The Securities and Exchange Board of India (SEBI), at its board meeting on 25 June, approved amendments to the SEBI (Alternative Investment Fund) Regulations, 2012 (AIF regulations), thereby providing a framework for the setup of funds focused on investments in startups (angel funds).
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The AIF regulations apply to all forms of vehicles set up in India to pool funds from investors, Indian or foreign, on a private placement basis. The regulations define several categories of funds with the intent to distinguish the investment criteria and the regulatory concessions that may be granted.
Category I AIFs encompass AIFs with a defined investment strategy focusing on venture capital funds, small and medium enterprises funds, social venture funds and infrastructure funds, which in SEBI’s view lead to “positive spillover effects on the economy”. The amendments approved by SEBI allow angel funds to be added as a sub-category to venture capital funds.
Key features
The final text of the amendments is still awaiting notification. Some of the key aspects of the amendments as described in SEBI’s press release after the board meeting are:
Investor ticket size/corpus of the fund: The minimum ticket size for investors is ₹2.5 million (US$ 40,000) compared with ₹10 million for other AIF categories. The committed capital must be drawn down within three years.
Investor qualification: Individual angel investors are required to have at least 10 years of experience in early stage investments, as a serial entrepreneur or a senior management professional and must have net tangible assets of at least ₹20 million. Corporate angel investors must have a minimum net worth of ₹100 million. Alternatively, they are required to be registered as an AIF or a venture capital fund.
Continuing interest: The level of sponsor commitment (2.5% of the fund’s corpus or ₹5 million – whichever is lower) is prescribed as “continuing interest”.
Investee companies: To receive angel funding, an investee company must be within three years of its incorporation; not listed on a stock exchange; have a turnover of less than ₹250 million; and not be promoted by or related to an industrial group with group turnover exceeding ₹3 billion.
Deal ticket size/holding period of investments: The deal ticket size should be between ₹5 million and ₹50 million and an investment must be held for at least three years.
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
