An invitation to high networth accredited investors

KS Badri Narayanan Chennai | Updated on March 05, 2021

SEBI's proposal will boost financial products innovation

Are you earning an annual income of ₹2 crore? Do you have a net worth of ₹7.5 crore with at least half of that being financial assets? Do you earn ₹1 crore annual income and have net worth over ₹5 crore (with ₹2.5 crore financial assets)? If your answer to any one of these questions is yes, then you can get the proposed special status of ‘accredited investor’.

Get that badge and you can enjoy relaxations on both investments and regulations. The Securities and Exchange Board of India is toying with the idea of introducing a new concept called accredited investor, which is quite popular in developed markets such as the US and Singapore.

Accredited investors, also widely known as qualified/professional investors, are those who can take informed decisions after understanding various financial products and the risks and returns associated with them. Those with the financial capacity to hire expert managers/advisors can also be ‘well advised’ accredited investors.

Apart from individuals/HUFs/family trusts, others such as trust (other than family trust), bodies corporate, central/state government agencies such as SIDBI, NABARD and non-resident Indians will also be eligible for getting the ‘accredited’ status. Multilateral agencies, sovereign wealth funds, international financial institutions and Category-I foreign portfolio investors can also gain this special status. An NRI with annual income of above $300,000 can become an accredited investor. Otherwise, the NRI should have a net worth of over $1 million, of which at least $500,000 should be in financial assets, or an annual income of $150,000 with net worth of over $750,000 (with not less than $375,000 in financial assets). Financial assets are equity, cash or cash equivalents or amount receivables.

Key benefits

For accredited investors, there are some relaxations on both on investments and regulations. For instance, the minimum ticket size for a PMS is ₹50 lakh currently. However, in case of a client who is an accredited investor, the portfolio manager can accept capital and manage a portfolio of less than ₹50 lakh. Similarly, the minimum capital commitment required to participate in AIFs is ₹1 crore. But the AIF manager can now accept a capital commitment of less than ₹1 crore for an accredited investor.

Similarly, rules have also been relaxed on the service provider side (AIF/PMS) to attract accredited investors. Maximum investment by category I and category II AIFs in an investee company cannot exceed 25 per cent of its net investible funds. Similarly, a category III AIF is not allowed to invest more than 10 per cent of its net investible funds in a single investee company. However, AIF (or a scheme of AIF) in which all investors are of the accredited type, will enjoy flexibility in terms of norms.

Innovative products

This is a welcome move by the regulator, as it will give scope for more innovative products from PMS and fund managers. As the minimum investment threshold is virtually lowered, even high net worth investors can participate in innovative products with much lower capital. In the overall portfolio of individuals, this new opportunity may even enhance their returns if they are game for a little more risk.

SMEs and start-ups that have strong fundamentals but lack funds can also benefit if PMSes or AIFs choose to invest in them to give better return to investors.

However, the one-year validity of accreditation, may act as a dampener and ideally should be, say, at least three years. The selection of the appointing agency for giving accreditations should also be done carefully. It would be much better if the regulator or regulated entities such as stock exchanges are entrusted with the responsibility.

For accredited status to individuals there must be a minimum education qualification (at least a graduate degree) criterion so that they understand the nuances and risks of each product. Now, the onus is likely to be on the accredited investors and they cannot complain of mis-selling if they willingly invest in high-risk products.

But investors, either accredited or non-accredited, should always understand the risk involved in investments and their financial capacity before shelling out their money in any complex product.

Published on March 05, 2021

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