By Eshank M. Shah
Chartered Accountant
Investors and investments have, over the decades, evolved with respect to form, structure, taxation and compliances involved. The constant need to test and re-invent has led to newer market participants exploring the investment universe.
However, one of the foremost principles of investment and investing, that is, investors should invest in financial products after knowing the risks and returns associated with them, and therefore take an informed decision regarding their investments in line with their risk-return profile, continues to prevail.
SEBI Consultation Paper: On 24th February, 2021, SEBI introduced a ‘Consultation Paper on the Introduction of the Concept of Accredited Investors’ (‘Consultation Paper’) in the Indian securities market.
The Consultation Paper made a case for introduction of the concept of Accredited Investors (AI) in the Indian securities market and covered the following aspects:
- Benefits to the Indian Securities Market
- Proposed AI eligibility criteria for various categories of investors, namely, Individuals, HUFs, Family Trusts, Bodies Corporate and Non-Resident Investors
- Process and validity of accreditation
- Procedure for implementation
SEBI Press Release (SEBI PR): Subsequently, on 29th June, 2021, SEBI via PR No. 22/2021, inter alia proposed a formal introduction of the framework for AI in the Indian securities markets.
This article covers the following aspects:
(A) CONCEPT OF AI
The AI framework as proposed by SEBI in India and prevalent framework across different economies; impact on the Indian securities markets vis-à-vis Private Equity, Venture Capital, Portfolio Management Services (PMS) and the Startup ecosystem.
AI, or as they are colloquially called Professional or Qualified Investors, amongst others are a class of investors who possess expert understanding of various financial products, the risks and returns associated with them, coupled with the financial capacity to absorb losses, enabling them to take relatively higher risk in their investing endeavours.
Hence, they are classified as a distinct group to recognise their ability to take informed decisions regarding investments and to selectively eliminate the need for extensive regulatory protection. Such investors may also enjoy relaxations with respect to disclosure requirements, filings of offer documents / prospectus, etc., and enhanced flexibility in respect of investor reporting.
Across the globe, other jurisdictions have also similarly demarcated this investor class considering their distinct knowledge and investment experience, alongside financial capacity.
(B) WHY HAVE ACCREDITED INVESTORS
The investment ecosystem in India today restricts investments in various asset classes based on the capacity of the investor to digest risks associated with that investment. This ability to digest risks is determined by minimum investment thresholds and high net worth requirements.
However, over time, investors have gained requisite knowledge to demonstrate an understanding of the asset class along with the ability to take on the risks associated with such investments.
Therefore, identifying this new investor diaspora as an ‘Accredited Investor’ enables achieving the premise of risk-reward balance coupled with the opportunity to allow investors to invest in asset classes that they understand and follow which would fill in the gap in the current investment and securities regulations. This model has also been successfully implemented globally (see ‘Accredited Investor Ecosystem Globally’ below) and has resulted in the creation of this new investor diaspora.
Overall economic boost in the investment universe and promotion of asset classes which hitherto were inaccessible to a large set of investors would be visible.
(C) THE ACCREDITED INVESTOR FRAMEWORK AS PROPOSED BY SEBI IN INDIA1 AND ACROSS DIFFERENT ECONOMIES:
(I) The eligibility criteria for Resident Investors, Non-Resident Indians and Foreign Entities as proposed by SEBI are as detailed below:
|
Category of investor
|
Eligibility criteria for Indian
investor to be an Accredited Investor
|
Eligibility Criteria for Non-Resident
Indians and Foreign Entities to be Accredited Investors
|
|
Individuals, HUFs and Family Trusts
|
Annual income >= INR 2 crores; or
Net worth >= INR 7.5 crores with not
less than INR 3.75 crores of financial assets; or
Annual Income >= INR 1 crore + Net
worth >= INR 5 crores; with not less than INR 2.5 crores of financial
assets;
|
Annual income >= USD 300,000; or
Net worth >= USD 1,000,000; with not
less than USD 500,000 of financial assets; or
Annual income >= USD 150,000 + Net
worth >= USD 750,000; with not less than USD 375,000 of financial assets
|
|
Trusts (other than Family Trusts)
|
Assets Under Management >= INR 50
crores
|
Assets Under Management >= USD 7.5
million
|
|
Bodies Corporate
|
Net worth >= INR 50 crores
|
Net worth >= USD 7,500,000
|
|
Others
|
Central and State Governments,
Developmental agencies such as SIDBI, NABARD, etc., set up under the aegis of
Government(s), funds set up by Government(s) and QIB’s as defined under SEBI
(ICDR) Regulations, 2018
|
Multilateral agencies, Sovereign Wealth
Funds, International Financial Institutions and Category – I FPIs
|
1 SEBI Consultation Paper dated 24th
February, 2021
Manner of determination of annual income, net worth and value of real estate assets
(i) The income and asset details which need to be considered for assessment of eligibility criteria shall be as per the data furnished in the Income-tax Returns filed for the immediately preceding financial year and the financial year in which assessment is being made.
(ii) For calculation of net worth, the value of the primary residence of the investor shall not be included.
(iii) In case the assets of the investor accounted for the assessment of eligibility criteria are in the form of real estate, a ‘ready reckoner rate’ as published by the respective local bodies shall be considered.
Manner of determination of annual income and net worth in case of joint accounts
In case of joint accounts held by individuals, the account shall be considered as an AI account only in the following scenarios:
(i) The First holder of the account is an AI;
(ii) The Joint holders are parent(s) and child(ren), where at least one person is independently an AI;
(iii) The Joint holders are spouses and their combined income / net worth meets eligibility criteria.
Manner of determination of financial capacity in case of bodies corporate
For bodies corporate, the latest statutorily audited information as on the date of application shall be considered for assessment of eligibility.
For trusts, the calculation of Assets Under Management shall be based on the valuation data as included in the Statutory Audit Report of the preceding financial year or as on the date of application.
(II) Accredited Investor Ecosystem Globally
|
Country
|
Accredited Investor criteria
|
Regulation
|
|
United States of America
|
Earned income exceeding USD 200,000 (or
USD 300,000 together with a spouse) in each of the prior two years and
reasonable expectation of a similar earning for the current year, or
|
SEC Reg 501(d)
|
|
United States of America
|
(continued)
has a net worth over USD 1,000,000,
either alone or together with a spouse (excluding the value of the primary
residence
|
SEC Reg 501(d)
|
|
Singapore
|
Net personal assets exceeding SGD 2
million (or equivalent in foreign currency), or in case of Corporates – Net
Assets exceeding SGD 10 million (or equivalent foreign currency) or
Income in preceding 12 months should be
not less than SGD 300,000 (or equivalent in foreign currency)
|
Section
4A(1)(a) of the Securities and Futures
Act (SFA)
|
|
Australia
|
Net assets of at least AUD 2.5 million, or
A gross income for each of the last 2
financial years of at least AUD 250,000
|
Section 708(8) of the Corporations Act,
2001
|
|
United Kingdom
|
‘Experienced Investor’ definition in the
UK:
A body corporate which has net assets in
excess of
€ 1,000,000 or which is part of a group which has net assets in excess of €
1,000,000;
Trustee of a trust where the aggregate
value of the cash and investments which form part of the trust’s assets is in
excess of € 1,000,000;
An individual whose net worth, or joint
net worth with that person’s spouse, is greater than € 1,000,000, excluding
that person’s principal place of residence
|
Section 3 of Financial Services
(Experienced Investor Funds) Regulations, 2012
|
When compared to global benchmarks, the financial parameters (vis-à-vis income and net worth) laid down by SEBI are on the higher side and may indicate a sense of conservative caution which is understandably needed in the advent of the sensitivity and adaptability concerns that surround this critical regulation. However, over time SEBI may consider re-evaluating these parameters as soon as AI investment becomes mainstream and with the imminent need to reduce entry barriers (income and net worth) for a seamless functioning of these crucial market participants.
(D) IMPACT ON THE INDIAN SECURITIES MARKETS VIS-À-VIS PRIVATE EQUITY, VENTURE CAPITAL, PMS AND STARTUP ECOSYSTEM
The Indian financial and securities market ecosystem is evolving with the Startups and the alternative investment space is fast maturing.
The proposed regulations as detailed below create a base for a thriving market and a soft regulatory regime. While the market for customised products for elite investors may not be readily available in the Indian securities market at this juncture, putting in place the required enabling framework will propel innovation in and development of the securities market in time to come.
|
Category of market participant
|
Associated effects under proposed
regulations2
|
Impact (Author’s view) and SEBI PR
|
|
Investors
|
Recognition as AI will help in availing
intended benefits
|
Portfolio diversification through access
to customised investment products or structured products;
more investment products due to lower
entry barriers such as minimum investment size
|
|
Alternative Investment Funds (AIF)
(Venture Capital, Private Equity and
Startups)
and
PMS players
|
Flexible participation for AI under the
AIF and PMS regulations
|
This is a welcome step and a much-needed
initiative opening up the investment ecosystem to AIs who were hitherto
restricted from such investments owing to prevalent minimum investment norms
AIFs3 and PMS4
would be able to attract capital from AIs for this fast-growing asset class
helping Startup and Venture Capital investments get the much-needed push
without the minimum investment norm requirements.
|
|
Alternative
Investment Funds
and
Portfolio
Management Services players
|
Beneficial interrelationship of AI with
AIF and PMS
for AI’s with minimum investment of INR
10 crores (PMS) or INR 70 crores (AIF)
|
Accredited Investors with minimum
investment of
INR 70 crores with AIF may avail
relaxation from regulatory requirements such as portfolio diversification
norms, conditions for launch of schemes and extension of tenure of the AIF
OR
INR 10 crores with registered
|
|
Alternative
Investment Funds
and
Portfolio
Management Services players
|
|
(continued)
PMS provider may avail relaxation from
regulatory requirements with respect to investments in unlisted securities
and shall be able to enter into bilaterally negotiated agreements with the
PMS provider
The above benefits shall be instrumental
for availing better means for investment structuring, pooling of capital,
co-investments, etc.
However, the threshold of INR 70 / 10
crores seems to be on the higher side and may merit reconsideration
|
|
Investment Advisers (IA)
|
Optimal engagement with IA
|
The terms of the agreement may be determined
mutually between the IA and the AI client, without diluting the fiduciary
responsibility cast on IAs under the SEBI Investment Advisors Regulations.
AI shall be in a better
position to bargain since the limits and modes of fees
can be governed through bilaterally negotiated contractual terms
|
2 SEBI PR
dated 29th June, 2021
3 As an illustration, the minimum capital
commitment required to participate in AIFs is INR 1 crore. In case of an
Accredited Investor, the manager may accept a capital commitment less than INR
1 crore
4 As an illustration, any entity may enter into
an agreement with a Portfolio Manager to avail customised asset management,
i.e., portfolio management service with a minimum capital of INR 50 lakhs. Such
capital may be made available to the Portfolio Manager in the form of cash or securities.
In case of a client who is an Accredited Investor, the Portfolio Manager may
accept capital and manage a portfolio of less than INR 50 lakhs
Accreditation Agencies
Accreditation Agencies (AA) can be Market Infrastructure Institutions (MIIs), i.e., Stock Exchanges, Depositories and / or subsidiaries of such MIIs. The modalities of accreditation, including documentation, fees, etc., will be specified by the AA separately.
Accreditation, once granted, shall be valid for a maximum period of one year from the date of accreditation.
The investor shall submit the necessary data and documents to the AA for ascertaining its eligibility to be an Accredited Investor. If eligible as per the approved criteria, the Accreditation Agency shall provide a certificate to this effect, clearly indicating the period of validity. Each certificate of accreditation shall have a unique certificate number.
The AI shall provide a copy of the Accreditation Certificate to the financial product / service provider along with a declaration to the effect that:
(i) The Investor is aware that being an AI, it is expected to have the necessary knowledge or means to understand the features of the investment product / service, including the risks associated with the investment and also has the ability to bear the financial risk associated with the investment.
(ii) The Investor is aware that the investment product / service in which it is proposing to participate may have a relaxed and flexible regulatory framework and may not be subject to the same regulatory oversight as retail products / services.
(E) WELCOME TO THE AI IN INVESTING AND ITS BALANCE
SEBI continues to pursue its ambitious attempts to harmonise the Indian securities market with the staggered introduction of global best practices in investments while giving due recognition to sophisticated market participants for better regulation.
While from a risk minimisation and mitigation perspective for market participants SEBI will need to ensure a robust recognition process and monitor the impact on the asset classes, short-term liquidity boost and transparency of information by parties looking to on-board AI’s with investor protection and interest would remain the paramount factor.
We hope that the accreditation, and acceptance, of specialist investors further propels the quantum of investments into new asset classes and helps drive the Indian economy to greater heights.
