up before the notice goes out. If dissent is higher than expected, the manager or incoming sponsor must be able to fund the buy-out within the 3-month window.
Why the regulation differentiates
An investor in an open-ended scheme can already leave through normal redemptions, so the exit mechanism only needs to ensure that leaving because of a material change is not penalised. An investor in a close-ended scheme has locked capital for the tenure of the scheme and has no market for the units. Holding such an investor to changed terms would be coercive, so SEBI requires an arranged buy-out at an independently determined value.
Oversight and responsibility
The trustee (for a trust-structured AIF) or the sponsor (for other structures) is responsible for ensuring that the process is followed and for keeping SEBI informed. The exit costs cannot be charged to the scheme, because doing so would make the remaining investors pay for a change they did not seek.
Common mistakes
- Offering redemption in a close-ended scheme without a buyer, leaving the scheme to fund the exit.
- Using a single valuation, or valuers who are not independent of the manager.
- Charging valuation or legal costs to the scheme.
- Allowing less than one month for dissent, or missing the 3-month completion timeline.
- Treating a fee increase as a disclosure matter rather than a material change.
Checklist for fund managers
- Identify whether the proposed change is a material change and whether SEBI approval is needed.
- Confirm whether the scheme is open-ended or close-ended and select the exit route.
- Arrange funding or a buyer for dissenting investors' units in advance.
- Appoint two independent valuers for close-ended schemes.
- Issue the notice with at least one month for dissent.
- Complete the exit within 3 months and report to the trustee or sponsor and SEBI.
Frequently Asked Questions on Exit Options for Material Changes in AIFs
What is the minimum dissent period for a material change in an AIF?
Investors must be given at least one month to express their dissent to the proposed material change.
How is the exit price determined in a close-ended AIF?
The units are valued by two independent valuers, and the exit must be at a value not less than the average of the two valuations.
Who bears the cost of providing exit to dissenting investors?
The manager, sponsor or the incoming manager or sponsor. The costs cannot be charged to the scheme or its investors.
Within what time must the exit be completed?
Within 3 months from the last date of the dissent period.
Can a Category I or II AIF be open-ended?
No. Category I and II AIFs must be close-ended; only Category III AIFs may be open-ended.
Is an exit option always required for a change in manager?
No. If investors holding at least 75% by value approve a change in sponsor, manager or control, the exit mechanism does not apply.
Conclusion
A material change turns investor disclosures into investor rights. The exit mechanism is tailored to the scheme's structure: redemption or buy-out in open-ended schemes, and an independently valued buy-out in close-ended schemes, in both cases at no cost to investors and within fixed timelines.
Planning the exit route, funding and valuation before announcing the change is the most reliable way to complete the process on time.
This article is intended for general information and knowledge sharing only and does not constitute professional advice or solicitation of any kind. Provisions are summarised as of September 2026. Readers should refer to the relevant provisions, regulations and judicial pronouncements for their specific facts.