12 Unlocking the World of Accredited Investors: A Comprehensive Guide to SEBI's Framework for AIFs, Portfolio Managers, and Investment Advisers

Key Takeaways:

- Introduces the concept of "Accredited Investors" (AIs) in the Indian securities market

- Defines eligibility criteria based on income and net worth thresholds

- Outlines the accreditation process and responsibilities of Accreditation Agencies

- Allows AIs to access investment products with regulatory concessions or lower ticket sizes

- Provides guidelines for investment service providers to onboard and engage with AIs

- Establishes validity periods for accreditation certificates based on financial information

- Offers flexibility for AIs to withdraw consent and discontinue accreditation benefits

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has unveiled a comprehensive framework for "Accredited Investors" (AIs), a groundbreaking initiative aimed at facilitating informed investment decisions and fostering a more inclusive securities market. This framework introduces the concept of AIs, individuals or entities that meet specific financial criteria, allowing them to access investment opportunities with regulatory concessions or lower ticket sizes.

Under this framework, AIs may avail flexibility in minimum investment amounts or exemptions from certain regulatory requirements applicable to investment products, subject to conditions outlined for Alternative Investment Funds (AIFs), Portfolio Managers, and Investment Advisers. The framework establishes clear eligibility criteria, accreditation procedures, and guidelines for investment service providers to onboard and engage with AIs.

Eligibility Criteria for Accredited Investors:

The framework defines specific income and net worth thresholds for individuals, Hindu Undivided Families (HUFs), family trusts, sole proprietorships, partnership firms, trusts, and body corporates to qualify as AIs. These criteria ensure that AIs possess the necessary financial means and understanding to navigate the complexities of investment products tailored for them.

Accreditation Process and Agencies:

Individuals and entities seeking AI status must approach an Accreditation Agency for accreditation. These agencies, which include subsidiaries of recognized stock exchanges and depositories, are responsible for verifying documents, processing applications, issuing accreditation certificates, maintaining data of accredited investors, and ensuring confidentiality.

Accreditation Validity and Renewal:

The validity period of the accreditation certificate is determined by the applicant's financial information. If the eligibility criteria are met for one financial year, the certificate is valid for two years. If the criteria are met for two consecutive financial years, the validity extends to three years. Newly incorporated entities meeting the net worth criteria can obtain a two-year accreditation certificate.

Onboarding Accredited Investors:

Investment service providers must obtain a copy of the Accreditation Certificate and an undertaking from prospective AIs, confirming their consent to avail benefits under the AI framework, their ability to bear financial risks, and their understanding of the investment product's features and associated risks. Service providers are required to independently verify the accreditation status and disclose relevant conditions and regulatory concessions to AIs.

Withdrawal of Consent:

AIs have the flexibility to withdraw their consent and discontinue accreditation benefits, subject to specific conditions. If an AI withdraws consent after availing lower ticket size benefits, they must increase their investment to the minimum regulatory requirement within the specified timeframe. Investments made prior to withdrawal will be grandfathered, but subsequent transactions will follow the standard regulatory framework.

The SEBI's framework for Accredited Investors represents a significant step towards fostering a more inclusive and informed securities market. By providing regulatory concessions and tailored investment opportunities, this initiative aims to empower financially capable individuals and entities to make informed investment decisions while ensuring appropriate safeguards and investor protection measures.

FAQs:

Q1: What is the purpose of the Accredited Investors framework?

A1: The Accredited Investors framework aims to facilitate informed investment decisions by allowing individuals and entities meeting specific financial criteria to access investment opportunities with regulatory concessions or lower ticket sizes, subject to appropriate safeguards.

Q2: Who qualifies as an Accredited Investor?

A2: The framework defines eligibility criteria based on income and net worth thresholds for individuals, HUFs, family trusts, sole proprietorships, partnership firms, trusts, and body corporates. These criteria ensure that AIs possess the necessary financial means and understanding to navigate complex investment products.

Q3: How is the accreditation process conducted?

A3: Individuals and entities seeking AI status must approach an Accreditation Agency, which includes subsidiaries of recognized stock exchanges and depositories. These agencies are responsible for verifying documents, processing applications, issuing accreditation certificates, and maintaining data of accredited investors.

Q4: What is the validity period of the accreditation certificate?

A4: The validity period of the accreditation certificate depends on the applicant's financial information. It can range from two years (if the criteria are met for one financial year) to three years (if the criteria are met for two consecutive financial years).

Q5: Can Accredited Investors withdraw their consent?

A5: Yes, AIs have the flexibility to withdraw their consent and discontinue accreditation benefits, subject to specific conditions. If an AI withdraws consent after availing lower ticket size benefits, they must increase their investment to the minimum regulatory requirement within the specified timeframe.

Q6: What are the responsibilities of investment service providers regarding Accredited Investors?

A6: Investment service providers must obtain a copy of the Accreditation Certificate and an undertaking from prospective AIs, independently verify the accreditation status, and disclose relevant conditions and regulatory concessions. They must also include provisions in the client agreement regarding the consequences of an investor becoming ineligible as an AI during the agreement's tenure.

Key Precedents:

The Accredited Investors framework introduced by SEBI draws upon several precedents, including:

1. SEBI Circular No. SEBI/HO/IMD/IMD-I/DF9/P/CIR/2021/620 dated August 26, 2021:

This circular laid the groundwork for the Accredited Investors framework, introducing the concept and outlining the modalities for accreditation.

2. SEBI Circular No. SEBI/HO/AFD/PoD1/CIR/2023/189 dated December 18, 2023:

This circular further expanded the Accredited Investors framework, providing additional guidelines and clarifications regarding the accreditation process, eligibility criteria, and responsibilities of Accreditation Agencies.

3. SEBI (Alternative Investment Funds) Regulations, 2012:

The AIF Regulations were amended to provide regulatory concessions and exemptions for 'Large Value Funds for Accredited Investors' (LVFs), a specific category of AIFs catering to AIs.

4. SEBI (Portfolio Managers) Regulations, 2020:

The framework allows AIs to access investment opportunities with regulatory concessions or lower ticket sizes under the Portfolio Managers Regulations.

5. SEBI (Investment Advisers) Regulations, 2013:

The Accredited Investors framework extends to Investment Advisers, enabling AIs to benefit from tailored investment advisory services.

These precedents have played a crucial role in shaping the Accredited Investors framework, establishing the legal and regulatory foundations for its implementation and ensuring alignment with existing securities regulations.

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Here's AIF Master Circular's verbatim Chapter 12

Chapter 12 - Framework for Accredited Investors{35}

12.1. Pursuant to public consultation and approval of the SEBI Board, the framework for “Accredited Investors” (Als) has been introduced in the securities market.

12.2. Under the aforesaid framework, Als may avail flexibility in minimum investment amount (“Lower ticket size”) or concessions from specific regulatory requirements applicable to investment products, subject to conditions applicable for specific products/ services under SEBI (Alternative Investment Funds) Regulations, 2012, SEBI (Portfolio Managers) Regulations, 2020 and SEBI (Investment Advisers) Regulations, 2013. The modalities of accreditation are provided in Annexure 8.

Accreditation Agency.

12.3. Persons desirous of being reckoned as Als shall approach an Accreditation Agency for accreditation. Accreditation Agencies shall be responsible for:

a) Verification of documents submitted by applicants for accreditation,

b) Timely processing of applications for accreditation and issuance of accreditation certificate,

c) Maintaining data of accredited investors,

d) Verification of accreditation status,

e) Maintaining confidentiality of investor information at all times, and

f) Any other responsibilities as may be specified by SEBI from time to time.

12.4. Accreditation Agencies shall have the requisite infrastructure including systems and manpower to fulfill their responsibilities as specified under para 12.3 above.

12.5. The following entities are eligible to carry out the accreditation process:

(i) Subsidiaries of recognized Stock Exchanges, provided the Stock Exchange meets the following criteria:

a) Minimum 20 years presence in Indian securities market,

b) Minimum net worth of 200 crore rupees,

c) Presence of nation-wide terminals,

d) Having Investor grievance redressal mechanisms in place, including arbitration,

e) Presence of Investor Service Centers (ISCs) in at least 20 cities, and

f) Any other criteria as specified by SEBI from time to time.

(ii) Subsidiaries of Depositories.

12.6. The framework for Als shall be made available on the websites of accreditation agencies.

12.7. Accreditation Agencies, which are also KYC Registration Agencies (KRAs), may access Know Your Customer (KYC) documents of applicants available with them in capacity of KRA and may also access the same from the database of other KRAs, for the purpose of accreditation.

12.8. The Accreditation agencies shall grant accreditation solely based on the KYC and the financial information of the applicants.

12.9. To this effect, the accreditation certificate issued by accreditation agencies shall include the following disclaimer:

“the assessment of the applicant for accreditation is solely based on the applicant’s KYC and financial information and does not in any manner exempt market intermediaries and pooled investment vehicles from carrying out necessary due diligence of the accredited investors at the time of on-boarding them as their clients. ”

12.10. The validity period of the accreditation certificate is, as under:

12.10.1. If the applicant meets the eligibility criteria for preceding one financial year, the accreditation certificate issued shall be valid for a period of two years from the date of issuance.

12.10.2. If the applicant meets the eligibility criteria in each of the preceding two financial years, the accreditation certificate issued shall be valid for a period of three years from the date of issuance.

12.10.3. If the applicant is a newly incorporated entity, which does not have financial information for the preceding financial year but meets the applicable net- worth criteria as on the date of application, the accreditation certificate issued shall be valid for a period of two years from the date of issuance.

Filing of LVF Schemes with SEBI{36}

12.11. Pursuant to introduction of framework for “Accredited Investors” in the securities market, AIF Regulations were amended to provide certain relaxations from regulatory requirements to ‘Large Value Fund for Accredited Investors’ (LVF).

12.12. In terms of proviso to Regulation 12 of AIF Regulations, LVFs are exempt from filing their placement memorandum with SEBI through Merchant Banker and incorporate comments of SEBI, if any, in their placement memorandum i.e. LVFs can launch their scheme under intimation to SEBI.

12.13. While filing the placement memorandum for LVF schemes with SEBI, a duly signed and stamped undertaking by Chief Executive Officer of the Manager of the AIF (or person holding equivalent role or position depending on the legal structure of Manager) and Compliance Officer of Manager of the AIF shall be submitted in the format as mentioned at Annexure 9.

Extension of tenure beyond two years{37}

12.14. Regulation 13(5) of AIF Regulations permits close ended AIFs to extend its tenure up to two years with the approval of two-third of its unit holders by value of their investment in the said AIF, while the proviso to Regulation 13 (4) of AIF Regulations permits LVF to extend its tenure beyond two years, subject to terms of the contribution agreement, other fund documents and such conditions as may be specified by the Board from time to time. In this regard, it is specified as under:

12.14.1. In order to enable the investors to take an informed decision, the placement memorandum, contribution agreement or other fund documents of LVF shall lay down terms and conditions for extension of the tenure beyond two years.

12.14.2. LVF shall be required to obtain approval from its Trustee/Board of Directors/Designated Partners (depending upon the legal structure of the LVF) for extending the tenure beyond two years, at least one month before expiration of the fund tenure or extended tenure.

12.14.3. In case requisite conditions specified in the placement memorandum, contribution agreement or other fund documents of LVF for extension of tenure beyond two years are not fulfilled, LVF shall liquidate and wind up in accordance with AIF Regulations and Circulars issued thereunder.

Note:-

{35}SEBI Circular No. SEBI/H0/IMD/IMD-I/DF9/P/CIR/2021/620 dated August 26, 2021 and SEBI Circular No. SEBI/HO/AFD/PoD1/CIR/2023/189 dated December 18, 2023

{36}SEBI Circular No. SEBI/HQ/AFD/RAC/CIR/2022/088 dated June 24, 2022

{37}SEBI Circular No. SEBI/HQ/AFD/RAC/CIR/2022/088 dated June 24, 2022