Sebi's move to introduce accredited investors concept to benefit AIFs

Capital markets regulator Sebi's decision to introduce the concept of accredited investors' will enhance the attractiveness of alternate investment funds (AIFs), experts said on Wednesday.

Accredited investors will be a class of investors who may be considered to be well informed or well advised about investment.

The Sebi's board approved a proposal on Tuesday to introduce a framework for accredited investors in the Indian securities markets. This came after the regulator issued a consultation paper on the concept in February.

Individuals, HUFs, family trusts, sole proprietorships, partnership firms, trusts and body corporates can get accreditation based on financial parameters and information as may be specified by the regulator.

Eligible subsidiaries of depositories and specified stock exchanges will issue an accreditation certificate to such investors.

Ashley Menezes, Partner and COO, ChrysCapital and Co-head Regulatory Affairs Committee, IVCA, said Sebi's decision to introduce the framework for accredited investors is a monumental step that will hugely benefit the alternate investment community.

"The global concept of sophisticated investors, who are well informed and advised about investment products, and therefore should be afforded flexibility in making and managing their investments, will significantly boost the participation in AIFs and PMS products," he added.

Subramaniam Krishnan, Partner Private Equity & Financial Services - Tax & Regulatory Services, EY, said the move will pave the way for a paradigm shift in the manner financial products are structured and distributed to end investors.

According to him, some of the benefits of accreditation should flow to investors and managers of portfolio management services, alternative investment funds, and investment advisory businesses.

"Over time this should be a powerful tool to distinguish sophisticated investors who have the capability to independently evaluate and manage risk without extensive regulatory prescriptions making Indian regulations more aligned with capital market regulations in more mature markets," he added.

An accredited investor is an internationally renowned concept that allows sophisticated investors more latitude and agency in the investment decisions they choose to make.

In India, an accredited investor will now have more latitude in tailoring financial investments in AIFs, PMS, through investment advisors in a manner that suits their risk appetite and investment thesis, Siddharth Pai, Founding Partner and CFO at 3one4 Capital, Co-Chair of Regulatory Affairs Committee, IVCA, said.

"This has been a key ask of the Indian AIF industry as well in order to enhance the pool of domestic rupee capital and to allow for greater flexibility and liberalisation of the frameworks governing sophisticated investors... It will greatly enhance the attractiveness of Indian AIFs to both domestic and foreign investors," he added.

Under the proposed framework, Sebi said accredited investors will have the flexibility to participate in investment products with an investment amount lesser than the minimum amount mandated in the AIF norms and Portfolio Managers (PMS) rules.

AIF for accredited investors, where each investor invests a minimum amount of Rs 70 crore, may avail relaxation from regulatory requirements.

Accredited investors with a minimum investment of Rs 10 crore with a registered PMS provider may avail relaxation from the regulatory requirement with respect to investment in unlisted securities and can enter into bilaterally negotiated agreements with the PMS provider.

Accredited investors, who are clients of investment advisors, will have the flexibility to determine the limits and modes of fees payable to the investment advisor through bilaterally negotiated contractual terms.

Tejesh Chitlangi, Senior Partner IC Universal Legal Advocates & Solicitors, said Sebi has approved various relaxations in its regulatory regime where investments are carried out by accredited investors, an investor class which will be defined by the regulator shortly.

Longstanding industry demand for non-applicability of minimum investment ticket size for accredited investors has been agreed upon by Sebi for its AIF and PMS rules and the requisite amendments should be in place soon.

"The relaxation from several regulatory requirements, particularly exempting portfolio diversification requirement for the funds constituted only of big-ticket size accredited investors each putting in at least 70 crores, will open up several investment structuring options for investors as well as the fund management community," Chitlangi said.

Though a reduction in the minimum eligibility amount should be considered by Sebi, it can then also facilitate the much needed single purpose and other co-investment vehicles across the investment sizes and not necessarily facilitate only the larger ones, he added.