Comparative Analysis Of Eligibility Criteria For The Accredited Investors Proposed By SEBI
Arunabh Rajan & Gauransh Gaur
18 May 2021 2:55 PM GMT
The SEBI, through its consultation paper, has recently introduced the concept of Accredited Investors (AI) in the Indian Securities Market. The objective behind introducing this concept is to recognize a certain class of investors who have good financial acumen with a tendency to make informed decisions regarding the investments and have the ability to take the risk due to their...
The SEBI, through its consultation paper, has recently introduced the concept of Accredited Investors (AI) in the Indian Securities Market. The objective behind introducing this concept is to recognize a certain class of investors who have good financial acumen with a tendency to make informed decisions regarding the investments and have the ability to take the risk due to their higher loss absorption capacity. It is a commendable move by the SEBI where it has gone beyond its "one-size-fits-all" regulatory approach, and has opened the Indian markets to more nuanced financial products with the assurance that only suitable investors will be permitted to participate in them. Of its many important provisions such as the procedure for application and the accreditation process, the article focuses on the eligibility criterion which is debatable, and would examine its logical fallacy through a comparative analysis.
Who is an Accredited Investor?
With an aim to boost financial innovation, SEBI has conceptualized a new class of investors. This set of investors are capable enough to appreciate the nuances of the securities market by understanding the different financial products and the risks and returns associated with them, and thus can make informed investment decisions. Accredited Investors, Qualified Investors, and Professional Investors are all terms used to describe these types of investors.
Proposed Qualification in India
According to the consultation paper, only those investors who meet certain requirements for net worth, financial assets, or profits are allowed to register as AIs. One of these three conditions must be met by an individual investor who wants to be recognized as an AI-:
- His/her annual earnings must be more than Rs 2 crore.
- Alternatively, his/her net worth must be at least Rs 7.5 crore, with at least Rs 3.75 crore in financial assets; or her annual income must be at least Rs 1 crore,
- His/her net worth must be at least Rs 5 crore, with at least Rs 2.5 crore in financial assets.
SEBI has also recommended an annual income of over or equal to USD 3 lakh or a net worth of over or equal to USD 1 million with not less than USD 5 lakh in financial assets for NRIs and foreign individuals and family trusts. Fulfilling the criterion would entail them obtaining an accreditation certificate from the accreditation agencies, however, specific classes of investors such as central and state government, multilateralagencies, qualified institutional buyers are not required to go through the process and would be deemed as accredited investors.
The Underlying Dilemma
While many stakeholders hail this move to introduce AI as a tailor-made regulatory solution that will aid in the introduction of complex financial products with the least amount of compliance burden, the issue with the preposition lies with the flawed presumption that the net worth is proportional or equivalent to the financial acumen of the investor. One must acknowledge and appreciate that high net worth does not promise a strong financial acumen of the investor. In other words, having a high-risk absorption capacity does not obviate the necessity of investor's understanding of the complex financial products of the market. For instance, an accredited investor could land himself in huge losses if he chooses to invest in any product without undertaking the necessary industry research on a particular financial product. With the comparative relaxation proposed by SEBI, due diligence for assessing the products has gained more importance than ever before so that they do not end up being the victims of a fraud.
The Way Out
SEBI should consider enhancing the scope of the accredited investors' definition by taking into consideration the qualifications of an individual. It is pertinent to mention that the definition of an 'accredited investor' in the USA no longer relies upon the net worth of an individual as its sole consideration. According to the new definition, the accredited investors can be:
- Individuals holding certain professional certifications, designations, and other credentials issued by an accredited educational institution designated by the SEC from time to time by order (e.g., registeredbrokers and investment advisers).
- Individuals who are "knowledgeable employees," as defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940, of the private fund issuer of the securities being offered or sold. Such employees include, among others, an executive officer, director, trustee, general partner, advisory board member of the private fund, and an employee of the private fund or the fund's manager who has participated in investment activities in connection with his or her regular duties or functions for at least 12 months.
Thus, Securities and Exchange Commission (SEC) of USA has allowed the individuals possessing certain professional certifications, designations or credentials, or having an industry experience of at least a year to be the accredited investors. Further, United Kingdom also has qualitative criteria for classifying an "elective professional client" under the Financial Conduct Authority's (FCA) Conduct of Business Sourcebook. Any individual working in a financial sector with at least one year as a professional with knowledge of the transactions or services would be eligible for the classification if he fulfils the other required criteria.
Such types of non-monetary criteria can be introduced by SEBI for the application process of accredited investors. Individuals having "professional certifications", or any other credentials issued through any institution recognized by the SEBI, or individuals dealing in the investment activities with a considerable experience of the industry can be allowed to be accredited investors. The threshold of net worth can be reduced by the SEBI in case individuals are required to fulfil the non-monetary criteria. This would ensure the efficiency in the eligibility criteria of the accredited investors where monetary and non-monetary criteria would have equal importance in determining them.
India's securities market will surely witness a rapid rise and development, owing to the proposed introduction of AI, which will result in increased investor participation and a greater number of market products and services. Given that the Indian securities market lacks tailored investment products for specific types of investors, establishing an enabling framework could pave the way for the introduction of better and more creative products, facilitating the growth and development of the securities market as a whole. However, in addition to the proposed AI system, SEBI should focus on introducing the non-monetary criteria for selecting the accredited investors so that investors can assess the complex financial products efficiently in a relaxed regulatory framework. This introduction of the non-monetary criteria would enhance the scope of the investors through which there would be more investment in complex financial products paving the way for holistic development of the securities market in India
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