SEBI eases norms for angel fund investment in Start-ups

Bar & Bench January 11 2017

Apurva Kanvinde and Arunabh Choudhary

The Securities and Exchange Board of India (“SEBI”) has on 4th January, 2016 amended the SEBI (Alternative Investment Fund) Regulations, 2012 (“AIF Regulations”) in order to boost angel fund investment in start-ups. The amendments to the AIF Regulations were approved in the SEBI Board meeting held in November, 2016.

Angel funds are a sub-category of venture capital funds that raise funds to invest in start-ups. The AIF Regulations contain a separate chapter for angel funds. Due to the high risk involved, the AIF Regulations stipulate specific conditions applicable to angel funds that are not applicable to other alternative investment funds. Such conditions include investment experience by individual angel investors, restriction on family connection between the angel fund and the angel investor etc.

With a view to develop the alternative investment industry, SEBI, in March 2015, constituted a Committee of experts under the chairmanship of NR Narayana Murthy called the "Alternative Investment Policy Advisory Committee". Based on the recommendations received from the same, SEBI has made the following amendments for angel funds investing in early-stage entities:

Increase in the upper limit of number of Investors:

Angel funds are permitted to raise money through private placement only. Accordingly, the upper limit for the number of angel investors in a scheme has been increased from forty- nine to two hundred in line with the private placement provisions under the Companies Act, 2013.

Definition of start-ups realigned with DIPP Policy:

Prior to the amendment angel funds could invest in start-ups that were incorporated during the preceding three years from the date of such investment. This has been realigned with the definition of start-ups under the start-up policy issued by the Department of Industrial Policy and Promotion (“Start-Up Policy”). The Start-Up policy stipulated that an entity shall be considered as a 'start-up’ up to five years from the date of its incorporation/registration. Accordingly, broadening their reach, angel funds can now invest in start-ups incorporated during the preceding five years.

 Reduction of Minimum Investment Amount and Lock-in Period:

The requirement of minimum investment amount by an angel fund in any venture capital undertaking/start-up is reduced from INR 50,00,000/- (Indian Rupees Fifty Lakhs Only) to INR 25,00,000/- (Indian Rupees Twenty Five Lakhs Only). Further the lock-in period for investment has been reduced from three years to one year.

Investment in Overseas start-ups

Angel Funds are now permitted to invest in overseas venture capital undertakings up to 25 per cent of their investible corpus subject to conditions as prescribed by SEBI and the Reserve Bank of India (“RBI”) from time to time. This is in line with the SEBI circular issued in October 2015 permitting venture capital funds and other alternative investment funds to invest upto 25 per cent of their investible corpus in companies having Indian connection.

The amendments introduced to the AIF Regulations are a welcome move to liberalise the fund raising environment for start-ups and encourage the angel fund industry in India.

Arunabh Choudhary is a Principal Associate and Apurva Kanvinde is a Senior Associate at the Mumbai office of Juricorp.

To download the full article, click on the ‘Download Briefing’ button given below.