By Sonam Chandwani & Tanaya Desai
The Securities and Exchange Board of India (SEBI), in its board meeting held on November 23, 2016, introduced amendments to the SEBI (Alternative Investment Funds) Regulations, 2012, thus ushering in a more liberalised and progressive era for fund-raising in start-ups as also enhancing the scope of investment of foreign investors in unlisted debt securities.
In order to further develop the alternative investment industry and the startup ecosystem in India, SEBI, in March 2015, constituted a Committee of experts drawn from across market participants called the “Alternative Investment Policy Advisory Committee” (“AIPAC”) under the chairmanship of NR Narayana Murthy. Based on the recommendations received from the same, the SEBI eased a few rules for angel funds to invest in early-stage entities, and to permit FPIs to invest in unlisted Non-Convertible debentures and securitised debt instruments.
Prior to the recent amendment, the provisions of the SEBI (Alternative Investment Funds) Regulations, 2012 read with the Amendment to the SEBI (Alternative Investment Funds) Regulations, 2013, provided for stringent rules, primarily with angel funds not even being recognised under the ambit of Venture Capital Funds.
The changes brought about by the amendment of 2013, provided for the following:
- Angel Funds were included in the definition of ‘Venture Capital Funds’ and a separate Chapter had been inserted specific to such funds.
- In view of the high risk investments of such funds, certain conditions have been imposed on investors. For instance, individual angel investors shall be required to have early stage investment experience/ experience as a serial entrepreneur/ be a senior management professional with 10 years experience.
- For ensuring investments are genuine angel investments, angel funds shall invest only in venture capital undertakings which are not more than 3 years old, have a turnover not exceeding Rs 25 crore, are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of Rs. 300 crore, and have no family connection with the investors proposing to invest in the company.
- Further, investment in an investee company by an angel fund shall be not less than Rs. 50 lakhs and more than Rs. 5 crore and shall be required to be held for a period of at least 3 years.
The above provisions, although a positive step in giving recognition to angel funds and promoting the early-stage entity culture as compared to the SEBI (Alternative Investment Fund) 2012, still hindered the fund-raising with a high minimum investment, longer lock-in period, and stringent prerequisites of the start-ups the angel funds envision investing in start up.
Unlike traditional venture capitalists, angel investors usually invest smaller amounts of money, make their investment decisions quickly, and rarely require a board seat as a condition of investment, their incentive being an equity ownership interest. This makes them an attractive funding option for startups that don’t need large investments and want to retain more control over their business. But, owing to the regulations requisites, as also the risks that such funds are subject to, this venture capital funding scheme seemed to suffer a setback, while on the other hand, the capital market has been witnessing a substantial growth in the startup culture, which are in need of such angel investors.
In light of the same, the amendments proposed by the AIPAC seek to boost investments in the early stages for the startups in the country, by relaxing the regulations and making them more feasible and a viable option to the angel investors.
The changes as per the Amendments to SEBI (Alternative Investment Funds) Regulations, 2012 are as follows:
- The regulator has increased the upper limit for number of angel investors in a scheme from forty nine to two hundred.
- Such funds have also been allowed to invest in overseas venture capital undertakings up to 25 per cent of their investible corpus in line with other Alternative Investment Funds (AIFs).
- The definition of startup for Angel Funds investments will be similar to definition of DIPP as given in their startup policy.
- Angel Funds will also be allowed to invest in startups incorporated within five years instead of the earlier norm of three years.
- The requirements of minimum investment amount by an angel fund in any venture capital undertaking have been reduced from Rs.50 lakh to Rs.25 lakh so the start up can raise funds at the initial stage of idea generation.
- The lock-in requirements of investment made by angel funds in the venture capital undertaking has been reduced from three years to one year.
As start ups fail to get capital from banks NBFC’s or other financial institutions this comes as a welcome change, with the relaxations aimed at boosting angel funds and startups. The main aim of such amendment is to bring about ease of doing business, while making the culture more angel-fund friendly.
Sonam Chandwani is a founding partner at KS Legal & Associates, Tanaya Desai was an intern at KS Legal & Associates.
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