The Securities and Exchange Board of India’s (SEBI) decision in its board meeting on Friday to extend a host of relaxations to alternative investment funds’ (AIFs) targeted at accredited investors (AIs) is expected to lead to a rise in the number of investors in this category, said experts.
As on May-end, there were only 649 AIs with valid accreditation certificates, according to a consultation paper by SEBI. Of this 405 are individuals and 122 corporate bodies.
To get the accreditation status, three eligibility options are there for individuals: net worth of over Rs 7.5 crore, with at least Rs 3.75 crore in financial assets, annual income of more than Rs 2 crore, or a combination of a net worth of over Rs 5 crore and an annual income of more than Rs 1 crore.
Why accreditation count has been low
In its paper, SEBI 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 recent board meeting, the regulator has allowed AI-only schemes which offers regulatory flexibility in terms of less compliance around investor protection. The board noted AIFs are for sophisticated risk aware investors and the current reliance on minimum commitment threshold (of Rs 1 crore) as a proxy for investor sophistication may be inadequate.
More flexibility for managers and investors
An industry player said that since the touch point of investors are fund managers, more flexibility to the managers will help them in getting more investor accreditation status.
According to Harsh Kothari, Partner at IC RegFin Legal, under the new category, SEBI is comfortable that AIs understand the risks. For AI-only AIFs, SEBI has approved relaxations 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, he said.
Kothari explained that this along with the recent angel funds and co-investment amendments will help in ensuring investor protection by only permitting AIs to invest in AIFs. “It looks like that these amendments along with other proposals will ensure that in the longer run, only sophisticated investors who understand the inherent risks will be able to invest in AIF” he said.
The regulator has permitted angel funds to raise capital exclusively from AIs, while newly registered funds will be required to comply immediately, while those registered before the circular have until next September for transition. During this period, they can onboard up to 200 non-accredited investors but cannot accept new contributions from them after the deadline.
In another circular, it allowed Category I and II AIFs to offer accredited investors a co-investment facility by launching a separate co-investment scheme (CIV scheme). According to SEBI, managers of AIFs must choose between the PMS route and the CIV scheme route for an investor’s co-investment.