Wealthy and wise

Globally, financial products are acquiring greater sophistication with inter-connected markets and digital innovation, but regulators are finding it difficult to keep up. The big dilemma for financial regulators is how they can shield uninformed investors from the risks of new asset classes, while still enabling innovative forms of fund-raising for firms. Therefore, it is good to see SEBI exploring the concept of ‘accredited investors’ for alternative assets in the Indian market. By allowing retail investors to formally validate their financial awareness, the process of accreditation ensures that the eligibility criteria for participating in high-risk, high-return assets are based more on financial savvy, than on networth.

Protecting the ‘small’ investor has been the cornerstone of India’s securities market laws for many years. And SEBI regulations now rely solely on ticket size to sift retail investors in riskier assets such as SME public offers, portfolio management services, venture funds and angel funds. However, the definition of ‘small’ investor is fluid — while a minimum ₹1-lakh subscription is needed for an SME IPO, the bar is at ₹1 crore for private equity or angel funds. The many securities scams have also shown us that not all wealthy investors are well-informed. Many high networth investors lost money in collective investment schemes, NSEL and art funds. In contrast, many less-affluent investors are financially savvy and may be keen to participate in equity crowd-funding, or create wealth through portfolio management services or SME IPOs. The ‘accredited investor’ dispensation prevalent in markets such as the US and Europe addresses this dichotomy by using wealth and knowledge criteria to screen expert investors. In the US, investors with annual incomes of $200,000 or investible networth of $1 million can apply for accreditation. In the UK, investors have to self-certify income and financial awareness. Drawing from different regimes, the Narayana Murthy committee on alternative investments (November 2016) has suggested a ₹50-lakh annual income for three out of the last five years, registration with the tax department, and an online test on financial markets for investor accreditation in India. This is under examination by SEBI. Once it is in place, SEBI can use this framework not only to enable alternative investments, but also to clarify the regulatory regime for unregulated vehicles such as crowd-funding and peer-to-peer lending.

While using qualitative and quantitative criteria to accredit investors is a good approach, SEBI should collate more data on the actual income distribution in India before setting the income bar at ₹50 lakh. Given that only 42,800 people have declared incomes of over ₹1 crore, there is the risk of the financial bar for accreditation again being set too high. In fact, only recently the SEC chairman argued for diluting the accreditation criteria in the US on the grounds that all investors deserved “equality of opportunity” in exploring new assets that can expedite their wealth creation efforts. More money should not be necessary to make more money.

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