Certificates for Accredited Investors would be provided by Accreditation Agencies, which can be subsidiaries of stock exchanges or depositories (National Securities Depository Limited or Central Depository Services Limited) or any other institution that meets the eligibility criteria.
The relaxed criteria in minimum investment will be able to unlock the potential of the AIF industry by enabling investors to enter the market who were previously backing off due to higher ticket sizes. The widening of the investor base, for instance, can be gauged from that of the size of the market for Portfolio Management Services (PMS), which requires a minimum investment of INR 50 lakhs per investor.
The investor base of PMS was ~1.4 lakh as of Oct 2022. Hence, given the fact that there could be 15,000 to 20,000 unique investors across all AIFs registered with SEBI, and considering the PMS base, we are looking at growth in the AIF base, which is 7-9x the current size for the near term.
Some mutual funds have a fully digitised onboarding process which allows seamless transaction processing with minimal Turnaround Time (TAT). Given the potential growth of AIFs due to the inclusion of smaller ticket size investors with an Accredited Investor framework, there is a need for digitising the onboarding process for AIFs.
We suggest Accreditation Agencies to consider building a digital infrastructure for AIFs for the onboarding process that would
- Reduce TAT to issue Accredited Investor certificate to the minimum, and
- Remove any back and forth between investors and Accreditation Agencies by providing a standardised format of the NW certificate.
(iv) Listing of fund units
The development of a secondary market for AIFs is essential to ensure liquidity in the AIF industry. As per Section 14 of SEBI’s AIF regulations, units of close-ended AIFs may be listed on a stock exchange subject to a minimum tradable lot of INR 1 crore, after the final close of the scheme. However, we are not aware of any AIFs listing their units till date.
The listing of AIF units would
- Ensure liquidity by allowing investors an easy exit opportunity (subject to KYC) due to dematerialisation and enabling price discovery in a demand-supply mechanism.
- Create a more enabling environment for Pension Funds, which are more inclined to investing in listed securities according to PFRDA guidelines, to invest in AIF units.
In this regard, clear operational guidelines should also be established by the regulator with respect to standardisation of contribution agreements, handling of fractionalised units, tradable lot sizes for Accredited Investors, and involvement of merchant bankers in the listing process.
The article has been covered in ET Prime on January 20, 2023. You can read it in the below mentioned link
Thinking beyond traditional investments: here’s what could revolutionise AIFs
The views provided in this blog are the personal views of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment.