securities market, certain investment opportunities are not available for regular retail investors. Accredited investors satisfy specific financial conditions that allow them to access a broader, more exclusive range of investment options. These opportunities may include private equity, hedge funds, venture capital funds, and other alternative investments. The accredited investor status empowers entities to participate in these specialised investments.
Accredited investor meaning
An accredited investor is an individual or a business that fulfils certain financial criteria and can, therefore, invest in securities that the general public cannot access. These securities may or may not be registered with the financial authorities and are thus unregulated. The criteria to qualify as an accredited investor are set by the market regulator, with the aim of creating a high-functioning, sophisticated market for advanced securities products.
Becoming an accredited investor in India
The Securities and Exchange Board of India (SEBI) established the criteria and the process for high net-worth individuals (HNIs) to become accredited investors in India. These requirements have been established to ensure that the entities investing in high-profile securities, including hedge funds and private equity, are financially viable and have no insolvency issues. These criteria become all the more important since many of the securities available to the investors are unregistered and, therefore, carry a high risk.
SEBI has developed the following criteria for entities that seek to become accredited investors in India:
- A business organisation that has a minimum net worth of Rs. 25 crore can satisfy the conditions of becoming an accredited investor.
- Individuals seeking this qualification need to have a liquid net worth of Rs. 5 crore and must maintain an annual gross worth of Rs. 50 lakh.
- If a business entity or an individual can sufficiently prove their financial stability, they can be considered accredited investors by SEBI.
- SEBI also requires individuals and businesses to have some level of experience in dealing with financial markets and have a profitable and robust investment portfolio.
Accredited investors in India
In India, the following entities are considered accredited investors:
- High Net Worth Individuals (HNIs) - HNIs are people who own a significant amount of wealth and financial assets, although a strict definition or criteria for them has not yet been formulated in India.
- Qualified Institutional Buyers (QFIs) - Financial institutions, such as banks, insurance companies, and foreign institutional investors (foreign portfolio investors) are considered QFIs in India.
- Angel Investors and Venture Capital Funds - Entities that are known to invest in sunrise companies and early-stage startups qualify as accredited investors in India. These investors typically have a high risk appetite and also have a successful track record in high-profile, high-risk investments.
Advantages
The most distinct advantage enjoyed by an accredited investor is access to exclusive investment opportunities, such as hedge funds and venture capital. The second advantage emanates from the first one. Due to the high-risk nature of their investments and their vast experience in financial markets, accredited investors often receive high returns. Furthermore, as they have broad and unique opportunities at their disposal, these investors have a wider space to diversify their investments and boost their returns. Lastly, these investors have greater control over their investments, as they can pick and choose their targets and build a robust portfolio.
Disadvantages
In many cases, the securities these investors deal in are high-risk alternative investments. For example, a venture capitalist investing in a startup stands to lose money if the startup idea does not take off in the market, which can happen for a variety of reasons. The risk involved also stems from the fact that these securities are unregistered and unregulated, making them susceptible to fraudulent dealings. Another drawback is that alternative investments can be more complex than traditional investment options. An accredited investor will need to have a strong grasp of the market and its functioning to make sound investment decisions.
Conclusion
In conclusion, the status of being an accredited investor in India offers access to a realm of exclusive investment opportunities, such as hedge funds and venture capital, which are not readily available to the general public. While these opportunities can lead to potentially high returns and greater portfolio diversification, they also come with inherent risks. Investors must navigate the complexities of unregistered and unregulated securities, as well as the unpredictable nature of alternative investments. Therefore, while accredited investors enjoy certain advantages, they must exercise caution and maintain a thorough understanding of the market to make informed investment decisions and mitigate potential drawbacks.
