SEBI

SEBI Proposes Higher Investment Limits for Angel Funds

India’s rising tide of technology-enabled startups has reached an inflexion point, driven by innovation, entrepreneurial drive, and changing regulations. Based on the Alternative Investment Funds framework regarding the regulation of the operation of the Angel Funds, the Securities and Exchange Board of India has put forward a draft regulation that revises the existing norms comprehensively.

These changes are proposed to attract a broader spectrum of investors, increase investment thresholds, and provide safeguard mechanisms against risks, all while maintaining the ease of business.

The blog explores what the proposed amendments will bring, their implication for the startup ecosystem, and what the future holds for angel funding in India.

Understanding Angel Funds and Their Role

Angel funds are a subset of AIFs that invest in startups during their early stages. Angel funds are becoming vital, not only for nurturing new ventures but also by providing the much-needed capital to scale up innovative ideas into businesses. By congregating resources from accredited investors, angel funds fill the gap between self-funded ventures and larger institutional investments.

As of March 31, 2023, SEBI’s record listed 82 registered angel funds with total investor commitments amounting to ₹70.53 billion ($836.10 million) and investments amounting to ₹33.43 billion. These mark the growing significance of angel funds as a source of critical financing for India’s startup ecosystem. Entrepreneurs looking for company registration in India must understand this scenario and plan their move accordingly.

 Various stakeholders have considered the existing regulations, which have not gone through revisions for years, as restrictive. SEBI’s new proposals are expected to address these concerns.

Key Changes Proposed by SEBI

Key changes proposed by SEBI are as follows:

1. Revised Investment Limits:

The most important key change proposed by SEBI is to revise the investment range for angel funds in startups:

• The minimum investment required was reduced from ₹2.5 million to ₹1 million.
• The maximum investment required has been increased from ₹100 million to ₹250 million.

The reduction of the minimum investment threshold makes angel funds more accessible to smaller investors, fostering inclusiveness. On the other hand, raising the maximum limit would empower funds to back more ambitious and capital-intensive ventures, thus enabling the startups to scale faster. It will have a long-term impact on the registered alternative investment funds.

2. Expanded pool of investors:

SEBI intends to broaden the investor base, but with the prerequisite of qualification of investors or participants. The proposed eligibility criteria are as under:

• Individual investors: The minimum qualification required for individual investors is five years of experience in the relevant field with accreditation from an independent accrediting agency.
• Institutional investors: These are entities such as family trusts and corporations that can take part provided an accreditation standard is attained.

By focusing on this, SEBI ascertains that the participants have the risk appetite and the expertise to judge such high-stake investment proposals.

3. Increased flexibility for angel funds:

• No Minimum Corpus: The proposed amendment removes the minimum investment corpus threshold that must necessarily be invested in an angel fund, in case there are at least five accredited investors in the fund. For the simple reason that this will reduce the barriers to the establishment of new angel funds.
• Diversification Relaxation: SEBI intends to remove the rules on diversification, allowing funds to be invested in fewer startups. To prevent these funds from converting into a single-investment vehicle, every investment should be made with contributions from at least three investors.
• Limitation of Investors per Company:

4. Limitation of Investors per Company:

SEBI has been considering capping the number of investors for a single company at 200, so that startups do not become over-reliant on a large number of investors. The idea is to keep the house in order and ensure efficient decision-making to avoid probable complications arising out of an excessively fragmented investor base.

5. Public Consultation and Compliance Timeline:

SEBI has invited public comments on these proposals till November 28, 2024, in order to demonstrate its commitment to a transparent and participatory regulatory process. Once finalised, the existing funds shall have one year to comply with the new rules.

Implication for Startups and Investors

Various Implications for Startups and Investors are as follows:

1. Encouraging Startup Growth:
   The proposed regulations will most likely boost early-stage funding as a result of larger investments permitted from angel funds. For startups in such capital-intensive verticals like healthcare, clean energy, and deep tech, an increased maximum investment cap of ₹250 million will be particularly rewarding.
   Moreover, the lower minimum threshold might attract a new class of smaller investors that would further diversify funding sources.
2. Attracting the Qualified Investor:
   By demanding accreditation and focusing on experience, SEBI expects that angel funds are run by those individuals or entities who can understand the complexity of early-stage investing. This aligns with the regulator’s objective to limit participation to those with a commensurate risk appetite and the ability to assess investment proposals. This selective approach can help mitigate the risks associated with inexperienced investors entering high-risk ventures.
3. Greater Operational Flexibility:
   This gives the angel funds the flexibility to operate on the basis of unique strategies and preferences. This could catalyse the creation of niche funds focusing on specific sectors or geographies and hence offer customised services to startups.
4. Increased Regulatory Scrutiny:
   It would ban the misuse of angel funds as single-investment vehicles because it requires the investments to be made with the contribution of at least three investors, which would bring transparency and accountability, promoting the collective effort of different investors.

Challenges and Concerns

1. Striking balance between accessibility and expertise: While lowering the minimum investment threshold increases accessibility, there is also the likelihood that such a move may attract people who have limited experience. Striking the right balance between making the market more inclusive and maintaining high standards becomes necessary.
2. Steering the Compliance Requirements: The funds and their investors will need to be accredited by independent agencies. While this would ensure credibility, the downside would be increased administrative burdens, especially for new entrants into the fold.
3. Impact on the existing funds: Existing funds will be given one year after the finalisation of the new rules to comply. The transition can be hard for the funds whose structure deviates significantly from the proposed norms.

Angel Funding in India – The Way Forward

The proposed changes are a reflection of SEBI’s dual focus on ease of doing business and safeguarding investor interest. In furtherance of this, the revision in investment limit, expansion of investor base, and revision in operational flexibility are measures to establish India as a global hub for startup financing.

These reforms come at a time when India’s startup ecosystem is seeing unprecedented growth, with sectors like fintech, edtech, and agritech attracting worldwide attention. Angel funds form an integral part of this ecosystem and would play a very important role in sustaining this momentum.

To Wrap Up

SEBI’s move to amend the regulations on angel funds is headed in the right direction, with an aim of establishing an environment that makes fund-raising vibrant and inclusive in India for startups. The revised framework opens up greater funding possibilities, brings investment experience, and gives the startups financial strength to compete in the global markets.

Success would be determined by the implementation and adaptability of these reforms by the stakeholders. While public consultations progresses, SEBI has to take into consideration the views of the investors, startups, and other participants in the ecosystem so that the final regulations achieve the right balance between promotion of innovation and accountability.

Therefore, with these regulatory enhancements, the future of angel funding in India does look promising and the country is set to take its startup ecosystem to new heights.

To get expert assistance for SEBI services for angel funds, visit https://enterslice.com/.

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