SEBI proposes concept of 'Accredited Investors'
The financial market regulators in many jurisdictions around the world, such as Canada, Singapore, China and the United State of America (“US”) recognize and acknowledge the concept of a class of well-informed investors who not only have a relatively higher level of understanding when it comes to financial products and associated risks, but also have a higher risk appetite in terms of their ability to take financial decisions. Such investors are typically termed as ‘Accredited Investors’ (“AIs”) or ‘Qualified Investors’. The industry understanding is that such AIs have sufficient financial means to absorb any loss and do not require a wide regulatory protection, which means that certain relaxations can be accorded to such investors like easing off on disclosure requirements and filing of offer documents, flexibility in respect of investor reporting and other regulatory concessions.
The introduction of AIs with uniform eligibility criteria accompanied with a flexible regulatory framework, may provide certain benefits to the Indian securities market such as, an increase in investment products due to lower entry barriers such as minimum investment size; better risk labeling and increased transparency; and better channelization of regulatory resources for protection of other investors.
On February 24, 2021 the Securities and Exchange Board of India (“SEBI”) released a consultation paper introducing a framework on AIs (“AI Framework”)1 to the Indian securities market. Some key provisions of the AI Framework are highlighted below:
Prospective Advantages in adopting the AI Framework
The introduction of the concept of AIs may offer the following set of advantages:
SEBI seems to have drawn up the AI Framework after taking cue from the success and drawbacks of various jurisdictions, a few examples of which are provided below:
With the proposed introduction of the concept of AI, India’s securities market is on the precipice of meteoric growth and development, through the consequential increased participation of investors and increased number of market goods and services. Given that the Indian securities market does not readily provide for tailored investment products for specific class of investors, laying the foundation of an enabling framework may pave the way to introduction of better and innovative products thereby facilitating the growth and development of the securities market at large.
Alongside the direct benefits to the AI, the proposed AI framework will also ensure regulatory focus on less-informed investors, who are otherwise vulnerable to unfair practices such as mis-selling, and thereby requiring increased protection. Several industry experts have hailed the move by SEBI, having long argued against the ‘one-size fits all’ regulatory approach by SEBI and now exposing Indian markets to increased complex financial products, with the affirmation that only suitable investors would be allowed to participate in them. There are arguments against the AI Framework specifically in terms of the eligibility for AIs to the effect that net worth criteria cannot be a surrogate for financial acumen, noting that several high net worth individuals have crashed and burned while participating in complex securities.
An interesting point to look out for when the AI Framework is formalized would be the treatment of investments made by AIs (in a year in which they meet the qualifying criteria) in the following year, if they no longer meet the minimum net worth / annual income / AUM requirement; does the eligibility of the AIs to hold such investments continue, or will it fall away and will the AI be required to comply with disclosure requirements earlier exempted from? It is unclear from the consultation paper how this issue will be addressed, given the floating criteria and absence of an accreditation certificate renewal process. It is also yet to be seen how the AI framework will impact the regulatory environment surrounding the IPO process.
Another point to be noted is that in light of the already existing class of QIBs5, SEBI is now going to recognize another special class of investors. The AI framework has not addressed how two special classes of investors seeming to have benefits at par with each other will be regarded by SEBI, in terms of regulatory treatment, and how the two special classes will co-exist. Will AIs be recognized as retail investors for the purposes of an initial public offering (“IPO”)? Will AIs be permitted to invest in a qualified institutional placement? It will be interesting to see how SEBI answers these questions in the fine print of law.
SEBI has closed the window on receiving comments from stakeholders and other entities on the AI Framework on March 18, 2021.
1 Consultation Paper on Introduction of concept of “Accredited Investors” in Indian securities market, February 24, 2021, available at: https://www.sebi.gov.in/reports-and-statistics/reports/feb-2021/consultation-paper-on-introduction-of-the-concept-of-accredited-investors_49269.html
5 As per the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, qualified institutional buyer is defined as: (i) a mutual fund, venture capital fund, Alternative Investment Fund and foreign venture capital investor registered with the Board; (ii) a foreign portfolio investor other than Category III foreign portfolio investor, registered with the Board; (iii) a public financial institution as defined in section 4A of the Companies Act, 1956; (iv) a scheduled commercial bank; (v) a multilateral and bilateral development financial institution; (vi) a state industrial development corporation; (vii) an insurance company registered with the Insurance Regulatory and Development Authority; (viii)a provident fund with minimum corpus of twenty five crore rupees; (ix) a pension fund with minimum corpus of twenty five crore rupees; (x) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of the Government of India published in the Gazette of India; (xi) insurance funds set up and managed by army, navy or air force of the Union of India; (xii) insurance funds set up and managed by the Department of Posts, India;