The Securities and Exchange Board of India (SEBI) issued a consultation paper on Wednesday, proposing the creation of a new class of ‘accredited investors’ (AIs).
SEBI says certain investors have a better understanding of the risks and returns associated with different financial products, and therefore can be allowed to invest in customised or complex products.
Once recognised, such AIs could also be given relaxations on certain existing regulations.
For example, the consultation paper proposes that an AI investing in the scheme of a portfolio management service (PMS) firm can invest less than the minimum required sum of Rs 50 lakh.
Similarly, new lower limits could be laid down for alternative investment funds (AIFs) or other products.
How can one become an AI?
The consultation paper says only those investors who meet certain criteria of net worth, financial assets or income are allowed to get themselves registered as AIs.
An individual investor, who wants to be recognised as an AI, needs to fulfil one of these three conditions.
Her annual income must be at least Rs 2 crore. Or her net-worth must be at least Rs 7.5 core or more, with at least Rs 3.75 crore in financial assets; Or, her annual income must be at least Rs 1 crore, and networth must at least be Rs 5 crore, with investments in financial assets worth at least Rs 2.5 crore.
Opening the door for new complex products
According to SEBI, such an investor classification will also help it to focus its ‘regulatory resources’ on investors that need more protection – investors not so well-informed and vulnerable to wrongful practices such as mis-selling.
Kaustubh Belapurkar, Director-Fund Research at Morningstar, says it is a good move, as when such complex products are launched in India, only investors that have adequate financial resources will be allowed to invest in them, and it will be off-limits for everyone else.
Investment products offered to AIs will be regulated, but not as heavily as other avenues.
The paper says that the flexibility allowed in designing AI-targeted investment products will encourage more innovation.
Vinod Jain, principal adviser at Jain Investment Planner, says the idea of AIs is well-known globally. “It gives such investors more regulatory leeway in making their investments,” he says.
“We could see global hedge funds that can have a ‘sell call’ on certain assets in certain countries, and a ‘buy call’ in other countries. We could also see leveraged investment products,” Jain adds.
There are many high-risk investment products. However, as SEBI’s consultation paper points out, AIs’ “financial capacity gives them the ability to absorb losses and thus relatively higher risk products may also be suitable for such investors.”
Giving more flexibility to existing products
The consultation paper says PMS products and AIFs can deviate from regulatory limits set for certain investments, if they are able to demonstrate that all the investors in their fund are AIs, but meet a higher minimum investment criteria.
For example, if all the investors in a PMS are AIs having a minimum investment of Rs 10 crore each, then the PMS can even invest 100 percent of its corpus in unlisted securities, which otherwise is restricted to 25 percent.
Similarly, an AIF can borrow money – more than two-times the net asset value of the fund – to make investments , if all the investors are AIs with each having a minimum investment of Rs 70 crore.
Developed markets such as US and Singapore has many financial products catering to AIs.
Such products are an important part of the asset allocation plans of most HNIs abroad. These products can give potentially higher returns, but are also highly risky as the strategy is linked to different assets.
Introducing a new investor class that is well aware of various aspects of such investments will allow complex products to be launched without much compliance burden.
The SEBI’s consultation paper is open for comments and suggestions till March 18, 2021.