While the Securities & Exchange Board of India (Sebi) wants to increase the number of accredited investors by allowing the launch of accredited investors (AI) only funds, industry players believe that it is not feasible to launch these products given that the number of investors with accreditation status remain low due to less flexibility provided to these investors.
A CEO of an AIF said that it is not feasible to launch a fund as there are only 650-odd investors with this status as against more than 15 lakh total AIF investors. He added that investors are not finding it getting accredited attractive enough and they can still write a cheque to an AIF without disclosing the details of their assets. Another executive pointed out that fees charged for accreditation is another aspect that needs to be looked at.
Why Sophisticated Investors are Shying Away
Accredited investor fees in India involve a one-time processing fee of around Rs 5,000) plus a certification fee, which varies by investor type and duration. For Individuals/HUFs/Trusts, the two year certification costs Rs 5000 and Rs 9,500 for three years.
Ruchi Chojer, SEBI Executive Director, said at the CII National Summit on Alternative Investments on Thursday that the industry is looking very keenly at the growth of accredited investors, while there are some positive developments, the base is very small, so even two times jump in six months seems trivial. “We are internally debating and even at the level of advisory committee as to how we can smoothen the process of accreditation and make awareness about it because as I understand with several industry participants, I learn there are concerns among the people who understand risk and return on what fulfils the requirement to taking accreditation,” she said. “You will soon hear some developments in this regard on how we are thinking of easing out and trying to address the concerns that are in the minds of these investors,” she said.
Sebi’s Proposed Pivot
In its paper on AI only funds, SEBI had noted that the reason behind the low AI count needs to be seen in the backdrop of minimal features/ flexibilities in extant AI regulatory framework, thus reducing the attractiveness of AI status for high-risk investors. “Largely, sophisticated investors who have necessary net-worth to obtain accreditation are comfortable enough to invest more than Rs 1 crore in an AIF, rather than obtain accreditation to avail exemption from the ticket size,” it said. In the previous board meeting, the regulator had allowed AI-only schemes which offered regulatory flexibility in terms of less compliance around investor protection.
Industry players had seen the introduction of AI-only funds as well as the reduction in minimum investment amount from Rs. 75 Crores to 25 Crores for Accredited Investors in a Large Value fund as a welcome move.” They said that the approved relaxations in these kind of funds which includes doing away with the 1,000 investor limit due to which AIFs had to launch multiple funds; and providing measures for operational flexibility to managers will benefit the investors. This along with other proposals for AIFs are aimed at ensuring that in the longer run, only sophisticated investors who understand the inherent risks will be able to invest in AIFs.