Exam for accredited investors? SEBI working group suggests experience and knowledge test in addition to net worth

Exam for Accredited Investors? SEBI’s working group suggests knowledge test, besides net worth

A Securities and Exchange Board of India (SEBI) working group on ease of doing business for Alternative Investment Funds (AIFs) has suggested an exam for individuals who want to become accredited investors, in addition to existing monetary criteria, sources said.

The working group’s view is that only monetary thresholds like income and net worth may not ensure that the individual has the necessary investment knowledge and tolerance for risk, according to the sources.

The working group believes that a holistic approach may be required to understand and decide on investment opportunities in private markets. Hence, such eligibility criteria may be considered.

According to industry sources, the working group emphasised experience and skill set, and suggested a qualitative assessment in the form of an accredited investor examination.

It suggested recognising specific professional credentials and considering experience in risk-based products for over three years as qualification criteria for an accredited investor.

Employees of investment management firms with more than five years of experience in the financial industry should also qualify, it said.

However, some industry insiders are of the view that ultimately, risk-taking ability should matter, and not some exam passing certificate. They said SEBI already mandates a full undertaking about understanding of risk and other issues at the time of registration as an accredited investor.

There is a contrary view, too. An investment advisor dealing in AIF, PMS investments said that things seem fine when everything is going well, but if something goes wrong, people tend to blame the regulator. According to an industry source, the regulator is yet to take a call on this particular recommendation. Under its policy making process, SEBI floats consultation papers and seeks feedback before finally drafting the policy. An email sent to SEBI did not elicit any response.

Undertaking about knowledge of risk

Currently, the criteria for individuals to become accredited investors solely rely on income and net worth. But while onboarding, a declaration is mandatory from such investors that they have the necessary knowledge and means to understand the features of the investment products or services eligible for accredited investors, including the risks associated with the investment.

Also, an accredited investor has to give an undertaking about the ability to bear the financial risk associated with the investment. SEBI regulations also mandate that an accredited investor has to give in writing that the person is aware that investments by accredited investors may not be subject to the same regulatory oversight as other investors.

Financial criteria for accredited investors

Individuals, HUFs, family trusts and sole proprietorships, which meet either of the financial criteria are eligible: Annual income of more than Rs 2 crore or net worth of Rs 7.5 crore, out of which at least Rs 3.75 crore should be in financial assets; or annual income of Rs 1 crore or above with net worth of above Rs 5 crore, out of which at least Rs 2.5 crore in financial assets. However, the value of the primary residence of the individual, karta of HUF, or the sole proprietor is not considered for the calculation of net worth.

SEBI’s push for accredited investors

The market regulator is encouraging AIFs to move towards the accredited investor regime, which will give the regulator confidence to consider light-touch regulation for AIFs. The industry has sought an easier registration process for accredited investors, so that more people can register. Currently, the number of accredited investors is around 200.

Benefits as an accredited investor

Accredited investors get exclusive investment opportunities as compared to retail investors, such as in private placements, AIF, venture capital, private equity and hedge funds, etc. They are allowed to invest with a lower ticket size in AIFs and portfolio management services (PMS). For AIF, the minimum prescribed limit is Rs 1 crore and Rs 50 lakh for PMS.

As a part of the larger scheme of ease of doing business across the regulated entities, SEBI had last year formed a working group for AIFs. It comprised representatives of the AIF industry, investment and legal experts, and former regulatory officials.