[Shreshtha Mathur and Chahak Agarwal are fourth year law students at National Law University, Jodhpur]
The Securities and Exchange Board of India (SEBI) on 22 May 2019 released the “Framework for the process of accreditation of investors for the purpose of Innovators Growth Platform”. It seeks to provide a boost to entities seeking to get listed on the Innovators Growth Platform (IGP), the stock exchange platform for listed start-ups. Easing of norms for accreditation of investors is a welcome step for those willing to invest in start-ups and new age companies. An accredited investor is traditionally a person or a business entity who is allowed to deal in securities that may not be registered with financial authorities and receive special status under financial regulation laws. Different countries have different thresholds for qualification as sophisticated or accredited investors. This is in line with the measures SEBI has been taking to promote ‘ease of business’ in the Alternative Investment Funds’ (AIFs) arena.
This post seeks to lay down the evolution of the concept of “accredited investors” (AIs) and AIFs as a distinct asset class. It also critically analyses the recently issued SEBI circular.
Alternate Investment Funds Regulations, 2012
Financial products have acquired great importance globally in the wake of interconnected markets and digital innovation. In an emerging economy like that of India, AIFs act as engines of economic growth and are a vital part of a robust capital market. The exponential increase of the AIF industry has made it quintessential to explore domestic sources of capital other than traditional sources such as banks and non- bank financial companies which can be routed through AIFs, and to expand the pool of investors qualified to invest in AIFs. In order to boost investment in start-ups and early age companies by way of opening up newer avenues for investors, SEBI has taken various progressive measures. In 2012, SEBI introduced the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 to recognize such pooling vehicles as a distinct asset class with a minimum investment limit of ₹1 crore. 
AIPAC Reports of 2016
In 2015, SEBI constituted a standing Alternative Investment Policy Advisory Committee (AIPAC) under the chairmanship of Mr. Narayana Murthy to recommend measures for further development of the alternative investment and start- up wave in India. Through its two reports, AIPAC 1 and AIPAC 2 which were submitted in January 2016 and December 2016 respectively, the committee recommended the introduction of the global concept of AIs wherein an investor having a certain minimum income, or asset, or net worth can make such investments without triggering regulations that apply to fund offerings to retail investors.
It was proposed, consistent with the global practice, to identify individuals as accredited investors who are capable of understanding investments with their associated risks, possess sufficient financial sophistication to assume risks associated with offerings and have a sound financial track record. The term AI according to the report has been defined to include “individuals or HUFs, company, a firm, an association of persons or a body of individuals whether incorporated or not, a local authority and every artificial juridical person who report a total income (including exempt income) exceeding INR 50 lacs annually in immediately three assessment years preceding the assessment year in which the investment is made.”
Along with the quantitative criterion, the AIPAC also proposed investment knowledge and acumen as a criterion apart from the minimum investment limit. The proposed procedure for accreditation involves an online test to ascertain an investor’s basic knowledge of investing through a set of 15 questions. It was also recommended that investors could register themselves for accreditation and their status verified through online processes with the view to exploit digital technology and take forward the government’s goal of ease of doing business and digital India.
The circular gives a definition to AIs as investors whose holding in the issuer company is eligible for the computation of at least 25% of the pre-issue capital in accordance with Regulation 283(1) of the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018 (the ICDR Regulations). The circular also lays down the eligibility for entities to be considered as AIs:
1. Any individual with total gross income of ₹50 lakhs annually and who has minimum liquid net worth of ₹5 crores; or
2. Any body corporate with net worth of ₹25 crores or more.
Earlier, SEBI’s Consultation Paper provided that only an AI can invest money in a crowdfunding project, where qualifications of an ‘AI’’ had been prescribed for Qualified Institutional Buyers, companies incorporated under the Companies Act, High Net worth Investors, Eligible Retail Investors and others.
According to the new SEBI Circular, an investor who has a demat account with a depository has to make an application to the stock exchanges or depositories for recognition as an AI. The documentation required for accreditation has been provided in Annexure A of the Circular. The accreditation granted by the stock exchange or depository shall be valid for a period of three years from the date of issue of such accreditation. In case, such AI becomes ineligible due to change in their financial status, they are required to inform the stock exchange or depository of such ineligibility. The exchanges or depositories are directed to implement the procedure for accreditation within 45 days from the date of issue of the Circular.
In addition to that, merchant bankers are expected to ensure due diligence with regard to eligibility of AIs and their holding in the company desirous of listing on the IGP is in accordance with regulation 283(1) of the ICDR Regulations at the time of application by a company for listing on the IGP. The eligibility of issuers for listing on the institutional trading platform has been prescribed under regulation 283.
This framework can enable alternative investments, along with clarifying the regulation for crowd-funding which is presently unregulated. However, there are additional changes that can make it more effective.
The AIPAC Report 2 proposed that individuals who are capable of identifying potential investments possess sufficient financial sophistication to assume the risks associated with the offerings and have a sound financial track be recognised as AIs. The present regime only recognises a quantitative qualification of eligibility for an AI.
The United States’ position on AIs is similar to that of India, as investors with a minimum annual income of $200,000 or an investible net worth of $1 million can apply for accreditation. In fact, the chairman of the Securities Exchange Commission has contended that the accreditation criteria in the US must be made more inclusive as all investors deserved “equality of opportunity” in exploring new assets.
Qualitative eligibility based on acumen and knowledge is proposed to be included for AIs in order to make the new regime more inclusive and it shall also be in accordance with SEBI’s principle of protection of minority shareholders. The Report also recommends the digitization of the accreditation process. An option is proposed to be given to the assessee to register as an AI at the time of registering on Income Tax Department’s assessee e-portal. Then, the assessee will have to complete the registration procedure by providing necessary details. The assessee will then be informed whether he is eligible or not to be an AI. Once cleared to be an AI, the assessee shall go through a simple online test of about 15 questions to ascertain his basic knowledge of investing. The test will judge the knowledge of the potential AI and instruct them about good practices of investing. If the assessee is unable to pass the test, he can take the test within a week. This digitization recommendation is capable of making the process convenient along with eradicating delays in fund raising which is essential for any start up.
– Shreshtha Mathur and Chahak Agarwal
 Regulation 10, Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.