What is an Accredited Investor?

To protect the greatest asset of the stock market, the government has established the Securities and Exchange Board of India, responsible for regulating and managing the investors and the included entities. However, the rules, regulations and status are different for different entities to ensure that the stock market runs smoothly. When the rules are different for some investors, they are referred to separately for ease of identification. One such type of investor is known as Accredited Investor.

An investor must know about every type of investor to understand the stock market better. This blog will shed light on accredited investor meaning and how they affect the overall stock market.

Who is an Investor?

An Investor is an entity that is authorised by the Securities and Exchange Board of India to buy or sell securities in the stock market. These entities include retail investors, non-retail investors, mutual fund houses, insurance companies, banks, high-net-worth individuals etc. Some investors may use their capital for making personal profits, while some may use money pooled from customers to invest a large sum of money in securities on their behalf. All investors, irrespective of the type, need to adhere to certain rules for conducting trading in the stock market set by SEBI.

Who is an Accredited Investor?

An accredited investor is a financial entity or an individual allowed by the Securities and Exchange Board of India to trade in securities that are not registered with the financial authorities. An accredited investor is given more flexibility and privilege because of fulfilling certain requirements of asset size, net worth, governance status or trading experience. An accredited investor generally trades in securities that are not available to the general public, or as they are called, Retail Investors.

In India, the Securities and Exchange Board of India uses the term accredited investor for financially sophisticated investors who need fewer regulations and protection in the stock market. In defining an accredited investor, SEBI includes entities such as high-net-worth individuals (HNWIs), insurance companies, banks, trusts and brokers.

Understanding Accredited Investors

Almost all securities are registered with the Securities and Exchange Board of India. Retail investors who don’t invest a large sum of money at a time are only allowed to invest in registered securities. However, accredited investors are legally allowed to trade securities not registered with SEBI. As a majority of accredited investors are high-net-worth individuals or financial entities that invest a large sum, some companies offer their securities directly to accredited investors. It allows the companies to raise enough capital without having to register their securities with SEBI, saving them a lot of time and money. The process of offering securities directly to accredited investors is called private placement.

Private placement poses a great risk to accredited investors as SEBI does not regulate the securities offered. Since the accredited investors deal directly with the company, it is up to them to analyse the securities and make a decision on whether to invest. Hence, authorities ensure that accredited investors are financially stable and experienced to take on such levels of risk.

When companies offer securities directly to accredited investors, the role of regulatory authorities such as SEBI is limited to offering or verifying the guidelines to determine who is qualified to be called an accredited investor. Only if the entities fulfil the set benchmarks, they are allowed by SEBI to trade securities using private placement. Accredited investors also deal in funding rounds for startups and have access to hedge funds, venture capital and angel investments.

Requirement for Accredited Investors

As per SEBI, an institution or business entity can trade securities through private placement and be called an accredited investor if they have a net worth of Rs 25 crore. Similarly, for an individual to be considered an accredited investor, he/she must have a liquid worth of Rs 5 crore with a total annual gross income of Rs 50 lakh.

SEBI insists that an entity must adhere to the requirements to be called an accredited investor. The most important factor is to be financially stable to absorb the risk of losing capital on unregistered investments. Almost all the entities that are called accredited investors are required to have at least some years of experience and a profitable portfolio.

Purpose of Accredited Investor

SEBI is responsible for safeguarding the interests and investments of investors while promoting investments to help companies raise enough funds. However, to carry both, companies should ideally register their securities with SEBI. Furthermore, it also increases the workload of SEBI as it has to oversee the listing process and regulate the securities.

On the other hand, accredited investors are ready to trade securities that are not registered with SEBI as they get them at a lower price than they would if listed. They are ready to absorb the high risk and directly deal with the company. Since the responsibility to analyse the securities lies on accredited investors, and they are required to keep the depositories and stock exchanges informed about the deal, SEBI allows them the privilege. Accredited investors fulfil the main purpose of SEBI to promote investment and allow companies to raise funds. As the companies can do it cheaply by offering the securities to accredited investors, SEBI sees no harm in the process.