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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.
Almost all securities are registered with the Securities and Exchange Board of India. Retail investors who don’t invest much money at a time are only allowed to invest in registered securities. However, accredited investors are legally allowed to trade securities that are not registered with SEBI. As most 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 registering 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 decide whether to invest. Hence, authorities ensure that accredited investors are financially stable and experienced enough 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.
As per SEBI, an institution or business entity can trade securities through private placement and be called an accredited investor if it has 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 and a total annual gross income of Rs 50 lakh.
SEBI insists that an entity adheres 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 accredited investors must have at least some years of experience and a profitable portfolio.
SEBI is responsible for safeguarding investors’ interests and investments while promoting investments to help companies raise enough funds. However, to accomplish both, companies should ideally register their securities with SEBI. Furthermore, this increases SEBI’s workload 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, who must keep the depositories and stock exchanges informed about the deal, SEBI allows them the privilege. Accredited investors fulfil the main purpose of SEBI, which is 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.
Being an accredited investor can give you certain trading privileges that come with utmost flexibility. Here are the requirements for registering as an accredited investor:
An accredited investor is the one who is provided authority and flexibility to trade securities that are not available to retail investors. As retail investors invest a small amount of money compared to big financial institutions and high net worth individuals, they are more likely to be negatively impacted by incurring losses.
Accredited Investors are professionals who know how to analyse the securities and manage the attached risks. However, the process of becoming an accredited investor is lengthy and requires extensive research by the depositories and stock exchange. But once an investor is legally deemed as an accredited investor, the benefits and privileges are unprecedented.
As per SEBI, these entities can be accredited to be called an accredited investors: Individuals
However, the above entities need to apply for becoming an accredited investor with a depository or stock exchange.
An individual must have at least Rs 5 crores as savings and Rs 50 lakh as total annual gross while an institution should have a net worth of Rs 25 crore to be considered an accredited investor.
Accredited investors can invest in private equity, venture capital, hedge funds, and other investments that can present a higher potential return. However, these types of investments involve increased risk, and higher returns are not guaranteed or uniform across investors.
They can access exclusive investments, from private equity funds to hedge funds and venture capital. These can provide higher returns and diversification but generally have more risk, less liquidity, and longer investment timeframes.
Public stocks, bonds, mutual funds, and ETFs can all be purchased by non-accredited investors. They may also become involved in crowdfunding opportunities or real estate investments. But access to complex, high-risk private investments is limited to accredited investors.
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