The Security and Exchange Board of India (SEBI) established the accredited investor procedure in India for high net-worth individual (HNI) investors who meet the regulatory body’s qualifications to participate in listed companies.
What will be the requirements for becoming an accredited investor?
- To be considered an accredited investor, you must fulfill at least one of the following criteria:
- Have specific professional certificates, designations, or other credentials, or are a “knowledgeable employee” of a private fund
- Have a net worth of more than $1 million, either alone or with a spouse or spousal equivalent (excluding the value of the primary residence)
- Have earned income in excess of $200,000 ($300,000 if married or equivalent) in each of the previous two calendar years. The individual must also establish credibility by demonstrating that he or she will at the very least meet these income levels this year.
However, there is one key guideline to remember regarding that final statement. For all three years, you must achieve the income criteria using the same method: single or married. We’ll go over it.
Consider a couple that made $250,000 two years ago but whose wife did not work. He made $160,000 last year, while his wife made $200,000 (for a total of $360,000). The pair may easily show that they are capable of earning the same or more this year.
It may appear that the pair fulfilled the criteria for becoming accredited investors. However, the couple did not use the same technique to determine income for all three years. To become an accredited investor, an individual must achieve those criteria for each of the three years, either alone or with a spouse or equivalent. The sole exception is if the person was unmarried for the first three years and subsequently married, or vice versa.
In order to become an accredited investor in India, an investor or corporate entity with a Demat account must apply to the depositories or the stock exchange for accreditation. The stock market will issue the investor accreditation for a period of three years once the investor’s eligibility has been established.
Furthermore, any change in the accredited investor’s financial situation must be reported to the stock market and depositories.
Who Is Eligible to Become an Accredited Investor?
To be deemed an accredited investor, a company or organization must have a net worth of Rs.25 crore in order to participate in publicly traded companies. A liquid net worth of at least Rs. 5 crores and a cumulative yearly gross of Rs. 50 lakh are also required for an individual to be declared an accredited investor.
The regulatory authority establishes the rules for accredited investors to guarantee that the interests of investors are protected, as the danger of losing money on unfamiliar investments is often considerable. SEBI also guarantees that accredited investors have the financial resources to bear any losses resulting from unregulated securities.
AIF Regulations Significant Changes
Because AIs are well-informed investors, they have been granted exemptions that allow them to engage in investment products with a lower investment amount. An AI can subscribe to an Alternative Investment Fund (“AIF”) for any amount, even if it is less than INR 10 million. Furthermore, if the external investors in any AIF scheme are only AIs, and each of them invests at least INR 700 million, the AIF will be renamed Large Value Fund For Accredited Investors (“LVF”).
The significant concessions given to LVF are as follows:
- LVF is exempted from submitting the placement memorandum to SEBI for review prior to the commencement of a program.
- The term of a closed-ended fund can be extended for up to two years; and
- LVFs (which are constituted as Category I or Category II AIFs) are allowed to invest up to 50% of their investable funds in an investee firm directly or through investment in the units of other AIFs (as opposed to 25%). Similarly, LVFs (which are created as Category III AIFs) are allowed to invest up to 20% of their investable funds in an investee firm directly or through investment in units of other AIFs (rather than 10%).
The requirement that AIFs established for particular investment objectives or pre-identified assets invest 25% for Category I and Category II and 10% for Category III for diversification would limit the flexibility of AIFs formed for specific investment objects or pre-identified assets. The exemption from the diversification requirement given to LVF, as well as the extension of its lifespan, has opened up new opportunities for capital raising and structuring solutions.
The notion of AIs has been widespread in many other industrialized and emerging economies, and it was also a pressing necessity in India. SEBI’s decision to finally recognize and implement a framework for AIs is a positive step. SEBI has now imposed qualifying requirements based only on quantitative characteristics. As the regime evolves, SEBI, like many other mature markets, may loosen certain quantitative standards and incorporate certain independent qualitative metrics (qualification/experience) as eligibility criteria for AIs. We look forward to such progressive relaxations in the eligibility requirements since they will play a critical role in improving this framework and gradually bringing more skilled investors inside its scope.
To summarise, the launch of this AI Framework will usher in a new era in the Indian securities industry. It is projected to open up new channels for capital raising by giving sophisticated investors much-needed financial flexibility, allowing the Indian stocks market to hit new highs.
