New Class of Investors – Accredited Investors

Accredited Investors

SEBI has notified and classified a new class of investors as Accredited Investors thereby raising of funds and investment in the various products may be expected to go up with lesser regulatory restrictions. SEBI earlier had issued consultation paper on the concept of Accredited Investors in the month of February, the concept is already established in the foreign countries, where the accredited investors are high-net-worth investors permitted to invest in unregulated or less-regulated investment products.

Further, on 26^th of August, 2021 SEBI has issued an circular vide no SEBI/HO/IMD/IMD-I/DF9/P/CIR/2021/620 with respect to the modalities for implementation of the framework for Accredited Investors stating the eligibility requirements, the procedure to avail the benefit, the procedure to opt out the benefit and the list of compliances to be followed by the investment provider or the registered intermediary.

A person or an entity will be identified as an Accredited Investor based on net worth and income, it can be Individuals, HUFs, family trusts, sole proprietorships, partnership firms, trusts and body corporates. Also, SEBI has notified the entities which are eligible to recognize and certify Accredited Investors.

Eligibility Criteria to be recognised as Accredited Investors

The criteria to be recognised as Accredited Investor varies depending on the type of investor as follows:

1. Individuals, Hindu undivided families, family trusts and sole proprietorships whose:

a. Annual income is at least Rs 2 crore; or

b. Net worth of at least Rs 7.5 crore, with at least Rs 3.75 crore held in financial assets; or

c. Annual income of at least Rs 1 crore and whose net worth is Rs 5 crore, with at least Rs 2.5 crore as financial assets

Note:

i. The value of the primary residence of the individual, Karta of HUF and the Sole Proprietor shall not be considered for calculation of net worth.

ii. In case of investments held jointly:

a. Where the joint holders are parent(s) & child(ren), at least one person should independently fulfill the eligibility criteria for AI

b. Where the joint holders are spouses, their combined income/ net worth should meet the eligibility criteria for AI.

2. Partnership firms in which each partner independently meets the income/net worth criteria for accreditation

3. Trusts (other than family trusts) and body corporates with net worth of Rs 50 crore or more.

Note:

Net worth of Body Corporates shall be calculated as:

Net worth = (Capital + free reserves) – (Accumulated losses + deferred expenditure not written off)

The following agencies may not be required to obtain a certificate of accreditation

1. Central Government and the State Governments, developmental agencies set up under the aegis of the Central Government or the State Governments (SIDBI, NABARD)

2. Funds set up by the Central Government or the State Governments

3. Qualified institutional buyers as defined under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018

4. Category I foreign portfolio investors

5. Sovereign wealth funds

6. Multilateral agencies (Asian Development Bank, World Bank, IMF) and any other entity as may be specified by the Board from time to time

Accreditation Agency

SEBI has notified a subsidiary of a Recognized Stock Exchange or a subsidiary of a Depository is eligible to get registered as an Accreditation Agency. Criteria for a Recognized Stock Exchange has been mentioned and the same are as follows:

a) Minimum 20 years presence in Indian securities market,

b) Minimum networth of INR 200 crores,

c) Presence of nation-wide terminals,

d) Having Investor grievance redressal mechanisms in place, including Arbitration,

e) Presence of Investor Service Centers (ISCs) in at least 20 cities, and

f) any other criteria as specified by the Board from time to time

Responsibilities of Accreditation Agency

Accreditation Agencies shall have the requisite infrastructure including systems and manpower to fulfil their responsibilities. The responsibilities are as follows:

a) verification of documents submitted by applicants for accreditation,

b) timely processing of applications for accreditation and issuance of accreditation certificate,

c) maintaining data of accredited investors,

d) verification of accreditation status

e) maintaining confidentiality of investor information at all times, and

f) any other responsibilities as may be specified by SEBI from time to time

Procedure for Accreditation

1. An application has to be made by a person intending to register as Accredited Investor to the Accreditation Agency as specified by the agency along with the list of required documents.

2. Accreditation Agency to verify if such person is ‘fit and proper’ to participate in the securities market, including absence of any convictions or restraint orders, not being a wilful defaulter, etc. at the time of accreditation.

3. The Accreditation Agency shall issue a certificate as an Accredited Investor Each Accreditation Certificate shall have a unique accreditation number, name of the Accreditation Agency, PAN of the Applicant and validity of accreditation (start date and end date).

Validity of Accreditation

Procedure to avail the benefits of Accreditation

Prospective investors shall submit the copy of Accreditation certificate along with an undertaking to the registered intermediary stating

a. The prospective investor gives consent to avail benefits under the Accredited Investors framework.

b. Has the ability to bear the financial risks associated with the investment.

c. Has the necessary knowledge and means to understand the features of the Investment Product, including the risks associated with the investment.

d. Is aware that the investment product is meant for Accredited Investor is and may not be subject to the same regulatory oversight as over investment products meant for investors other than Accredited Investor.

Investment Provider or the registered intermediary who can avail the benefit of the Accredited Investor has to comply the following:

a. To verify independently the status of accreditation with the concerned agency

b. May obtain additional undertakings from the prospective investors has to be availed without diluting the ones mentioned above.

c. Details of regulatory concessions available to the Accredited Investor to be disclosed prior to entering to an agreement.

d. Details of the regulatory concessions availed by the investor and investment provider along with the consequences if an investor becomes ineligible has to be mentioned in the agreement.

Withdrawal of Consent

Investors can withdraw the consent to act as an Accredited Investor anytime, however, the following conditions has to be complied:

a. In case of the benefit of lower ticket size, the investor is required to increase the investment to the minimum amount as per the regulatory framework within timeframe as mentioned in the agreement.

b. In case of the benefit of lower regulatory framework, then such investment shall be treated as investments by an Accredited Investor. Post withdrawal, further transactions shall be in accordance with the regulatory framework.

c. In case of pooled investment products launched exclusively for Accredited Investors along with the concessions in regulatory framework, option to withdraw is not available.

d. The modalities for withdrawal has to be mentioned in the agreement.

With framework of Accredited Investors being notified by SEBI, this enables a class of investors to explore the various investment products designed specifically for them. Further, SEBI has also notified the list of documents required and undertakings to be given by each category of investors separately thereby notifying the complete framework.