Accredited Investor – Know the Benefits and How to Become One
27 October 2022
Accredited investors are individuals and entities with high net worth who have a special grant to deal with securities. Only in August 2021, SEBI (Security and Exchange Board of India) introduced the concept of accredited investors in India to open up newer methods of raising funds from the market.
This article helps get a clear understanding of how an accredited investor works, the requirements to become an accredited investor and the benefits. Keep reading!
What is an Accredited Investor?
An accredited investor is an individual or an entity that has large enough monetary resources with the capacity to bear high risks in investing. SEBI permits them to trade in private securities only if they fulfil specific criteria such as asset size, net worth, governance status or trading experience.
Such investments may not necessarily be registered with financial authorities like SEBI, RBI, IRDA, PFRDA, etc. Investments in entrepreneurship and hedge funds are examples of such investments. These options are usually not available to regular retail investors.
While underlining the definition of an accredited investor, SEBI has created a separate category of investors who possibly require fewer regulations and lower levels of protection in the stock market. This includes individuals with a high net worth, insurance companies, banks, trusts and brokers.
How Do Accredited Investors Work?
Accredited investors are licensed by approved authorities to invest in specified securities. Interested investors must fulfil certain criteria to become accredited investorsin India. The criteria depend on the type of investor applying for the accreditation.
Once accredited, investors become eligible to invest in those securities that are not open to the general public. The accreditation is valid for only one year from the date of accreditation. If investors want to continue such accreditation, they would have to get accredited again. However, suppose the applicant meets the eligibility criteria in each of the last three years. In that case, the certificate of accreditation may be generated for two years from the date of accreditation.
To become an accredited investor, you must first register yourself with ‘Accreditation Agencies’ or AA. Accreditation agencies are recognised by SEBI (Securities and Exchange Board of India).
These agencies can be subsidiaries of recognised stock exchanges or other institutions as authorised by SEBI. AAs also appoint brokers and intermediaries to facilitate interested investors’ accreditation. The next steps are as follows:
The AA verifies that the applicant meets the criteria and eligibility to participate in the securities markets – there are no convictions/pending cases, no wilful defaults or restraining orders, etc.
The AA then issues an accreditation certificate to eligible investors after which they would be able to invest in the avenues available specifically for such investors.
Who Can Be an Accredited Investor?
The following types of investors get the accredited investor status –
Individuals with liquid net worth of Rs. 5 crore and maintain an annual gross of Rs. 50 lakh
Business entity with a net worth of Rs. 25 crore
What are the Requirements to Be an Accredited Investor?
The accredited investor requirements are as follows:
Type of investor
Individuals, HUFs, sole proprietorships and family trusts
Annual income should be Rs.2 crore or more, orThe net worth should be Rs.7.5 crores or more out of which a minimum 50% should be in the form of financial assets, orThe annual income should be Rs.1 crore or more, plus the net worth should be Rs.5 crore or more. Moreover, at least Rs.2.5 crores of the aggregate amount should be invested in financial assets If individual investors hold a joint account, the account would be considered as an accredited investoraccount if the following criteria are fulfilled –If the joint account is held with parents or children, at least one accountholder fulfils the accredited investoreligibility requirementIf the joint account is held with spouse, the combined net worth or income of the couple fulfils the accredited investor criteria
The firm should be established under the provisions of the Indian Partnership Act, 1932Each partner in the firm should qualify on the accredited investor criteria specified above for individuals
Trusts (except family trusts)
Assets under Management should be Rs.50 crores or above
Net worth should be Rs.50 crores or above
Government agencies, Qualified Institutional Buyers, Multilateral agencies, Sovereign wealth funds
Entities such as Central and State Governments, Developmental Agencies set up under the purview of the Government (NABARD, SIDBI etc.), Government Funds, QIBs, Multilateral Agencies (Asian Development Bank, IMF, World Bank, etc.), are deemed accredited investor
Foreign portfolio investors
The eligibility would depend on the rupee equivalent of their net worth, income or AUM which is verified based on the income proof that they submit.
What Types of Investments Can Accredited Investors Make?
Accredited investors can invest in hedge funds, Alternate Investment Funds (AIFs), Portfolio Management Services (PMS), unlisted start-ups and other exclusive investment avenues and private placements that are high-risk and require large capital.
Advantages of Being an Accredited Investor
The benefits of becoming an accredited investor are:
Under Portfolio Management Services, while there is a minimum ticket size of Rs.50 lakh specified for eligible investors, you can invest with lower ticket sizes as an accredited investor. This enables you to retain your liquidity or diversify your investments, as may be your requirement. This is on the caveat that the necessary disclosures are made in the disclosure document and client agreements.
You get the benefit of relaxed regulatory accredited investor requirements with your investments. For example, the conditions prescribed in the client agreement document of PMS regulations need not be binding on the accredited investor. You would also have reduced regulatory conditions on audit, SEBI filings, investment conditions, etc.
An accredited investor can avail of discretionary/non-discretionary or advisory services from their portfolio managers up to 100% of their AUM in unlisted securities, as long as the appropriate disclosures are complete.
You get access to investment products specifically designed for an accredited investor. As a new class of investors is introduced in the financial markets, it is expected to result in the development of new, innovative and tailor-made products. This gives a wider choice of investments for the class of investors.
Things to Know About an Accredited Investor
Here’s are a few important aspects of accredited investor:
An accredited investor is a high net-worth individual with experience in the markets who meets specific criteria set forth by SEBI to trade in private placements.
Accredited investors get special treatment such as relaxed regulations and accredited investor opportunities to invest in unique private offerings by virtue of their accreditation given to them on the basis of asset size, net worth, governance status and/or trading experience.
Usually, the accreditation is valid for a year. If, however, you qualified to be an accredited investorfor the last three years, your accreditation would be valid for two years.
For calculating net worth as an eligibility parameter, the value of the primary residential property of the individual/HUF/sole proprietor will not be considered.
If the investments are owned jointly, and the joint holders are parents and children, at least one joint holder has to fulfil the eligibility criteria individually. If the joint holders are spouses, their combined income/net worth will be considered.
Even though you become an accredited investor, you would have the flexibility to withdraw your consent to remain as such.
If you want to renew your accredited investor status, you would have to make a fresh application after the tenure of the status expires.
If you have the desired risk profile and you want to expand your portfolio to include unconventional investment avenues, you may explore the option of becoming an accredited investor.Apply with authorised accreditation agencies to get your certificate of accreditation. Enjoy the benefits of an accredited investor statusand diversify your portfolio.
In case you do not fulfil the eligibility criteria, you can invest in mutual funds available for retail investors. Check out Navi Mutual Fund for a host of funds to suit your financial goals. Download the Navi App now!
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
Q1. When was the concept of accredited investor introduced in India?
Ans: While it has existed longer in the US markets, the concept of accredited investorwas introduced in India in August 2021 by the Securities and Exchange Board of India (SEBI).
Q2. Can any entity become an accreditation agency?
Ans: No, entities desirous of becoming an accreditation agency would have to fulfil the eligibility criteria specified by SEBI. As per SEBI notification, recognised stock exchanges and their subsidiaries that meet the below criteria are eligible to become accreditation agencies – The entity should have a minimum presence of 20 years in the Indian securities market The minimum net worth should be Rs.200 crore The entity should have pan-India terminals The entity should have a grievance redressal mechanism for customer complaints as well as the facility for arbitration It should have Investor Service Centres (ISCs) in at least 20 Indian cities.
Further criteria for the stock exchanges and other institutions is work in progress.
Q3. How is the net worth verified for accreditation?
Ans: The net worth of an individual should be Rs.7.5 crore or more out of which a minimum 50% should be in the form of financial assets. The net worth is generally verified based on the income documents submitted by the investor.
Note that for computing net worth as an eligibility parameter, the value of the primary residential property of the individual/HUF/sole proprietor will not be taken into account. Where investments are jointly held, and the joint holders are parents and children, at least one person has to fulfil the eligibility criteria individually. However, if the joint holders are spouses, their combined income/net worth will be taken into account.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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