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Who are Accredited Investors? – Definition, Eligibility Criteria

calendar24 May, 2023
timeReading Time: 15 Minutes
Who are Accredited Investors? – Definition, Eligibility Criteria

The Securities and Exchange Board of India (SEBI) introduced the idea of approved investors to the Indian securities market. Accredited investors are those who fulfil certain financial standards, such as a minimum yearly income or net worth. These requirements vary from state to state. ‘Accredited investors’ are now allowed to take part in the Indian securities market according to the Securities and Exchange Board of India (SEBI)[1].

Who Among The Investors Is Considered to Have Accredited Status?

The term “accredited investors” refers to individuals or companies that have been granted a licence to trade in restricted securities. There is a possibility that these securities will be registered with the relevant monetary authorities; however, this will not be done automatically.

A person or organisation must demonstrate that it satisfies the standards set out by the market regulator in order to be considered an accredited investor.

The High Net worth Investor (HNI) protocol was developed by the Security and Exchange Board of India (SEBI) to provide access to India’s listed firms to HNI investors who are able to show that they meet the requirements of the regulatory body.

Instructions on How to Become an Accredited Investor in India

  • Accreditation from the depositories or the stock exchange is necessary in order for any individual or business in India that maintains a demat account to be able to engage as a “qualified institutional buyer” (QIB). After it has been determined that the investor meets the criteria for eligibility, the stock market will grant them accreditation for a period of three years.
  • Any time there is a change in an accredited investor’s financial situation, it is required that the stock exchange and depositories be notified. It’s Possible That Someone Is an Accredited Investor. In order to be considered an accredited investor in publicly listed projects, a company or organisation has to demonstrate that they have a net worth of at least Rs.25 crore. To be considered an accredited investor, you need to demonstrate that you have a minimum of Rs. 5 crore in liquid assets as well as Rs. 50 lakh in cumulative yearly income.
  • Because there is a larger potential for monetary loss when investing in the unknowable, the regulating body adopts guidelines in order to protect the interests of authorised investors and to mitigate the increased risk of financial loss. SEBI conducts checks on accredited investors in order to determine whether or not they are in a position to sustain the possible financial losses that are connected with investing in unregulated securities.

Eligibility Criteria for Classifying as an accredited Investor

Accredited Investors include Individuals, HUFs, Family Trusts, and Sole Proprietorships that satisfy the following criteria:

  • Partnership Firms established under the Indian Partnership Act, 1932 in which each partner meets the Accredited Investor criteria for individuals and whose annual income is at least INR 2 crore; OR (ii) net worth is at least INR 7.5 crore, of which at least INR 3.75 crore is in the form of financial assets; OR (iii) annual income is at least INR 1 crore+ net worth is at least INR 5 crore, of which at least INR 2.5 crore is in the form of financial assets.
  • Such instruments for passing on a legacy as trusts. Managed Assets amounting to more than or equivalent to 50 Crores INR in total value.
  • Businesses that have a collective net worth that is more than 50 Crores (INR).
  • Accounts held jointly by individuals are considered to belong to Accredited Investors in the following situations: (i) the joint holders are a parent and a child, and at least one of them independently meets the criteria for Accredited Investor; (ii) the joint holders are spouses, and their combined income or net worth meets the criteria for Accredited Investor; or (iii) the joint holders are a parent and a child, and at least one of them independently meets the criteria for Accredited Investor.
  • Central and State Governments, Developmental Agencies established under the authorities of the Government (e.g. SIDBI, NABARD, etc.), Funds established by Government(s), Qualified Institutional Buyers as defined under Securities Exchange Board of India, Issue of Capital & disclosure requirement Regulations, of 2018 . Category I Foreign Portfolio Investors (FPIs), Sovereign Wealth Funds, Multilateral Agencies (e.g. Asian Development Bank, New Development Bank, International Monetary Fund (IMF), World Bank, International Finance Corporation, etc.) are all eligible investors as approved and provided by the regulations for accredited investors under the “Introduction of framework for Accredited Investors in securities market” by SEBI.

Several advantages that come together with accreditation

  • Accrediting investors has the potential to identify people with the financial means and risk tolerance to engage in the securities market, especially in products with fewer levels of government control and more possibility for loss. This is particularly useful in identifying those who have the ability to participate in the securities market. It is expected that a regulatory approach that is less restrictive would stimulate the formation of bespoke investment vehicles.
  • Any incentive for accreditation must maintain an equitable equilibrium between the interests of investors and investment product purveyors (also called “investment providers”) in order to guarantee that investors and investment product providers (together referred to as “investment providers”) profit from certification. As a consequence of this, Accredited Investors have the potential to get the following privileges:

(i) To invest in financial products with a “lower ticket size” (also known as a “smaller initial investment”) that is less than the minimum amount required under the relevant Regulations.

(ii) Exemptions from prudential rules, investment conditions, filings with SEBI, audit/valuation/reporting frequencies, etc. that are connected to investment products (a “regulation-light framework”).

(iii) You should take advantage of investment possibilities that are only available to “Accredited Investors.”

  • Accredited Investors are eligible to take advantage of the decreased ticket size, as stated in the terms of the agreement with the investment provider. However, there will be no relaxation of any of the other regulatory standards that are relevant to the particular investment product. These investors would then be able to distribute their funds across a wider range of financial goods and service providers as a result of this development.

Agencies That Are Responsible For Awarding Accreditation

  • The Board may recognise as a “Accreditation Agency” one or more subsidiaries of a certified Stock Exchange or Depository, or any other institution that fulfils the Board’s eligibility conditions in order to carry out the accreditation process. This recognition may be used for the purpose of carrying out the accreditation procedure.
  • Start by reducing to a reasonable amount the total number of entities that are eligible to serve as Accreditation Agencies. As a result, Recognised Stock Exchanges may be expected to comply to the following criteria in order to ensure that its affiliates are able to successfully execute certification under the proposed framework.
  • (a) A minimum of twenty years of experience in the Indian securities market; (b) A minimum of INR 200 Crores in net worth; (c) Presence of national terminals; (d) Having grievance redress mechanisms in place, including arbitration; (e) Presence of Investor Service Centres (ISCs) in a minimum of 20 cities; and (f) Any other criteria as specified by the Board from time to time.
  • The particular standards for Accreditation Agencies, the process for recognising Accreditation Agencies, and the mechanisms for delivering such recognition may each be specified individually after engaging with relevant parties such as Stock Exchanges and Depositories.

Variety of Procedures for Accreditation

There are variety of procedures for Accreditation as listed below:

  • To become an Accredited Investor, a prospective investor, who will hereafter be referred to as an “Applicant,” must submit an application to an Accreditation Agency that satisfies the standards of the agency. Brokers and Depository Participants may be contacted at any point throughout the review process by Accreditation Agencies in order to request help in the processing of these submissions.
  • Applicants are needed to produce a copy of their most recent Union Income Tax Return in order to fulfil the requirement of self-certification of their income and assets.
  • The applicant’s home residence will not be taken into consideration throughout the asset appraisal process. The “ready reckoner rate” that is issued by local authorities may be used to establish whether or not an applicant is eligible based on the value of their assets.
  • Either the audited financial statements (statutory audit) from the business’s most recent fiscal year or the audited financial statements (audited by the statutory auditor) from the company’s most recent fiscal year must be evaluated in order to establish whether or not a firm qualifies as an Accredited Investor. The most recent audited accounts or the most recent statutory audit report have to be used in order to arrive at an accurate valuation of the trust’s assets currently under management.
  • An authorization with a time limit of one year is bestowed upon the applicant on the grounds of the financial information from the previous year. However, the accreditation will only be valid for a period of 2 years beginning on the date that it was awarded if the Applicant has satisfied the eligibility requirements for each of the three years that have proceeded the year for which the application for accreditation is being made and has provided the Accreditation Agency with the supporting documentation. The accreditation for the year of application shall be cancelled if the Applicant does not fulfil any of the eligibility conditions in any of the 3 years prior to the application year.
  • An Accredited Investor who wishes to renew his or her accreditation status is required to submit a new application to the Accreditation Agency along with all of the vital documentation, including proof of income/net worth/AUM (such as an Income Tax Return, audited accounts, etc.) prior to the expiration of the Accreditation Certificate’s validity period. This must be done in order to maintain the Accredited Investor’s accreditation status. The Accredited Investor’s accreditation will be renewed if the accreditation Agency approves the new application.
  • Accreditation necessitates the confirmation by the Accreditation Agency that the Investor satisfies the criteria of “fit and proper,” which implies that they have never been barred from participating in the trading of securities.
  • Each Accredited Investor is required to have a certificate in their possession that includes their name, a personal identification number (PAN) (or a similar number for investors from other countries), the date their Accreditation became active, and a one-of-a-kind Accreditation Number that was given by an Accreditation Agency. Accreditation Agencies are in charge of rapidly processing applications, protecting data, checking accreditation status, and upholding strict secrecy. Separately, following consultation with Accreditation Agencies, the processes for obtaining information on accreditation status, information exchange by Accreditation Agencies, protections for sharing and/or utilising such information, etc. should be specified. This should be done before the procedures for accessing information on accreditation status are outlined. This is important in order to guarantee that the data will be employed in an efficient manner.
  • The steps that must be taken in order to acquire all of the advantages that come with accreditation Potential investors may want to take into consideration using the following approach once public involvement, consultations with Stock Exchanges (NSE, BSE), and internal discussions have been completed.

Advantages of linking to an Accredited Investor’s Account

  • It is important for prospective investors to submit an application to one of the Accreditation Agencies together with the requisite paperwork in order to take advantage of the advantages that are connected with accreditation. The application may be submitted to the Accreditation Agency either directly by the applicant or indirectly by a Stock Broker / Depository Participant acting on the applicant’s behalf. In the event that an investor satisfies all of the relevant eligibility conditions, the Accreditation Agency is obligated to give a Certificate to the investor attesting to their position as an Accredited Investor.
  • The prospective investor is required to reveal both their status as an Accredited Investor and their choice to participate in the investment opportunity in the capacity of an Accredited Investor when either establishing an account or entering into an agreement with the investment provider. The potential investor is required to supply the investment provider with a copy of the Accreditation Certificate as well as a declaration that reads, “If the investment provider is willing to offer incentives in exchange for accreditation, the prospective investor must present the investment provider with a copy of the aforementioned Accreditation Certificate.”
    • The investor qualifies as an Accredited Investor and expresses a wish to make use of the regulatory benefits that come with their accreditation. (“Consent”)
    • The investor has a level of financial security that enables them to weather any potential losses.
    • The Investor is aware that it is his responsibility to acquire the information, skills, and/or resources required to evaluate the potential benefits and risks associated with the investment opportunity that has been provided to him, and he accepts this responsibility.
    • The Investor is aware that the proposed investment may not be subject to the same degree of regulatory scrutiny as retail or regular investment products, and that the regulatory framework governing the proposed investment may be less stringent and more adaptable than that of retail or regular investment products.
  • Before an investment provider may take on an Accredited Investor as a client, they need to explain the proposed investment, how it is distinct from more conventional investment products within the context of the relevant regulatory framework, and how the investor would profit from the regulatory light environment. The investment service provider is obligated to check with the issuing Accreditation Agency to ensure that the certificate number given by the prospective investor corresponds to a current accreditation status on the day of verification. Before entering into a client agreement with a potential investor who is interested in receiving advantages associated with accreditation, the investment provider is required to confirm that the potential investor is in possession of a current Accreditation Certificate.
  • Even while it is typically assumed of Accredited Investors that they would fulfil all relevant eligibility requirements throughout the time that the Accreditation Certificate is active, there are situations in which such criteria may not be satisfied consistently during the time that the certificate is valid. During the time that the Accreditation Certificate is still active, the investor will be regarded as an Accredited Investor, and, depending on the particulars of the agreement that was signed with the investment provider, the investor may be able to enjoy advantages that are connected to their accreditation. Investment providers have the authority to set extra eligibility requirements or limits for enrolling Accredited Investors, in addition to the conditions for eligibility that have been imposed by SEBI.

Withdrawal of Consent by Investors

  • Investors shall have the right to revoke their “Consent” to be treated as Accredited Investors at any time during the term of their investment (or term of service for which an agreement is entered into with the investment provider), with the exception of the case of investments in pooled investment products that are launched exclusively for Accredited Investors & in which the benefit of a regulation-light framework has been taken advantage of. In these cases, investors shall not have the right to revoke their “Consent”
  • The investment provider would construct the investment strategy after taking into consideration the regulatory leniencies agreed upon by all such investors for pooled investment products that are introduced specifically for Accredited Investors and that employ the regulatory-light framework. These products would be available only to Accredited Investors. If an investor decides that they do not want to be considered an accredited investor any more, this might have significant ramifications for the portfolio as well as the entire investing plan. For this reason, investors in pooled investment products (such as AIFs), which are launched solely for Accredited Investors and for which a regulation-light framework is made accessible, may not be able to withdraw their assent before the period of the investment product ends. This is because such products are launched exclusively for Accredited Investors and for which a regulation-light framework is made available.

Elimination of Benefits Associated with Accreditation

An Accredited Investor who, at the time they signed into a client agreement, got a benefit that was directly tied to their accreditation status is subject to having that advantage taken away from them in the following circumstances could become ineligible to continue to hold the status of Accredited Investor:

  • If an investor loses eligibility to be an Accredited Investor after entering into an agreement with an investment provider to access accreditation-related advantages, the investor’s earlier investment(s) shall continue to be recorded as investments by an Accredited Investor. This rule applies even if the investor entered into the agreement for the purpose of accessing accreditation-related benefits. It is the duty of the supplier of investing services to ensure that the client agreement has the required “grandfathering” wording. In addition, the investor and the investment provider are responsible for ensuring that the client agreement adequately provides for other consequences, if any, in the event that the investor becomes ineligible to be an Accredited Investor during the term of the client agreement & that such consequences take into account the particular characteristics of the investment product. Both parties are also obligated to ensure that the client agreement is in compliance with all applicable laws and regulations.
  • If an investor who bought a lesser ticket size decides to withdraw his “Consent” from the investment provider before the conclusion of the client agreement, he is obliged to raise his investment to the minimum investment size necessary for non-Accredited Investors for that investment product. This is the case even if the investor has an accredited investor status. It is the responsibility of both the investor and the investment provider to ensure that the client agreement includes a timeframe detailing when this increase will take effect.

The withdrawal of ‘Consent’ by investors who have used a regulatory-light investment structure (different from pooled investments: lower ticket size).

  • If an investor who initially took advantage of a regulation-light framework later revokes the Consent” provided to the investment provider before the end of the investment agreement/client agreement, the investor’s previous investments will be “grandfathered,” which means that they will be treated as if they had been made by an Accredited Investor.
  • During the term of the client agreement with the investment provider, any additional transactions (investments, capital infusions, or capital commitments, as applicable) will be considered transactions by a non-Accredited Investor and will require compliance with all applicable regulatory requirements. This is the case regardless of whether the transactions involve investments, capital infusions, or capital commitments. In the case of investment products like PMS, in which the investment amount (capital) is pulled down in advance, future transactions should reflect further investments made using the money that is already existing in the account.
  • Both the investment service provider and the investor (or investors) are responsible for ensuring that the client agreement details the procedures for withdrawing “Consent”, changing the accreditation status of partners or account holders associated with the investor (or investors), and the consequences of these actions for investments made through joint accounts and partnership firms. In the case that “Consent” is withdrawn, the accreditation status of partners/account holders changes, etc., the basic rules of client accounts that were outlined in the paragraphs that came before it should be adhered to.

Checklist for Accreditation

  • Checklist for accreditation in case of Individual/HUF

Sr. No

Document

Submission Status (Y/N/NA)

I

Copy of PAN Card

 

II

Copy of Aadhaar Card or Copy of Valid Passport

 

III

Income Tax Return (ITR) of last 3 financial years

 

IV

Certificate from practicing chartered accountant stating total gross income (annually) and liquid net worth as on date of application.

 

Working of Liquid Net worth shall be given as an Annexure to the certificate. The same shall be calculated as mentioned here*

 

V

Where the individual has been debarred/disciplinary action has been taken against investor by SEBI, RBI/any other regulatory body, then the debarment period or disciplinary action should be over. In case of a Non Resident Indian, he/she shall confirm that he or she hasn’t been restricted from accessing securities market by the country of jurisdiction where he/she resides.

 

VI

Declaration from investor which will state that:

        i.     he/she/it, is not a willful defaulter as defined under Regulation 2(1)(III) of SEBI (ICDR) Regulations, 2018

      ii.     he/she/it, is not a fugitive economic offender as defined under Regulation 2(1)(p) of SEBI (ICDR) Regulations, 2018

    iii.     he/she/it, is not in violation of Regulation 24 of SEBI (Delisting of Equity Shares) Regulation, 2009

    iv.     He/she/it is not in violation of the restrictions imposed by SEBI under SEBI circular no. SEBI/HO/ MRD/DSA/CIR/P/2017/92 dated August 01, 2017

      v.     he/she/it, is in compliance with the Reserve Bank of India regulations, if applicable

    vi.     that the investment in the Companies are as per the RBI norms, if applicable

  vii.     That the submissions made to the Exchange are true & correct and if found incorrect, the Exchange reserves the right to reject or decline the application & take necessary action.

viii.     that in case of ineligibility because of change in the financial status of the Accredited Investor, he or she, it shall inform the Stock Exchange of such ineligibility

 

Checklist for accreditation in case of Body Corporate (including LLP)

Sr. No

Document

Submission Status (Y/N/NA)

I

Certificate of Incorporation

 

II

If the body corporate is registered with any regulatory body like RBI, IRDA, etc., then certificate of such valid registration from such regulatory body

 

III

Copy of PAN card of body corporate

 

IV

Copies of Financial Statements of past 3 financial years.

 

V

Copies of Income tax return of the past 3 financial years.

 

VI

Certificate from statutory auditor of the body corporate stating net worth as on date of application. Working of Net worth shall be given as Annexure to the certificate.

 

VII

Certified copy of Board Resolution to make application for Accredited Investor as per IGP norms

 

VIII

Declaration from Managing Director or the Designated Partner or an authorized person that:

        i.   the body corporate or its promoters or partners or directors are not wilful defaulter as defined under Regulation 2(1)(lll) of SEBI (ICDR) Regulations, 2018

      ii.   the promoters or partners or directors of the body corporate are not a fugitive economic offender as cited under Regulation 2(1)(p) of SEBI (ICDR) Regulations, 2018

    iii.   the body corporate or its promoters or partners or whole-time directors should not be in violation of the provisions of Regulation 24 of the SEBI Delisting Regulations, 2009

    iv.   the body corporate/its promoters/partners, its directors should not be in violation of the restrictions imposed by SEBI under SEBI circular no. SEBI/HO/ MRD/DSA/CIR/P/2017/92 dated August 01, 2017

      v.   the body corporate is in compliance with RBI Regulations, if applicable

    vi.   that the investment made in the companies are within the limit prescribed by the RBI and if investments exceed the prescribed limit, then approval of RBI for the same has been obtained, in case the same is applicable

  vii.   that the submissions made to the Exchange are true and correct and if found incorrect, the Exchange reserves the right to reject the application and take necessary action

viii.   that in case of ineligibility due to change in the financial status of the AI, it shall inform the Stock Exchange/Depository of such ineligibility

 

Accredited Investors Eligibility Criteria at Other Countries

In several other countries, obtaining an Accredited Investor designation is subject to similar restrictions. Some countries, such as the United States, have income and net worth criteria for authorised investors that are uniformly high. Other countries, such as Canada, Australia, and Singapore, have standards that are only slightly different from one another.

Eligibility Criteria at the United States:

Accredited investors are required to satisfy the following conditions in order to participate in the market:

  • Those having an annual income of more than $200,000 (or $300,000 when combined with a spouse) who are certain that they will earn at least that much this year; Anyone with more than $1 million in net worth (not counting their main home); Anyone in a regulated business (such as banks, savings and loan organisations, licenced broker dealers, insurance firms, and so on); Anyone with more than $5 million in assets.
  • To be eligible to invest, for example, in the European States or Norway, a potential investor must fulfil one of these three conditions. The first component is an in-depth analysis of the individual’s capacity to formulate well-informed investment choices by drawing on their own prior experience and knowledge.
  • In order for the applicant to be successful in the second assessment, which is quantitative, they need to fulfil both of the following requirements.
  • On the relevant market, the firm has completed an average of 10 large deals each quarter over the course of the previous four quarters. And second that they have a net worth more of than EUR 500,000 and at least one year of experience working or volunteering in the financial business.

Lastly, the customer is required to submit written notice that they desire to be identified as a professional client, and the firm that they intend to do business with is required to warn them of the possible loss of protections in the transaction.

Conclusion

When it comes to trading securities that are off limits to normal investors, only accredited investors are allowed to participate. Because retail investors often invest lower total amounts of capital compared to major financial organisations and high-net-worth people, it is expected that losses will have a larger effect on retail investors.

“Accredited Investors” are financial industry specialists who are able to appraise securities and effectively manage the risks that are linked with them. However, depositories and stock exchanges both perform thorough due investigation on potential accredited investors, which causes the process to take longer than it otherwise would. On the other hand, accredited investors enjoy protection and returns on investment that have never been seen before.

Read Our Article: What Is SEBI? – Know Its Powers And Functions

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