The accredited investor framework is an example of proportionate regulation in India's capital markets. Examine its rationale and limitations.

Proportionate regulation means the intensity of rules scales with the investor's capacity to bear risk. Under Regulation 2(ab) of the SEBI (AIF) Regulations, an individual qualifies as an Accredited Investor (AI) with income ≥₹2 crore or net worth ≥₹7.5 crore [2]. SEBI now aims to expand the AI pool from about 1 lakh to 4 lakh [1]. The logic is sound, but the safeguards have not kept pace with this expansion.

Rationale

• Risk-based oversight: Sophisticated investors need less hand-holding. Large Value Funds for AIs (₹70 crore minimum) only notify SEBI and do not file a placement memorandum [3].
• A better test than ticket size: The ₹1 crore minimum, fixed in 2012, can push investors to put most of their wealth into risky AIFs. Accreditation instead checks financial health through an independent agency [4].
• Capital mobilisation: A wider AI base channels domestic risk capital into start-ups and unlisted high-growth firms [1].
• Built-in guardrails: The primary residence is excluded from net worth, each partner of a firm must qualify separately, and accreditation must be renewed every 2 years [2].
• Ease of compliance: The 2026 proposal accepts eCAS (electronic consolidated account statements) as proof [1].

Limitations

• Low take-up: There were fewer than 1,000 registered AIs against about 72,000 unique AIF investors (June 2025) [4]. The "1 lakh" figure counts people who could qualify, not certified investors.
• Wealth is not understanding: The criteria test only income or net worth [2]. 8 of 20 commenters in SEBI's consultation opposed accreditation as the sole test and sought a knowledge-based route [4].
• Diluted protections: AI-only schemes may waive pari-passu rights, extend tenure by up to 5 years with two-thirds consent by value, and shift trustee duties to managers. SEBI itself admits there is no trustee-independence norm [4].
• Circumvention risk: In December 2023, RBI barred banks and NBFCs from AIFs with exposure to their debtor companies, to stop evergreening [5].

Overall, the framework rightly matches regulation to sophistication, but widening eligibility while relaxing safeguards pulls in opposite directions. The way forward is the phased expansion SEBI has already promised [4], together with trustee-independence norms, a knowledge-based route to accreditation and public data on take-up and complaints. This would serve the SEBI Act's twin mandate: to protect investors and to develop the securities market.