Personal Finance

How to be an accredited investor

Aarati Krishnan | Updated on September 05, 2021

Any investor meeting certain minimum net worth and income criteria can get certified by notified agencies to earn that moniker

Have you ever wished that as an individual investor in India, you had access to some of the exciting high-risk high-return products that your global cousins dabble in? Have you been hoping that you could participate in hedge funds, angel investments or unlisted securities without betting too much on one product? Do you think you are capable of researching investment options on your own without a verbose offer document?

If you replied ‘yes’ to any of these questions and also have many zeros to your net worth, then you may like to sign up under SEBI’s new ‘accredited investor’ framework, notified last week, to expand your horizons.

Who can apply

Any investor meeting certain minimum net worth and income criteria can get himself or herself certified by notified agencies to earn the moniker of ‘accredited investor’.

SEBI’s new rules say that to apply to be an accredited investor, an individual needs to meet one of three conditions. One, you must have an annual income of over ₹2 crore. Two, you can have net worth of at least ₹7.5 crore - of which at least ₹3.75 crore is in the form of financial assets. Three, you can have an annual income of ₹1 crore and a net worth of ₹5 crore, out of which at least half is in financial assets.

To calculate this net worth, your primary residence or the home you live in, will be excluded from the calculation. Your other real estate assets will be considered. If you jointly hold investments with your parents or children, at least one of you should independently meet these conditions. You and your spouse can, however, combine your incomes/net worth to meet this bar.

You can apply for accreditation for one year or two years. If you need the certificate to be valid for one year, you need to have met the above conditions for the last financial year. To get two-year validity, you should have met these conditions continuously for the last three years.

What if you haven’t amassed the above net worth or income yet, but are a qualified chartered accountant, RIA, CFP or CFA? In that case, these regulations don’t allow you to be ‘accredited’ though you may have sufficient knowledge to evaluate sophisticated products. In developed markets such as US, the accredited investor definition has recently been expanded to include folks with professional or advisory qualifications, even if they don’t meet net worth or income criteria. But SEBI has not taken that road yet.

How to apply

You will have to apply with the required documents to the stock exchanges or depositories authorised by SEBI to function as ‘accreditation agencies’.

The documents you need to submit are copies of your PAN card and Aadhar or passport and your income tax returns for the last one or three years, depending on whether you seek accreditation for 1 or 2 years. A practicing CA needs to certify your net worth as of March 31 of the previous 1 or 3 years as required. You will also need to submit proof of valuation of your assets, by way of a demat account statement or ready reckoner rate applicable to real estate.

You need to sign a declaration that you are not a wilful defaulter, a fugitive economic offender or debarred from securities markets and if an NRI, not barred from accessing Indian markets. The accreditation agency will verify these and also that you are ‘fit and proper’ to participate in markets, before issuing a certificate. When you invest, you will have to additionally submit a consent letter saying that you have the necessary knowledge to understand a product’s features and risks.

What can you do

The intent of this framework is to allow folks with a sufficient financial cushion and risk-taking ability to participate in riskier investments, without SEBI or other regulators looking over their shoulder.

To start with, SEBI has relaxed minimum ticket size norms and diluted disclosure requirements for some products. As per the new rules, if you’re an accredited investor, you can invest less than the minimum ticket size of Rs 1 crore in Alternative Investment Funds (AIFs) and less than the ₹50 lakh norm in Portfolio Management Schemes (PMS).

The AIF universe in India today spans over 700 funds over three categories. Category I AIFs include venture capital and angel funds, social impact and SME funds. Category II includes real estate, private equity, distressed debt and venture debt funds. Category III spans hedge funds following long-short, arbitrage and derivative strategies. On PMS, a lower ticket size can allow you to spread your bets over multiple styles and managers instead of concentrating on just one or two.

If you are willing to commit larger sums, the AIFs or PMS’ you invest in may be allowed to take on more concentration risks. For instance, PMS managers have been allowed to roll out ‘large-value’ funds for accredited investors willing to invest ₹10 crore each, to invest wholly in unlisted securities. Accredited investors willing to bet ₹70 crore at one go, will gain access to large-value AIFs that take concentrated exposures of upto 50 per cent in their investee companies. Such funds need not file a placement document with SEBI. Expect this bouquet of products to expand as SEBI builds on this new idea.

Published on September 04, 2021

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