Not everyone is permitted to make all forms of investments. Exotic investments, such as hedge funds and early-stage companies are immune from a slew of laws and regulations designed to shield normal investors from risks.
An accredited investor is a person or entity permitted to invest in unregulated securities. They have the resources or know-how to manage all of the risks.
In the Indian securities market, SEBI has authorized the idea of Accredited Investors (AI). The Indian securities market’s regulator, SEBI, has established the notion of ‘accredited investors,’ which gets intended to open up a new route for raising funds.
Accredited Investors are a type of investor that is required to comprehend various financial products and the risks-returns involved and make educated decisions about their investments.
So, what exactly are accredited investors?
A person or company will be an accredited investor based on their net worth or income.
An accredited investor is a person or company with a net worth of a minimum of 7.50 cr. or a yearly income of at least two crores. Individuals or businesses with a total net worth of at least 5 crores and a yearly income of 1 crore can also become accredited investors.
To become accredited investors, corporations and trusts (excluding family trusts) must have a net worth of at least 50 crores. However, according to SEBI norms, there is a catch. Financial assets should account for at least half of one’s net worth or annual income. SEBI has granted stock exchanges and depositories the authority to issue accreditation certificates.
Depositories are third-party middlemen who keep an investor’s shares in Demat form. The Bombay Stock Exchange (BSE) and the National Stock Exchange are examples of stock exchanges (NSE).
An accredited investor is a company or individual permitted to trade in securities that are not open to the public. Furthermore, these securities may or may not have been filed with any financial regulatory organization. Yet, to become an accredited investor, an individual or a corporate organization must meet the market regulator’s eligibility requirements.
The Security and Exchange Board of India (SEBI) established the accredited investor procedure in India for high net-worth individual (HNI) investors who meet the regulatory body’s qualifications to participate in listed companies.
What categories of investors are eligible for AI recognition?
Individuals, HUFs, sole proprietorships, and family trusts with the following:
- An annual income of Rs 2 crore ($ 272,000 approx.) or more OR
- The net value of Rs. 7.5 crore ($ 1.02 million approx. ), at least half of which must be in financial assets OR
- An annual income of Rs 1 crore ($ 136,000 approx.) or more + net worth of Rs 5 crore ($ 680,000 approx. ), at least Rs 2.5 crore ($ 340,000 approx.) in financial assets
Partnership businesses in which each partner matches one of the conditions listed in i. Above.
Trusts (other than family trusts) have a legally audited net worth of more than or equal to Rs. 50 crore ($ 6.8 million approx.).
Body corporates with a statutory audited net worth of more than or equal to Rs. 50 crore ($ 6.8 million approx.).
Central and State Governments, Developmental Agencies established under the auspices of the Government(s) (e.g. SIDBI, NABARD, etc.), Funds established by the government, Qualified Institutional Buyers as defined under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, Category I Foreign Portfolio Investors, Sovereign Wealth Funds, Multilateral Agencies (e.g. Asian Development Bank, New Development Bank, International Monetary Fund).
Who Is Eligible for Accreditation?
The following entities require manual accreditation:
- HUF or Hindu Undivided Families
- Trusts for family members
- Single-person businesses
- Partnership corporations
- Trusts for non-family members
The following entities are automatically accredited:
- The central government
- State administration
- Funding from Centra and the state government
- Developmental organizations
- Institutional purchasers who are qualified
- FPIs in Category I
- Government-created sovereign wealth funds
- Multilateral organizations
How can an investor who satisfies the qualifying requirements become an AI?
- Prospective AI submits the necessary paperwork to an Accreditation Agency (AA).
- AA confirms that the applicant is qualified to engage in the securities market (e.g. no convictions, no restraining order, no wilful default, etc.).
- The Accreditation Authority (AA) issues an Accreditation Certificate (AC) with an Accreditation Number (AN).
The Advantages of Becoming an Accredited Investor?
Accredited investors can make use of two key advantages across the AIF and PMS areas.
Relaxed Alternative Investment Fund (AIF) Norms
An authorized investor can invest in assets for a lower minimum amount than the ordinary Alternative Investment Fund (AIF) mandate. For authorized investors, SEBI has established the phrase “big value funds.” It refers to an AIF in which the authorized investor has made a minimum investment of 70 crores.
Accredited investors in large value funds can spend up to:
- 50 percent ownership in a corporation, either directly or through AIF units (Category I & II)
- 25% ownership in a corporation, either directly or through AIF units (Category III)
SEBI has also granted accredited investors the right to prolong the tenure of big value funds beyond two years, subject to certain criteria.
Relaxed Portfolio Management Services (PMS) Norms
The SEBI defines a “big value accredited investor” as someone who invests at least ten crores in a PMS. The PMS can provide accredited investors with investing advice on unlisted stocks.
For 100% of the AUM, the PMS can provide discretionary or non-discretionary advisory services on unlisted securities. This is subject to the terms of the investor’s and the PMS’s agreement.
SEBI has also established criteria for the advising fee that Investment Advisers charge accredited investors. SEBI has also amended the requirements for AIFs, PMSs, and IAs.
Accredited investors would have more options for investment in financial assets. The minimal criteria for AIFs have been reduced, allowing more funds to flow into investee firms.
Furthermore, with a PMS, accredited SEBI investors can acquire more exposure to unlisted stocks. Accredited investors can discuss the fees and limitations with Investment Advisers (IAs)
Individuals or businesses that fulfill SEBI’s minimal standards can seek accreditation with a stock exchange or depository. The accreditation will be valid for three years.
And, what are accredited investments?
They say it takes money to earn money, and authorized investors have more options to put financial wagers. You’ll discover a list of today’s top investment choices for qualified investors, as well as reasons why each of these options is worth considering.
As previously stated, many of these investments may carry higher risks since they are exposed to less regulation and monitoring. Before putting their toes in the water, investors evaluating any of these investing possibilities for accredited investors should undertake proper due research and examine their specific financial plan.
Some accredited investments are:
- Hedge Funds: Hedge funds, similar to exchange-traded funds (ETFs) and mutual funds, are professionally managed by experienced investors, although they are subject to less regulation and inspection. As a result, they can invest in more complicated and sophisticated asset classes than these other types of investments. Because hedge funds can utilize a variety of investing methods (including options, shorts, derivatives, and other tactics) and make alternative investments, they can also offer accredited investors a variety of exclusive investment alternatives. If you prefer a certain investing method, you may also select hedge funds based on a specific money manager’s or investment fund’s investment philosophy and strategy.
- Venture Capital: Venture capital (also known as risk capital) is a type of equity financing in which venture capitalists and angel investors support potential startups and small businesses in return for a stake in the firm. These funds are often used to provide recipient organizations with seed money (funds used to create and test innovative business/product concepts) or rounds of cash that assist drive expansion and growth. As firms expand and improve in value, accredited investors have the opportunity to earn ever-larger returns on their investments, which are usually proportional to their ownership stakes and the amount invested.
- Crowdfunding: Crowdfunding is the process of soliciting funds from the public at large and the internet at large using the internet. In other words, the crowdfunding approach, which is assisted by online crowdfunding platforms that provide websites and applications where deposits may be made, allows ordinary people to combine resources. Equity crowdfunding platforms (in which investors receive a share in a company or project in proportion to their contribution in exchange for funding) can provide authorized investors with exclusive investment options. Real estate crowdfunding, in particular, has recently grown in popularity, allowing accredited investors to explore several new options (multifamily housing, commercial real estate, etc.) in addition to individuals buying and flipping houses.
- Private Equity Real Estate: Are you thinking about engaging in private equity real estate to earn money in real estate? Then you are essentially thinking about participating in the purchase, financing, and ownership of a piece of property (or collection of properties) through a pooled private or public investment fund. So, to prevent misunderstanding: REITs give investors access to publicly listed shares of real estate investments that produce revenue through rental income. Instead, private equity real estate refers to the process of engaging in professionally managed funds that may invest in varied speculative property offers ranging from undeveloped land to the construction of new luxury high-rises.
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