Sebi comes out with modalities for accredited investors framework

Markets regulator Sebi on Thursday came out with detailed modalities for implementation of the accredited investors framework, a move expected to open up a new channel of raising funds from sophisticated investors.

The regulator has issued guidelines on eligibility criteria for accredited investors (AIs), procedure as well as validation for accreditation, procedure to avail benefits linked to accreditation and flexibility to investors to withdraw "consent", according to a circular.

Sebi had earlier this month introduced the concept of "accredited investors" in the Indian securities market.

A person will be identified as an accredited investor on the basis of net worth or income.

Individuals, HUFs, family trusts, sole proprietorships, partnership firms, trusts and body corporates can get accreditation based on financial parameters specified by the regulator.

Under the framework, AIs may avail flexibility in minimum investment amount (lower ticket size) or concessions from specific regulatory requirements applicable to investment products.

This is subject to conditions applicable for specific products or services under the rules.

The regulator said subsidiaries of depositories and stock exchanges will issue an accreditation certificate to such investors.

It further said subsidiaries of recognised stock exchanges can carry out the accreditation process. This is subject to the condition that the stock exchange should have minimum 20 years of presence in the Indian securities market and should have a networth of at least Rs 200 crore.

Among other criteria, the exchange needs to have nation-wide terminals and should have investor grievance redressal mechanisms in place, including arbitration and presence of Investor Service Centres (ISCs) in at least 20 cities.

Accreditation agencies will be responsible for verification of documents submitted by applicants, timely processing of applications and issuance of accreditation certificate, maintaining data of accredited investors and verification of accreditation status.

Eligible subsidiaries will have to make an application to Sebi through the concerned stock exchange or depository for recognition as an accreditation agency within three weeks.

The accreditation agency will issue a certificate to the applicant as an AI. Each certificate will have a unique accreditation number, name of the accreditation agency, PAN of the applicant and validity of accreditation.

In respect of validity of accreditation, Sebi said if the applicant meets the eligibility criteria for accreditation for the preceding one year, the accreditation will be valid for a period of one year.

"If the applicant consistently meets the said eligibility criteria for accreditation in each of the preceding three years, the accreditation shall be valid for a period of two years," Sebi said.

With regard to eligibility criteria for AIs, Sebi said an individual, Hindu Undivided Family (HUF), family trust or sole proprietorship can be an accredited investor if their annual income is at least Rs 2 crore or net worth is at least Rs 7.50 crore, with at least half of it in financial assets.

Such entities with a combination of at least Rs 1 crore annual income and a net worth of Rs 5 crore, with at least half in financial assets, can also become an accredited investor.

For trusts other than family trusts, a net worth of at least Rs 50 crore would be required to qualify as accredited investors. For corporates, a net worth of Rs 50 crore will be must.

In case of a partnership firm, Sebi said each partner independently will have to meet the eligibility criteria for accreditation.

"In case of accreditation of individual investors, HUFs and Sole Proprietorships, the value of the primary residence of the individual, Karta of HUF and the Sole proprietor respectively, shall not be considered for calculation of net worth," Sebi said.

Explaining the procedure to avail benefits linked to accreditation, Sebi said prospective investors will have to submit a copy of the accreditation certificate and an undertaking to the investment provider saying such investor has the ability to bear the financial risks associated with the investment.

In the undertaking, it needs to be mentioned that such investor has the necessary knowledge and means to understand the features of the investment product, including the associated risks.

Sebi said investors will have the flexibility to withdraw their consent and discontinue availing benefits of accreditation subject to certain conditions.

"An investor who withdraws consent after availing the benefit of lower ticket size shall be required to increase the investment to the minimum amount that is stipulated under the applicable regulatory framework for the particular investment product, within the timeframe specified in the client agreement," Sebi said.

If an investor who has availed concessions in the regulatory framework withdraws the consent furnished to the investment provider before the expiry of the client agreement, the investments already made shall be 'grandfathered' -- that is such investments shall continue to be reckoned as investments by an AI, it added.

With effect from the date of withdrawal of consent, any further transaction will be in accordance with the applicable regulatory framework, the regulator noted.

"Investors in pooled investment products which are launched exclusively for AIs, in which concessions to regulatory framework have been availed, shall not have the flexibility to withdraw their consent," Sebi said.

The client agreement will have to provide the modalities for withdrawal of consent and consequences of the investor withdrawing the consent.