All you need to know about Accredited Investors

By Morningstar |  08-09-21 | 
 

Securities and Exchange Board of India (SEBI) has approved the concept of Accredited Investors (AI) in the Indian securities market. Accredited Investors are a class of investors who are expected to have an understanding of various financial products and the risks-returns associated with them, and therefore, are expected to be able to make informed decisions regarding their investments.

SEBI has recently issued a circular on the modalities for implementation of the framework for AIs, and accordingly amended the RIA and PMS Regulations. The salient features are as follows:

What types of investors can get recognition as AI? 

Individuals, HUFs, sole proprietors, and family trusts with:

  • Annual income of Rs 2 crore ($ 272,000 approx.) or more OR
  • Net worth of Rs. 7.5 crore ($ 1.02 million approx.) or more, of which at least 50% has to be in financial assets OR
  • Annual income of Rs 1 crore ($ 136,000 approx.) or more + net worth of Rs 5 crore ($ 680,000 approx.) or more, of which at least Rs 2.5 crore ($ 340,000 approx.) has to be in financial assets.

Partnership Firms

Partnership firms, where each of the partners meets one of the criteria mentioned in i. above.

Trusts

Trusts (other than family trusts) with a net worth (as per statutory audit) greater than or equal to Rs. 50 crore ($ 6.8 million. approx.).

Body Corporates

Body corporates with a net worth (as per statutory audit) greater than or equal to Rs. 50 crore ($ 6.8 million. approx.).

Government Agencies

Central and State Governments, Developmental Agencies set up under the aegis of Government(s) (e.g. SIDBI, NABARD, etc.), Funds set up by the government, Qualified Institutional Buyers as defined under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, Category I Foreign Portfolio Investors, Sovereign Wealth Funds, Multilateral Agencies (e.g. Asian Development Bank, New Development Bank, International Monetary Fund, World Bank, International Finance Corporation, etc.) etc. shall be deemed Accredited Investors.

Modalities:

  • For computing net worth, the value of the primary residential property of the individual/HUF/sole proprietor will not be taken into account.
  • Where investments are jointly held, and the joint holders are parents and children, at least one person has to fulfil the eligibility criteria.
  • Where investments are jointly held, and the joint holders are spouses, their combined income/net worth will be taken into account.
  • The circular spells out how net worth will be calculated for trusts, body corporates.

How can an investor (who meets the eligibility criteria) become an AI? 

  • Prospective AI applies to an Accreditation Agency (AA) with the required documents.
  • AA verifies that the applicant is fit and proper to participate in the securities market (e.g. no convictions, no restraining order, no wilful default, etc.).
  • AA issues an Accreditation Certificate (AC), with an Accreditation Number (AN).

What is the validity of an accreditation? 

  • 1 year from the date of accreditation.
  • If the AI meets the eligibility criteria in each of the last 3 years, 2 years from the date of accreditation.

What regulatory privileges or concessions an AI can get? 

  • Under PMS, an AI need not invest the minimum investment amount, subject to necessary disclosures being there in the Disclosure Document and Client Agreement.
  • The contents of the Client Agreement prescribed in the PMS Regulations need not apply to a Client Agreement with an AI.
  • A portfolio manager (PM) can offer discretionary/non-discretionary/advisory services to a large value AI (whose minimum investment amount would be Rs 10 crore or $ 1.36 million. approx.) up to 100% of the AUM in unlisted securities, subject to appropriate disclosures in the Disclosure Document and Client Agreement.
  • For an investment adviser (RIA), the fee to be charged to an AI will be “in the manner as specified by” SEBI. That is not yet clarified.

How can an AI get the concessions/privileges from a PM/RIA? 

  • At the time of investing with/getting advice from the PM/RIA, submit a copy of the AC.
  • Submit an undertaking that the AI consents to get the benefits – This document must also have other undertakings such as (i) the AI has the ability to bear the financial risks, (ii) the IA has the required knowledge and that (iii) the AI is aware that the product is meant for AIs and may not be subject to the same regulatory oversight as investment products meant for non AI investors.
  • The PM/RIA has to independently verify the status of accreditation of the AI.
  • Before entering into a Client Agreement with the AI, the PM/RIA must disclose to the AI, details of the regulatory concessions available for the proposed investment/advice, and the applicable conditions.
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