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SEBI eases rules for Angel Funds

Finsec Law Advisors

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SEBI, in its Board Meeting held on November 23, 2016, approved amendments to the SEBI (Alternative Investment Funds) Regulations, 2012, in relation to angel funds. SEBI had earlier introduced angel funds in 2013 as a sub-category of venture capital funds under Category-I Alternative Investment Fund by way of insertion of Chapter III-A to the SEBI AIF Regulations. They typically raise money from angel investors and invest in venture capital undertakings having a turnover of less than Rs. 250 million and are not promoted or related to an industrial group whose group turnover exceeds Rs. 3,000 million. SEBI’s decision to amend Chapter III-A of the SEBI AIF Regulations is pursuant to its ongoing attempts to develop the alternative investment industry and the startup ecosystem in India.

The SEBI AIF Regulations stipulated that no scheme of an angel fund shall have more than 49 investors. SEBI has now proposed to increase that number to 200. SEBI has also harmonized the definition of start-ups in Chapter III-A with the definition provided under the start-up policy of the Department of Industrial Policy & Promotion. Consequently, angel funds can now invest in 5 year-old start-ups, whereas prior to the proposed change, angel funds could only invest in companies which were incorporated within 3 years from the date of investment. Further, the minimum investment amount by an angel fund in a venture capital undertaking is also proposed to be reduced from Rs. 5 million to Rs. 2.5 million and the lock-in period for such investment will be reduced from 3 years to 1 year.  Further, angel funds would also be allowed to invest in venture capital undertakings overseas upto 25% of their investible corpus in line with other AIFs.

As on November 15, 2016, there are 268 SEBI-registered AIFs, of which, 85 are Category I AIFs, including five angel funds. The relaxations would enhance investments by angel funds and help them diversify risks by investing in foreign start-ups. The changes are also beneficial to start-ups, especially those seeking a small volume of funding in the initial stages and who are otherwise unable to easily obtain capital from traditional sources such as banks and financial institutions.