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The Securities and Exchange Board of India (Sebi) has come up with a framework creating so-called accredited investors, with relaxations for high-value investment vehicles. While details are awaited, a previous Sebi consultation paper provides an outline. Mint takes a look:

Who is an accredited investor?

A Sebi consultation paper in February 2021 defined an accredited individual investor as someone who satisfies at least one of three conditions. One, the investor has a net worth of  7.5 crore, with at least half of it in financial assets. Two, the investor has an annual income greater than 2 crore. Three, the individual has an annual income greater than 1 crore and net worth greater than 5 crore with at least half this amount in financial assets. For trusts and body corporates, the net worth threshold is 50 crore. The primary residence of an individual cannot be counted in the net worth calculation.

What relaxations has the regulator proposed?

Currently, those interested in portfolio management schemes (PMS) and alternative investment funds (AIFs) must invest at least 50 lakh and 1 crore, respectively; these thresholds won’t apply to accredited investors. Second, current rules mandate AIFs to make diversified investments, with strict conditions for launch of schemes, and extension of tenure. Sebi has proposed to allow the formation of AIFs where these rules are more relaxed, creating a potential high-return, high-risk investment avenue, but open only to accredited investors. They must invest a minimum of 70 crore in such AIFs.

New investors class
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New investors class

How do such investors get accredited?

The Sebi paper says there will be accreditation agencies to conduct the process, likely to be stock exchanges, depositories or subsidiaries of stock exchanges/depositories. The accreditation will be valid for one year from the date of accreditation. It is not clear if Sebi will prescribe any knowledge or expertise test in the final accreditation framework.

What are the changes for advisers?

Accredited investors will have the flexibility to determine the limits and modes of fees payable to the investment adviser through mutually negotiated contractual terms. For other investors, Sebi has fixed a ceiling of 1.25 lakh if a flat fee is charged, and 2.5% of assets under advice if a fee linked to assets is charged. Investment advisers can only collect fees for a maximum of two quarters in advance. This structure may not be suitable for high net-worth investors who may be willing to pay a high flat fee. Accreditation will solve this issue.

Are there any concerns about the framework?

The focus on net worth rather than financial knowledge or experience in the consultation paper can be somewhat restrictive. There may be wealthy individuals who are not financially savvy or highly knowledgeable small investors who do not satisfy the net worth requirements for accreditation. Basing income and net worth on a single year’s income tax return, as suggested in the paper, may not be comprehensive enough. It may also create a new ‘class system’ in financial services with greater flexibility for the privileged few.

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