The capital market regulator, Securities and Exchange Board of India, has floated a consultation paper to introduce the concept of ‘accredited investors’ in the Indian securities market and sought public comments on the same. The comments can be sent to the regulator latest by 18 March 2021. According to SEBI, the new regulatory framework is expected to help in designing more customised investment products, reduced compliance, better risk labeling (product classification) and increased transparency.
Accredited investors or qualified investors or professional investors, are considered to be informed investors on the assumption that their financial capacity (generally ascertained from income and/ or net worth) enables them to hire expert managers/ advisors as required. They already have an understanding of various financial products and the risks and returns associated with them and hence are able to take informed decisions regarding their investments. This class of investors are recognised by many market regulators globally.
SEBI is looking to have separate regulations for retail investors (where there is greater need for tightened regulations), and allow a little bit more flexibility, for accredited investors.
The market regulator SEBI regulates a number of investment products such as schemes of mutual funds, Investment Advisory Services, Real Estate Investment Trusts (REITs), Portfolio Management Services (PMS), Infrastructure Investment Trusts (InvITs), Alternative Investment Funds (AIFs), Venture Capital Funds (VCFs), and etc.
As one of the accredition criteria, for Indian individuals, Hindu Undivided Families (HUFs) and Family Trusts, SEBI has proposed an annual income of over or equal to Rs2 crore or net worth over or equal to Rs7.5 crore with not less than Rs3.75 crore of financial assets. Alternatively, such entities with an annual income above or over Rs one crore besides net worth higher or equal than Rs5 crore with not less than Rs 2.5 crore of financial assets may also be eligible. Accreditation once granted will be valid for a maximum period of one year.
As per SEBI, many times, prospective investors in the securities market are introduced to investment products/ services through distributors or friends/acquaintances/ advisors who may not always be able to sufficiently educate the prospective investors regarding the risk-return profile of the product/service being marketed or its appropriateness as compared to the financial goals of the prospective investors. The advisor is responsible for the advice given to the client and the advice is based on the information that the client has shared with the advisor. Hence, currently, to protect investors from unsuitable investment products in the securities market, one common measure is to stipulate a minimum investment threshold for every regulated product/ service.
However, market experts have for long argued against this ‘one-size fits all’ approach and that there is over-regulation by SEBI as they want to simplify each product to a level that every investor is able to understand and use/ operate it. Based on feedback from market participants, SEBI now considers that there is a case to consider the introduction of the concept of accredited investors in the Indian securities market.
As per the consultation paper, SEBI considers that the introduction of the concept of accredited investors with uniform eligibility criteria, accompanied with a flexible regulatory framework for the various products and services would be beneficial to all stakeholders. As per SEBI, investors are expected to gain via portfolio diversification by accessing customized investment products (structured products), more investment products due to lower entry barriers such as minimum investment size, customized contractual arrangements with product/ service provider.
The issuers of securities, portfolio managers and investment advisors would benefit from better risk labeling (product classification) and increased transparency, reduced compliance, and less time-to-market in designing investment products, according to the SEBI paper.
SEBI has stated that there would be light-touch regulatory framework for products/services meant for accredited investors, leading to better channeling of regulatory resources for protection of investors other than accredited investors, development of securities market through more participation and more innovative products.
As per current rules for PMS, in non-discretionary PMS (NDPMS), only 25% assets under management (AUM) can be invested in non-listed equities since unlisted equities are considered risky. The regulator hence restricts retail investors to from investing in unlisted equities. However, as per the new framework, if all the investors are accredited investors, then some of those conditions would not apply and the portfolio manager can invest the entire portfolio in unlisted equities.
The Risk profiling of investors availing IA & PMS too has grey areas. There is no exit route (without paying penalties) if a investor's risk profile deteriorates mid way through the contractual period of the scheme.