SEBI Proposes Key Reforms to the Accredited Investor Framework

The Securities and Exchange Board of India (“SEBI”) introduced the concept of an Accredited Investor (“AI”) in the Indian securities market in 2021. The relevant regulatory amendments were notified on August 3, 2021, followed by detailed modalities for implementation of the AI framework issued on August 26, 2021.

The framework was introduced to identify investors possessing the financial capacity and sophistication to understand and bear the risks associated with relatively complex investment products. It was designed to facilitate a differentiated regulatory approach by extending certain regulatory flexibilities to investors considered capable of making informed investment decisions without requiring the same level of protection applicable to other categories of investors.

Over time, accreditation has emerged as an important regulatory gateway across various investment products and structures, including Alternative Investment Funds (“AIFs”), Portfolio Management Services (“PMS”), Specialised Investment Funds (“SIFs”), Angel Funds and Co-Investment Vehicles (“CIVs”).

The significance of AI status lies in the regulatory flexibilities associated with it. Depending on the applicable regulatory framework, accredited investors may benefit from exemptions or lower investment thresholds and may access investment opportunities that are otherwise subject to restrictions applicable to other investors. The increasing relevance of the framework is also reflected in the growth in the number of accredited investors and the substantial investments held by such investors in AIFs.

SEBI's proposed changes therefore represent the next stage in the evolution of the framework, seeking to simplify the accreditation process, broaden the eligibility framework and introduce greater flexibility in the manner in which AI status may be determined.

Manager-Led Accreditation: A Shift in the Existing Model

One of SEBI's key proposals is the introduction of a manager-led accreditation mechanism as an additional route for determining an investor's AI status. Under the existing framework, investors generally obtain accreditation through an independent Accreditation Agency. SEBI now proposes to allow an investment manager to determine an investor's accredited status as part of the onboarding process, potentially reducing duplication of documentation and multiple interactions, particularly where the required financial and KYC information is already collected by the manager.

Under the proposed route, (i) a manager may determine an investor's AI status during onboarding, (ii) accreditation may also be recognised during the tenure of an existing scheme, (iii) accreditation may be valid for three years for products managed by the same manager, and (iv) recognition may operate at the group level across AIF, SIF and PMS vehicles managed by entities within the same group. However, self-certification by an investor would not, by itself, be sufficient for determining AI status.

The proposal also raises potential concerns regarding conflicts of interest, given that a manager has a commercial interest in onboarding investors into its products. To address these concerns, SEBI has proposed safeguards relating to accountability, maintenance of records, periodic audits and compliance reviews, independent oversight and formal accreditation policies. Such policies would address matters including conflicts of interest, segregation of accreditation activities from business development, grievance redressal, data privacy and cybersecurity.

The manager-led mechanism is proposed as an additional route and would not replace the existing Accreditation Agency framework. Investors seeking portability across unrelated managers may therefore continue to use the Accreditation Agency route, while those investing with the same manager or group may benefit from a more streamlined accreditation process.

Securities Market Assets as an Alternative Eligibility Criterion

Another significant proposal is the recognition of securities market assets as an independent basis for accreditation. SEBI proposes that an individual, Hindu Undivided Family, family trust or sole proprietorship may qualify as an AI based on securities market assets of at least ₹5 crore, while the corresponding threshold for a body corporate is proposed at ₹20 crore.

The proposal could make the accreditation process more compatible with the increasingly digital nature of securities market holdings. Securities market assets may be verified through electronic records, potentially reducing reliance on tax records and professional certifications. The proposed definition includes (i) equity and debt instruments, REIT and InvIT units, and AIF units held in dematerialised form, (ii) mutual fund holdings, (iii) futures open interest positions, (iv) unlisted securities held in dematerialised form, and (v) overseas securities market investments. Verification may be facilitated through electronic Consolidated Account Statements (“eCAS”) generated by depositories and broker statements.

SEBI has, however, recognised that securities market assets and net worth measure different aspects of an investor's financial capacity. While net worth takes liabilities into account, the value of securities holdings may not reflect borrowings, leverage or other obligations. The proposed criterion therefore recognises substantial securities market holdings and market exposure as an additional indicator of an investor's financial capacity and sophistication, rather than relying solely on net worth.

The proposal could potentially broaden access to investment products available to sophisticated investors. It also reflects a broader regulatory approach seen internationally, where investor sophistication may be assessed using different combinations of financial capacity, investment experience, professional expertise and verification mechanisms. Against this backdrop, SEBI's proposals may be viewed as moving towards a more flexible framework that recognises different indicators of an investor's financial capacity and sophistication.

Expansion of Deemed Accredited Investor Categories

SEBI has also proposed expanding the categories of investors that may be treated as deemed Accredited Investors. Certain institutional and governmental entities are already recognised as accredited investors without undergoing the standard accreditation process. The proposed framework would extend this approach to Persons Resident Outside India (“PROIs”), including foreign portfolio investors, as applicable under the relevant regulatory framework.

The proposal could simplify the participation of eligible foreign investors in investment products where AI status is relevant by reducing the need for a separate accreditation exercise. By removing an additional procedural layer, the proposed framework may also facilitate greater participation by foreign investors in AI-oriented investment opportunities in India.

Potential Extension of Accreditation to LLPs and Wholly Owned Subsidiaries

The consultation paper also seeks views on two additional issues that could potentially broaden the application of the AI framework.

The first relates to Limited Liability Partnerships (“LLPs”). SEBI is considering whether an LLP may be recognised as an accredited investor where each of its partners independently satisfies the applicable AI eligibility criteria.

The proposal draws from the existing approach applicable to partnership firms. However, SEBI has also identified the distinct legal characteristics of LLPs, including its legal identity and perpetual succession. Changes in the composition of partners could therefore raise questions regarding the continued eligibility of the LLP.

The second issue concerns wholly owned subsidiaries. SEBI is seeking views on whether a wholly owned subsidiary should be permitted to qualify as an AI based on the financial capacity of its parent company.

While the commercial rationale for such treatment may be apparent, the consultation paper identifies a significant concern: the parent and subsidiary are separate legal entities, and the financial strength of the parent does not necessarily mean that the subsidiary itself possesses equivalent loss-bearing capacity.