Markets regulator Sebi on Wednesday proposed raising the maximum investment limit by an angel fund in a startup to Rs 25 crore, a move that can provide a boost to the new-age technology companies. It has been proposed that the minimum investment limit should be reduced to Rs 10 lakh from Rs 25 lakh at present and that the maximum investment limit be increased to Rs 25 crore from the current Rs 10 crore, Sebi said in its consultation paper.
Additionally, the regulator has proposed allowing only “accredited investors” to invest in angel funds, looking to rationalise their fundraising processes, strengthening disclosure as well as governance requirements and providing operational clarity and investment flexibility.
These proposals aim to restrict angel funds to investors with commensurate risk appetite and ability to evaluate investment proposals, while also enhancing the ease of doing business in this space, Angel Funds, a type of Category I AIFs – Venture Capital Funds, provide capital to startups from angel investors.
As of March 31, 2024, there were 82 angel funds registered with Sebi with a total of Rs 7,053 crore in commitments and Rs 3,343 crore in investments.
In its consultation paper, Sebi said, “Investment by an angel fund in any startup shall not be less than Rs 10 lakh and shall not exceed Rs 25 crore”.
The present AIF Regulations provide that the investment by an angel fund in a startup shall not be less than Rs 25 lakh and shall not exceed Rs 10 crore. Further, it has been suggested to remove the 25 per cent diversification limit for angel funds. The present rules mandate that no more than 25 per cent of the total investments under all schemes of an angel fund can be made in a single venture capital undertaking.
To ensure that angel funds only on-board investors with the necessary risk appetite, it has been proposed to allow only “accredited investors” to invest in angel funds.
“If only accredited investors are allowed to invest, there may be no need for a cap on the total number of investors who may be on-boarded to an angel fund. However, the 200-investor limit per company of angel fund will remain, applicable annually, and excluding Qualified Institutional Buyers (QIBs),” Sebi said.
It has been proposed to allow employees and directors of angel fund and its manager to invest in angel fund with a minimum investment amount of Rs 5 lakh.
Sebi has suggested to replace the requirement of a minimum corpus of the angel fund of Rs 5 crore with the requirement that angel fund should start investing only after onboarding a minimum of 5 accredited investors.
“All the existing conditions linked to corpus/investable funds of angel fund should instead be linked to the total amount contributed by all the angel investors in the investments of the angel funds subject to their consent/approval,” Sebi said.
Sebi has proposed a third-party verification of investors’ eligibility and limiting angel funds to no more than 200 investors contributing to a specific investment.
To incentivise participation from various pools of capital, it has been recommended expanding the scope of angel investors to include HUFs, family trusts, sole proprietorships, trusts, accredited investors, reducing net-worth criteria for body corporates from Rs 5 crore at present, and considering individuals with a 5 years’ experience and a professional qualification as angel investor, Sebi said.
At present, angel investor is defined as any person who proposes to invest in an angel fund and satisfies one of the following conditions individual investor with net tangible assets of at least Rs 2 crore, excluding value of his principal residence and who has early-stage investment experience; or has experience as a serial entrepreneur; or is a senior management professional with at least 10 years of experience.
The Securities and Exchange Board of India (Sebi) has sought public comments till November 28 on the proposal.