Accredited investor is the term used by Securities and Exchange Commission in the USA to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. They are high net worth individuals, banks, insurance companies, brokers and trusts.
Often the prospective investors in the securities market are introduced to investment products/services through distributors or friends who may not be able to educate them about the risk and return of the product/service as compared to the financial goals of the prospective investor.
The Securities and Exchange Board of India has recently proposed the creation of a new class as ‘Accredited Investors’. These are the investors who have a better understanding of the risks and returns associated with different financial products and therefore can be allowed to invest in customised of complex products.
Who can be an Accredited investor in India?
To be an AI, one of the following conditions should be met-
- The individual investor who wants to be recognised as an AI must have Rs.2 crore as annual income-this includes individuals, HUFs and family trusts. Or,
- the AI should have net-worth of at least Rs.7.5 crore or more, with at least Rs.3.75 crore in financial assets. Or,
- Annual income must be at least Rs.1 crore and net worth must be at least Rs.5 crore with investments in financial assets worth at least Rs.2.5 crore.
To become an AI the criteria of net worth, financial assets or income are allowed to get recognised as an AI. SEBI has proposed the concept and the comments thereon can be sent to the regulator in a prescribed format latest by March 18.
For Trusts and body corporates proposed AUM and net worth is equal to-higher than Rs.50 crore. Multilateral agencies, sovereign wealth funds, international financial institutions and Category-I foreign portfolio investors may also be eligible.
Accredited investors participating in existing financial products/services shall have the option to choose the benefit of lower ticket size or flexible regulatory framework as may be appropriate for them.
This concept may offer benefits to investors and financial product/service providers, such as flexibility in minimum investment amount, regulatory requirements and access to products/services offered exclusively to AIs. The accreditation may be carried out via Accreditation agencies being the market infrastructure institutions or their subsidiaries.
Aim behind proposed AIs- Introduction of new and complex products:
- Design of AI targeted investment products is made flexible enough to boost it.
- The investment products will be regulated though not the same way as other instruments.
- Only those investors can become AIs, who have required financial resources thereby eliminating the unfit individuals or entities.
- Due adequacy of financial resources the AIs can bear the losses and high-risk products are justified in their hands.
- SEBI by creating this category will be able to regulate more effectively those investors that need more protection.
Benefits for existing products:
For certain investments AIFs can deviate from regulatory set limits if they prove that all investors in their fund are AIs and meet a higher minimum investment criteria. AIFs can borrow money more than two times the NAV of the fund to make investments if all the Investors are AIs with each having a minimum investment of Rs 70 crore.
Once the eligibility is determined, the accreditation will be granted for 1 year by the stock exchange. SEBI has fixed that the minimum capital requirements for PMSes and alternative funds could be below Rs.50 lakh and Rs.1 crore respectively.
Bhoi Smrutirekha Dharanidhar