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JC - Article - SEBI Framework for Accredited Investors & the Way Forward

Article

28 Sep 2021

SEBI Framework for Accredited Investors & the Way Forward

Published by LawStreetindia
Click here to view article in Published website.

   
Apurva Kanvinde (Partner, Juris Corp)
         
Rahul Apte (Associate)                      

The term Accredited Investors is said to be derived from the French word “accréditer” which means “to give accreditation to”. As the name suggests, the concept of Accredited Investors was introduced to appreciate the financial acumen and higher risk appetite of a class of investors and thereby providing them financial freedom to undertake investment in certain high risk complex financial products which are traditionally reserved primarily for ultra-high net worth / institutional investors. These investors are considered sophisticated enough to not require extensive regulatory protection and have the ability and willingness to invest in securities market, particularly in investment products that are relatively riskier and have lesser regulatory oversight.

Although the concept of “accredited investors” (“AIs”) has been recognised globally, there was no separate regulatory framework for such investors in India. Historically, in India, while financially or commercially the concept of AIs was understood, the concept of AIs was prevalent for the limited purpose (e.g., to enable investors to invest on the Innovators Growth Platform). The Securities and Exchange Board of India (“SEBI”) has now introduced a framework of AIsin the Indian securities market with an aim to create a pool of investors that have a higher risk appetite and to whom complex products with higher risk could be offered, and thus bring more investment in such products[1]. Since SEBI has officially introduced this concept in various SEBI regulations[2], it is now safe to say AIs are no longer a far-fetched dream for Indian securities market.

In this article, we will delve into the various aspects of this newly introduced concept of AIs and its current standing in the Indian securities market.

Who is an AI?

Any person (Individual / Hindu undivided family (“HUF”) / partnership firm[3] (“PF”) / body corporate / trusts) can be considered as AI if such person satisfies the financial criteria specified in the AIF Regs and a certificate of accreditation is granted by an accreditation agency[4] to such investor. The financial criteria prescribed by the AIF Regs are as follows:

(a) In case of an Individual / HUF / family trust / sole proprietorship:

(i) Annual income of at least INR 20 Million, or

(ii) Net worth of at least INR 75 Million (of which at least INR 37.5 Million should be in form of financial assets), or

(iii) Annual income of at least INR 10 Million and minimum net worth of at least INR 50 Million (of which at least INR 25 Million should be in the form of financial assets);

(b) In case of body corporate / trusts (other than family trust) - net worth of at least INR 500 Million; and

(c) In case of PF - each partner shall independently satisfy the eligibility criteria as provided above.

With respect to the eligibility, SEBI has inter-alia also clarified certain additional aspects which are as follows:

(a) Eligibility of foreign investors shall be determined on the basis of the rupee equivalent of their income and / or net worth as applicable; and

(b) Accreditation granted will be initially valid for 1 year. This period shall be 2 years, if such person has satisfied the eligibility criteria in each of the preceding 3 years.

Further, certain entities are granted deemed recognition as AIs and they would not be required to obtain certificate from the accreditation agency. These entities include Central Government, State Governments, developmental agencies / funds set up by these Governments, qualified institutional buyers, category I foreign portfolio investors, sovereign wealth funds and multilateral agencies.

Relaxation / Exemptions to AIs

Key Changes under the AIF Regs

Given that AIs are a class of well-informed investors, they have been given relaxations to provide the flexibility to participate in investment products with a lesser investment amount. An Alternative Investment Funds (“AIF”) can accept subscription of any amount from AIs even if it is less than INR 10 Million. Further, if the external investors[5] in any scheme of AIF comprise solely of AIs and each of them invest at least INR 700 Million then such AIF will now be called as Large Value Fund For Accredited Investors (“LVF”).

Following are the key relaxations granted to LVF:

(a) LVF is provided relaxation from submitting the placement memorandum to SEBI for comments prior to launch of a scheme;

(b) Extension of the tenure of cloe ended fund is permitted even beyond 2 years; and

(c) LVFs (which are formed as Category I or Category II AIF) are permitted to invest up to 50% of the investable funds (as against 25%) in an investee company directly or through investment in the units of other AIFs. Similarly, LVFs (which are formed as Category III AIF) are permitted to invest up to 20% of the investable funds (as against 10%) in an investee company directly or through investment in units of other AIFs.

The requirement to invest 25% for Category I and Category II and 10% for Category III for diversification would restrict the flexibility of AIFs formed for specific investment objects or for investment in pre-identified assets. The relaxation granted to LVF from the diversification requirement and the extension of tenure will now open new avenues of fund raising and structuring solutions.

Key changes under the PM Regs[6]

(a) Flexibility is provided to portfolio managers (“PM”) while entering into an agreement with large value accredited investor[7] (“LVAI”). A PM is not required to mandatorily include contents as specified in the PM Regulations in their agreement with LVAI;

(b) PM are permitted to provide discretionary or non-discretionary management or advisory services for up to 100% of the assets under management in unlisted securities if the client of PM is LVAI. This relaxation is subject to appropriate disclosures being made in the disclosure document; and

(c) PM can accept any funds / investment from client for management even if the quantum of such investment is less than INR 5 Million, provided the client of PM is an AI. For this, appropriate disclosures are required to be made in the disclosure document.

Considering AIs are a class of well-informed investors having significant market knowledge, permitting PMs to provide portfolio management or advisory services in relation to unlisted securities for 100% of the assets under a management is a pragmatic decision.

Way Forward

The concept of AIs has been prevalent in many other developed and developing markets and was the need of the hour in India as well. To finally give recognition and introduce a framework for AIs has been a welcome move by SEBI. Currently, SEBI has prescribed eligibility criteria based on quantitative parameters only. As this regime progresses, like certain other developed markets, SEBI may also relax certain quantitative parameters and introduce some separate qualitative parameters (qualification / experience) as eligibility criteria for AIs regime. We look forward to such gradual relaxation in the eligibility criteria as such relaxations will play a pivotal role in strengthening this framework and gradually accommodate more sophisticated investors within its ambit.

To conclude, introduction of this Framework for AIs will be considered a new era in the Indian securities market. It is expected to open new avenues of fund raising by providing the much-needed financial freedom to sophisticated investors and thereby help the Indian securities market to reach new highs.


[1]  Key Note Address by Shri Ajay Tyagi, Chairman, SEBI at NISM Second Annual Capital Markets Conference July 22, 2021.

[2] Amendments to Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regs”). SEBI has also cross referred this AIs definition by including appropriate references in other SEBI regulations such as Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020 (“PM Regs”) and Securities and Exchange Board of India (Investment Advisers) Regulations, 2013. Further, on 26th August 2021, SEBI has also issued a circular by which SEBI has provided clarification / modalities for implementation of framework for AIs.

[3] set up under the Indian Partnership Act, 1932.

[4] subsidiary of a recognized stock exchange/ depository/any other entity as may be notified by SEBI.

[5]  investors other than manager/sponsor of AIF, directors/employees of AIF or its manager.

[6] Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020 (“PM Regs”)

[7]  AIs who have entered into an agreement with PM for a minimum investment amount of ₹ 100 Million.