SEBI is contemplating introducing the concept of ‘Accredited Investors’ in the Indian securities market. This is still at the consultation stage as detailed in this notification (link or download here).
Globally, this is a pretty common concept in developed markets. Such investors are often referred to as qualified or professional investors. Such accreditation is selectively granted to those investors who are able to demonstrate their financial expertise, are assumed to have a better understanding of different financial products and the risk-return realities.
In the words of SEBI, these are a “class of investors who have an understanding of various financial products and the risks and returns associated with them and therefore, are able to take informed decisions regarding their investments.”
To put it more simply, it is granted to those who can be safely assumed to take informed decisions and have the necessary capacity to absorb losses if it comes to that.
Who is an Accredited Investor in India?
How can one become an Accredited Investor in India?
As per the consultation paper, only those investors who meet certain criteria of net worth, financial assets or income will be allowed to get themselves registered as AIs (or Accredited Investors).
SEBI has proposed several criteria for different types of investors to be granted the AI status:
- For resident Indian individuals: the threshold is a minimum annual income of Rs 2 crore; OR a minimum net worth of Rs 7.5 crore (at least half of that in financial assets, i.e. Rs 3.75 crore); OR annual income of more than Rs 1 crore and networth of at least Rs 5 crore (at least half of that in financial assets, i.e. Rs 2.5 crore). The same criteria are also applicable to HUFs and Family Trusts.
- For NRIs, the minimum annual income criteria is $300,000; OR net worth of at least $1 million (at least half of that in financial assets, i.e. $500,000); OR annual income of $150,000 and networth of $750,000 (at least half of that in financial assets, i.e. $375,000).
Similarly, different criteria are proposed for corporate bodies:
- Corporate Bodies need to have a minimum net worth of at least Rs 50 crore. The same is the criteria for trusts other than the family trusts.
- Overseas corporate bodies need to have a minimum net worth of $7.5 million. The same is the criteria for overseas trusts other than the family trusts.
So these are the eligibility criteria to become an accredited investor in India. At least this is what is proposed currently. The final regulation might be a more refined and tweaked version of the current proposal.
In a way, that is the accredited investor definition 2021 for India. And that is how to become an accredited investor in India? So if you had a question like what qualifies you as an accredited investor, then that’s your answer.
The accreditation once granted will be valid for a maximum period of one 1 year. And the accreditation of investors will be carried out through Accreditation Agencies that may be the market infrastructure institutions or their subsidiaries.
The idea behind this new move by SEBI is pretty simple.
Accredited investors (or qualified or professional investors), will be considered to be as informed investors on the basis of their financial capacity (like income and/or net worth, etc.) that enables them to hire expert investment advisors as and when they require. Also, it is assumed that these investors already have an understanding of various financial products and the risks and returns associated with them and hence, can be considered to be capable of making informed decisions regarding their investments.
So by separately identifying a sophisticated class of investors, SEBI is looking to have separate regulations for common retail investors (which need greater handholding and protection) and a different one for accredited investors, who can be granted a little bit more flexibility based on their financial profiles.
One benefit that an accredited investor might get is that they can get access to services such as portfolio management services (PMS) without necessarily having the minimum capital that is otherwise required Rs 50 lakh for investing in PMS.
SEBI has also rightly highlighted that “very often, prospective investors in the securities market are introduced to these investment products/services through distributors or friends/acquaintances. These introducers and/or distributors may not always be able to sufficiently educate the prospective investor regarding the risk-return profile of the product/service being marketed or its appropriateness as compared to the financial goal s of the prospective investor. In respect of distributors, there can also potentially be conflict of interest. Presently, to protect investors from unsuitable investment products in the securities market, one common measure is to stipulate a minimum investment threshold for each regulated product/ service.”
Read more about the real benefits of fee-only investment advice.
But having a ‘one-size fits all’ approach may not work as different investors have different levels of financial capabilities and financial understanding. So now SEBI seems to have rightly considered the need to introduce the concept of accredited investors in the Indian markets.
Since this new class of ‘accredited investors’ are expected to have a better understanding of the risks and returns associated with different financial products and have sufficient financial resources, they can be allowed to invest in customized or complex financial products.
The small common and retail investors who are not so well-informed and vulnerable to wrongful practices such as mis-selling will continue to remain under more protection – as complex products (available to Accredited Investors) will be off-limits for them everyone else who isn’t accredited.
I think this is a good move by SEBI on lines of having minimum (or limited) governance for identified sophisticated investors (or Accredited Investors). So it will allow for the separation of regulations for small retail investors and accredited investors. The latter can be allowed a little bit more flexibility leads to a reduction in compliance and result in the creation of more sophisticated and innovated products.
References:
- SEBI Circular on Modalities for implementation of the framework for Accredited Investors (Aug-2021)
- Introduction Of Framework For Accredited Investors In Securities Market (Jul-2021)
- SEBI Consultation Paper on introduction of the concept of Accredited Investors (Feb-2021)
Developed markets already have this concept where sophisticated financial products catering to a small class of accredited investors are on offer. Having such a structure in India will help cater to the high-end needs of HNIs in India. Innovative products can form an important part of HNIs portfolio, though these can also be high-risk kinds. But as SEBI’s paper points out, their “financial capacity gives them the ability to absorb losses and thus relatively higher risk products may also be suitable for such investors.”