Individuals to get Qib-like status with ‘accredited investor’ tag
Securities regulator Securities and Exchange Board of India (Sebi) has proposed the introduction of the concept of ‘accredited investor’ for the domestic market.
Who is an accredited investor?
Globally, some jurisdictions have adopted the concept of accredited investors, also referred to as qualified investors or professional investors. This qualification is granted those who can demonstrate their financial prowess, have better understanding of various financial products and the risks associated with them, and are able to take informed decisions and have the capacity to absorb losses. At present, the Indian markets have the concept of qualified institutional buyers (QIBS), which include mutual funds, insurance companies or foreign portfolio investors. These investors enjoy greater market access. However, an individual investor cannot obtain QIB status. The concept of accredited investor will provide Qib-like status to individual investors.
What are the criteria to become an accredited investor?
In a discussion paper, Sebi has proposed various criteria for different types of investors such as individual, corporate bodies and non-resident Indians (NRIS). For an individual, the threshold being annual income of a minimum ~2 crore, or minimum net worth of ~7.5 crore (at least half of that in financial assets), or annual income of more than ~1 crore and net worth of at least ~5 crore (at least half of that in financial assets). Corporate bodies need to have a net worth of at least ~50 crore. In the case of NRIS, the annual income has to be at least $300,000, or net worth of at least $1 million, or annual income of $150,000 and net worth of $750,000 (at least half in financial assets). For foreign corporate bodies, the minimum net worth requirement is $7.5 million.
Investors will also be expected to demonstrate understanding of various products and the risks associated with them.
What are the benefits?
Since these investors will have the requisite knowledge and financial wherewithal, they can have easier access to customised investment products (structured products), low entry barriers and will be subject to less compliance. Also, Sebi has proposed to have a “light touch” regulatory framework for various product and services for accredited investors. Further, service providers will have the flexibility of designing investment products targeted at these investors. In the discussion paper, Sebi provides an illustration that an accredited investor can get access to services such as portfolio management services (PMS) or alternative investment fund (AIF) without necessarily having the minimum capital that is otherwise required of ~50 lakh and ~1 crore respectively. Meanwhile, the regulator will have better protection for non-accredited investors. They will be safeguarded from dealing in riskier products. Sebi says a “light touch regulatory framework for products/ services meant for accredited investors will lead to better channelisation of regulatory resources for protection of investors other than accredited investors.”