Sebi’s ‘Accredited Investors’ note reaction: Networth not a surrogate for financial acumen

The consultation paper in its current form, given the high loss absorption capacity of the investor, expects it to put in all that it takes to understand complex financial products and the risks and rewards that come with it.

The intention is laudable though the timing may be debatable. Market regulator, Securities Exchange Board of India (Sebi), will today, Thursday, March 18 th , close the window on receiving the views on its consultation paper to introduce the concept of ‘Accredited Investors’ that it put out on February 24 th to elicit views. The aim is simple: to create a class of investors who have an understanding of various financial products and the risks and returns associated with them and will therefore be able to take informed decisions on the investments. Since they will be expected to have a higher loss absorption capacity, they will also get the benefit of light-touch regulatory environment.

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To have provisions for such class of investors who may be deemed as savvy enough to play in the market with complex financial products, may be an idea worth looking at in times when, as some argue, the rich are getting richer and poor not substantially better off. But then, if the end goal is to reduce palaver and also ease the regulator a bit and letting those who have a higher ability to absorb losses to do their homework, it may be worth a try.

Those who have read the Sebi paper closely and also understand this space better, feel the move seems interesting but there are likely to be challenges over deciding the eligibility criteria. As of now, the reliance is on the networth of these individuals or the corporate bodies that may seek to be the AIs (Accredited Investors). “It is a laudable move by Sebi because it opens up the scope for the regulator to focus more on those who have low loss absorption ability and marshal its energies in that direction. However, in deciding the eligibility for AIs, networth criteria, while a good measure by itself, cannot be a surrogate for financial acumen,’’ says Soumya Rajan, a family business expert and also the founder of Waterfield Advisors that deals with over 80 business families and manages assets worth around $ 4 billion or around Rs 30,000 crore.

Since, as she feels, it takes more than a high networth to be truly financially savvy, she articulates her concerns with an example: “If a product manufacturer decides to spin a yarn in whatever shape or form that convinces an accredited investor and who in turn gets to gloss over the huge risks associated with the product, the product manufacturer can still get away because there is light touch regulation and an unsavvy accredited investor could land himself and others in big trouble. All of it, because the regulator has taken the eye off and the accredited investor was not savvy enough resulting in a potential blow up.”

Even today, those who deal with the HNIs tell us it is not quite uncommon to find HNI dabbling in complex products but ending up only crashing and burning.

The consultation paper in its current form, given the high loss absorption capacity of the investor, expects it to put in all that it takes to understand complex financial products and the risks and rewards that come with it. In return, the regulator is offering a light-touch regulatory environment. The idea, in a sense, being that if these people invest in a complex product then the regulator will not be looking at the product manufacturing as closely because the investors that are coming into that product are accredited investors therefore the regulator need not be so watchful about those products because the hope is that the product manufacturers have done their bit to safeguard the interests of the investor.

The move by Sebi however does seem a step in the right direction though it does not clearly convey how good the networth criteria is likely to be? Also, how it can safeguard the investor or prevent frauds from happening? Afterall, as some argue, a product manufacturer will only need to take a declaration from the accredited investor that he or she fully understands the risks associated with the product and then leave the investor to suffer all the setbacks that may follow. The concept of ‘Accredited Investors’ however is not new and has been successfully deployed abroad. Tulsi Jayakumar, professor of economics and chairperson, family-managed business at the Bharatiya Vidya Bhavani’s SPJIMR (SP Jain Institute of Management and Research) says: “The concept of AIs already exists in US and Singapore. They are an important part of asset allocation of family trusts and HNIs (High Networth Individuals) abroad. From the point of view of the regulator, it would help concentrate their regulatory resources on categories of investors who are less financial savvy and need more protection.”

But then Professor Tulsi Jayakumar does feel, “it may also lead to more innovation through designing AI- targeted investment products.  The compliance burden may be lower.”

While a good idea, she does feel, it would depend on how the SEBI implements the concept. “While there is a quantitative eligibility, in terms of net worth etc., a qualitative eligibility criterion may also be in place. Whether family trusts may wish to invest in this risk will be a matter to wait and watch for.”

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