The intention is laudable although the timing may well be debatable. Market regulator, Securities Exchange Board of India (Sebi), will today, Thursday, March 18 th , close the window on getting the views on its consultation paper to introduce the idea of ‘Accredited Investors’ that it place out on February 24 th to elicit views. The aim is uncomplicated: to produce a class of investors who have an understanding of many monetary items and the dangers and returns connected with them and will as a result be in a position to take informed choices on the investments. Since they will be anticipated to have a larger loss absorption capacity, they will also get the advantage of light-touch regulatory atmosphere.
To have provisions for such class of investors who may well be deemed as savvy adequate to play in the market place with complicated monetary items, may well be an concept worth searching at in occasions when, as some argue, the wealthy are having richer and poor not substantially superior off. But then, if the finish objective is to decrease palaver and also ease the regulator a bit and letting these who have a larger potential to absorb losses to do their homework, it may well be worth a attempt.
Those who have study the Sebi paper closely and also fully grasp this space superior, really feel the move appears intriguing but there are most likely to be challenges more than deciding the eligibility criteria. As of now, the reliance is on the networth of these people or the corporate bodies that may well 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, these who deal with the HNIs inform us it is not pretty uncommon to obtain HNI dabbling in complicated items but ending up only crashing and burning.
The consultation paper in its existing type, offered the higher loss absorption capacity of the investor, expects it to place in all that it requires to fully grasp complicated monetary items and the dangers and rewards that come with it. In return, the regulator is supplying a light-touch regulatory atmosphere. The concept, in a sense, getting that if these folks invest in a complicated item then the regulator will not be searching at the item manufacturing as closely simply because the investors that are coming into that item are accredited investors as a result the regulator require not be so watchful about these items simply because the hope is that the item producers have performed their bit to safeguard the interests of the investor.
The move by Sebi nevertheless does appear a step in the correct path although it does not clearly convey how very good the networth criteria is most likely to be? Also, how it can safeguard the investor or avert frauds from taking place? Afterall, as some argue, a item manufacturer will only require to take a declaration from the accredited investor that he or she completely understands the dangers connected with the item and then leave the investor to endure all the setbacks that may well stick to. The idea of ‘Accredited Investors’ nevertheless is not new and has been effectively deployed abroad. Tulsi Jayakumar, professor of economics and chairperson, household-managed organization 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 really feel, “it may also lead to more innovation through designing AI- targeted investment products. The compliance burden may be lower.”
While a very good concept, she does really feel, it would rely on how the SEBI implements the idea. “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.”