What are accredited investors? The eligibility criteria and benefits

Currently, Indian markets have the concept of qualified institutional buyers (QIBs), which include mutual funds, insurance companies or foreign portfolio investors

Securities regulator Sebi has proposed to introduce the concept of ‘accredited investor’ for the domestic market. We try to understand the benefits of the same:

What 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 to investors who can demonstrate their financial prowess, have better understanding of various financial products and the risk associated with them and are thereby able to take informed decisions and have the capacity to absorb losses. Currently, 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 the QIB status. The concept of accredited investor will provide QIB-like status to individual investors.

What will be the eligibility 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 Rs 2 crore; or a minimum net worth of Rs 7.5 crore (at least half of that in financial assets); or annual income of more than Rs 1 crore and networth of at least Rs 5 crore (at least half of that in financial assets). Similarly, for corporate bodies, net worth of at least Rs 50 crore. In 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 networth of $750,000 (at least half of that in financial assets). For overseas corporate bodies, minimum net worth of $7.5 million. Besides the financial prowess, investors will also be expected to demonstrate understanding of various investment products and the risk associated with it.

What will be the benefits of being an accredited investor?

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- Rs 50 lakh and Rs 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. It will also lead to development of securities market through more participation and more products.