What is an Accredited Investor?

  •  5 min read
  • 0
  • 13 Dec 2023
What is an Accredited Investor?

Key Highlights

  • An accredited investor is an individual or business entity that is permitted to trade securities not available to the general public.
  • SEBI establishes net worth and income benchmarks for investors in order to accredit them.
  • SEBI's objective of protecting investor interests and promoting investment is aligned with the accreditation of investors.

Investors who are accredited with the Securities and Exchange Board of India may trade in securities that have not been registered with the financial authorities. Accredited investors have a greater level of flexibility and privilege due to certain factors such as asset size, net worth, governance status, and trading experience. These investors trade securities that aren't available to the general public, commonly known as retail investors.

In India, almost all securities are registered with the Securities and Exchange Board. A retail investor who does not invest a lot of money at one time can only invest in registered securities. However, accredited investors are legally permitted to trade securities not registered with SEBI.

Due to the fact that most of these investors are high-net-worth individuals or financial entities investing large sums, some companies offer their securities directly to them. It saves the companies time and money by allowing them to raise capital without having to register securities with SEBI. This process is called a private placement when securities are offered directly to accredited investors.

However, SEBI does not regulate the securities offered in private placements, which poses a significant risk to investors. Due to the fact that accredited investors deal directly with the company, it is up to them to analyse the securities and decide whether they wish to invest. Consequently, authorities ensure investors are financially stable and experienced enough to take on such risks.

The role of regulatory authorities such as SEBI in offering securities directly to such investors is to provide guidelines for determining who qualifies to be called accredited investors. SEBI only allows entities to trade securities using private placement if they meet the benchmarks. In addition to funding startups, these investors have access to hedge funds, venture capital, and angel investors.

SEBI describes an institution or business entity trading securities through private placement as an accredited investor if their net worth is Rs 25 crore. Individuals who wish to qualify as accredited investors must have a liquid worth of Rs 5 crore and a total annual income of Rs 50 lakh.

The SEBI insists that accredited investors must meet certain requirements. It is imperative that an investor is financially stable in order to bear the risk of losing capital on unregistered investments. Additionally, these investors must have a successful portfolio and at least some years of experience.

It is the responsibility of SEBI to protect investor interests and investments while promoting investments in order to help companies raise the funds they need. To carry both, companies should register their securities with SEBI. However, it increases SEBI's workload since it has to supervise the listing process and regulate securities.

On the other hand, accredited investors trade securities not registered with SEBI because they get them at a lower price than they would if they were listed. In addition, they are willing to take on the high risk and deal directly with the company. Because these investors are responsible for analysing securities and are required to keep depositories and exchanges informed of the deal, SEBI allows them to do so.

Accredited investors fulfil SEBI's main purpose of promoting investments and enabling companies to raise funds. As a result, SEBI sees no harm in the process because companies can sell securities cheaply to accredited investors.

As an accredited investor, you may be granted certain trading privileges with the utmost flexibility. The following are the requirements for becoming the one:

Step 1: Open Demat and Trading Account Demat and trading accounts are mandatory for all entities that wish to trade in the Indian stock market. With a Demat account, you can hold your bought securities in dematerialised form and use a trading account for transactions.

Step 2: Apply for Accreditation The next step after opening a Demat and trading account is to apply for accreditation as a licensed investor. The application must be sent to the depositories or stock exchanges. You will receive a licence to be an accredited investor for three years once the stock exchange or depository determines your eligibility to be one.

Step 3: Adhere to SEBI Rules and Regulations Securities and Exchange Board of India rules and regulations regarding accredited investors must be followed strictly. A depository or stock exchange under SEBI is fully authorized to cancel your accreditation if you fail to adhere to the set guidelines.

Step 4: Ensure Financial Stability It is important that the depository or stock exchange ensures that you are financially stable enough not to be negatively affected by incurring losses in the process of registering. Therefore, maintaining the required cash and net worth throughout is essential to avoid the cancellation of your license.

Conclusion

Accredited investors have the authority and flexibility to trade securities not available to retail investors. Retail investors invest a small amount of money compared to large financial institutions and high-net-worth individuals. An accredited investor is someone who knows how to analyse securities and manage the risks associated with them.

However, the process of becoming such an investor is lengthy and requires comprehensive research by the depositories and stock exchanges. As an accredited investor, an investor has access to unmatched benefits and privileges.

FAQs on Accredited Investor

Compared to retail investors, accredited investors have access to more investment opportunities and can potentially generate higher returns.

Accredited investors have access to private securities offerings, reduced regulatory requirements, and higher returns.

Yes. It does not mean that non-accredited investors cannot invest; however, the opportunities are different. Non-accredited investors can invest in bonds, real estate, equities, and other securities.

Enjoy Zero brokerage on ALL Intraday Trades
+91 -

personImage