Recently on February 24, 2021, Securities and Exchange Board of India (“SEBI”) released a consultation paper on Accredited Investors (“AIs”). Through this consultation paper SEBI has proposed to introduce the concept of AIs in the Indian securities market. Following is a brief on the framework proposed by SEBI.
AIs are conceptually a class of investors (recognized as such by many securities and financial market regulators around the world) who are able to take informed decisions regarding their investments. AIs are also termed as Qualified Investors or Professional Investors under different jurisdictions. Typically, AIs have (a) an understanding of various financial products and the risks and returns associated with them; and/ or (b) the financial capacity (generally ascertained from income and/ or net worth) to hire expert managers/ advisors as required for making investment related decisions. Different jurisdictions have considered either one or both of these qualifiers to define the eligibility criteria for AIs.
Jurisdictions which recognize AIs, reckon that these investors are sophisticated enough to not require extensive regulatory protection. In such jurisdictions issuers of securities and providers of financial/ securities market products/ services are offered a regulation-light regime, to offer their products/ services to AIs. This may be in the form of relaxations with respect to disclosure requirements, filing of offer document/ prospectus etc., and/ or flexibility in respect of investor reporting. Certain jurisdictions also permit issuers/ providers of financial/ securities market products/ services to design and offer specific products/ services exclusively to AIs.
Currently, investors in the securities market invest though a number of investment products/ services that are regulated by SEBI, such as schemes of mutual funds, Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InvITs), Alternative Investment Funds (AIFs), Venture Capital Funds (VCFs), Portfolio Management Service (PMS) and Investment Advisory Service. In order to protect investors from unsuitable investment products in the securities market, one common measure adopted by SEBI is to stipulate a minimum investment threshold for each of these regulated product/ service. Such criteria may also minimum investment threshold criteria may also be relaxed for AIs under the proposed framework.
The framework proposed by SEBI defines the eligibility criteria for procuring AI status to Indian as well as foreign persons, individuals as well as corporate entities. The framework also lays down a brief process of procuring, and validity of, “Accredited Investor” status. It also lays down a detailed process for availing “Accredited Investor” status for a specific product/ service only.
Some of the benefits that may be available under the framework across SEBI regulated products/ services, include (a) flexibility in minimum investment amount; (b) flexibility and relaxation in regulatory requirements (i.e., in respect of disclosures, reporting etc.); and (c) access to products/ services that may be offered exclusively to “Accredited Investors”.
A. Flexibility in Minimum Investment
It is proposed that AIs may participate in an existing investment product/ service at a lower threshold as compared to the minimum amount mandated in the respective regulations in relation to different financial products/ services. For example, if the minimum capital commitment required to participate in AIFs is Rs 1 Crore, then, in case of an AI, the fund manager may accept a capital commitment of less than Rs 1 Crore.
B. Flexibility in regulatory requirements
It is proposed that a relatively relaxed regulatory framework may be enabled for existing investment products/ services for participation by AIs alone at a certain minimum investment amount (higher than the minimum amount applicable for regular investors). Such relaxation may be with respect to the regulations/ circulars governing prudential norms, investment conditions, filings with SEBI, frequency of audit/ valuation/ reporting, etc. For example, regulatory framework may be relaxed for an AIF (or scheme of AIF) in which all investors (other than the fund manager/ sponsor and employees/ directors/ partners of manager/ sponsor) are AIs and each such Ais have committed a minimum capital of Rs 70 Cr (or USD 10 million or its equivalent).
C. New Exclusive Products
Jurisdictions around the globe have been witnessing a demand for tailor made investment products i.e. products designed to meet the specific investor’s risk-return-holding period profile. Many of these products may be suitable only for the well-informed/ well-advised investors, with a relatively high capacity to take financial risks. One of the key requirements for a thriving market for such products is a light touch regulatory regime. Accordingly, it is proposed that the framework enables introduction of new products which may be offered exclusively to AIs.
Each provider of investment product/ service may also have the flexibility to stipulate additional criteria or conditions, over and above the eligibility criteria specified by SEBI, to avail regulatory relaxations.
From private equity perspective, it may seem that this framework will only affect entities seeking to get listed on the Innovators Growth Platform (IGP) or the Qualified Institutional Platform (QIPs). On a deeper review, this framework may become a powerful tool in broadening alternative investments, enabling more crowd-funding opportunities and identifying new potential investment products which couldn’t be explored because of regulatory limitations. Adding a flavour of digitization to the fundraising, certification and monitoring processes within the framework may further make it more amenable to the investing (and invested) community.