Have you ever wished that as an individual investor in India you had access to some of the exciting high-risk, high-return products that your global cousins are grappling with? Did you hope that you could participate in hedge funds, angel investments or unlisted securities without betting too much on one product? Do you feel that you are able to research investment options on your own without a detailed offer document?
If you answered “yes” to any of these questions and your net worth also has many zeros, you may want to enroll in SEBI’s new “Approved Investor” framework, notified last week, to expand your horizons.
Who can apply
Any investor who meets certain net worth and minimum income criteria can get certified by Notified Agencies to earn the nickname of “Accredited Investor”.
The new SEBI rules state that in order to apply to be an accredited investor, a person must meet one of the following three conditions. First, you must have an annual income of more than 2 crore. Second, you can have a net worth of at least 7.5 crore, of which at least 3.75 crore is in the form of financial assets. Third, you can have an annual income of 1 crore and a net worth of ₹ 5 crore, at least half of which is financial assets.
To calculate this equity, your primary residence or the house you live in will be excluded from the calculation. Your other real estate assets will be taken into account. If you jointly hold investments with your parents or children, at least one of you must independently meet these conditions. You and your spouse can, however, combine your income / net worth to meet this bar.
You can apply for accreditation for one or two years. If you need the certificate to be valid for one year, you must have met the above conditions for the last fiscal year. To be valid for two years, you must have fulfilled these conditions continuously during the last three years.
What if you have not yet accumulated the above net worth or income, but are a qualified chartered accountant, RIA, CFP or CFA? In this case, these regulations do not allow you to be “accredited” although you may have sufficient knowledge to evaluate sophisticated products. In developed markets such as the United States, the definition of accredited investor has recently been broadened to include people with professional or advisory qualifications, even if they do not meet the criteria for net worth or income. But SEBI has not yet taken this route.
How to register
You will need to apply with the required documents to stock exchanges or depositories approved by SEBI to function as “accreditation agencies”.
The documents you need to submit are copies of your PAN and Aadhar card or passport and your income tax returns for the past one or three years, depending on whether you are applying for accreditation for 1 or 2 years. A practicing CA must certify your net worth as of March 31 of the previous 1 or 3 years, as required. You will also need to provide proof of valuation of your assets, by means of an account statement or a discount rate applicable to real estate.
You must sign a declaration stating that you are not a willful defaulter, a fugitive economic delinquent or excluded from the securities markets and if an NRI, is not prohibited from entering Indian markets. The accreditation agency will check these and also verify that you are “fit and fit” to participate in the markets, before issuing a certificate. When investing, you will additionally need to submit a consent letter stating that you have the knowledge to understand the features and risks of a product.
What can you do
The objective of this framework is to enable people with sufficient financial cushion and risk-taking capacity to participate in riskier investments, without SEBI or other regulators looking over their shoulders. .
To begin with, SEBI relaxed minimum ticket size standards and diluted disclosure requirements for certain products. Under the new rules, if you are an accredited investor, you can invest less than the minimum ticket size of Rs 1 crore in alternative investment funds (AIFs) and less than the ₹ 50 lakh standard in management systems. wallet (PMS).
The universe of AIFs in India today covers more than 700 funds divided into three categories. Category I AIFs include venture capital and angel funds, social impact funds and funds for SMEs. Category II includes real estate, private equity, distressed debt and risk debt funds. Category III covers hedge funds following long-short, arbitrage and derivative strategies. On PMS, a smaller ticket size can allow you to spread your bets across multiple styles and managers instead of focusing on just one or two.
If you are prepared to commit larger sums, the AIFs or PMSs in which you invest may be allowed to take more concentration risks. For example, PMS managers have been allowed to deploy ‘high value’ funds to accredited investors willing to invest ₹ 10 crore each, to invest entirely in unlisted securities. Accredited investors willing to bet 70 crore in one go will have access to high-value AIFs that take concentrated exposures of up to 50 percent in their issuing companies. These funds do not need to file an investment document with SEBI. Expect this bunch of products to grow as SEBI builds on this new idea.