Angel Funds in India

Context:

The Securities and Exchange Board of India (SEBI) has introduced a significant regulatory change by mandating that only accredited or “sophisticated” investors can participate in angel funds. This new framework is expected to raise governance standards but may temporarily disrupt early-stage funding, particularly in smaller cities.

Understanding Angel Funds in India

Angel funds are specialized investment vehicles designed to provide capital to startups during their early stages. Backed by high-net-worth individuals (HNIs) or corporate entities known as angel investors, these funds are a key subset of venture capital funds, but with a sharper focus on early-stage businesses.

What is an Angel Fund?

An Angel Fund is a money pool created by seasoned investors or companies to support startups with high growth potential. Unlike traditional venture capitalists, who typically invest during a company’s growth phase, angel funds engage during the seed or early development stage, often filling the funding gap before venture capital kicks in.

Key Features of Angel Funds

• Structure and Fundraising:
  • Angel funds raise capital exclusively from angel investors by issuing units and must have a minimum corpus of ₹10 crore (₹100 million).
• Investor Limit:
  • Angel funds can now accept investments from up to 200 investors, a significant increase from the previous cap of 49.
• Investment Range:
  • Minimum investment: ₹25 lakhs (reduced from ₹50 lakhs).
  • Maximum investment: ₹5 crore.
• Lock-in Period:
  • The lock-in for angel investors has been reduced to one year, down from three years, enhancing liquidity and flexibility.
• Eligibility of Investee Companies:
  Angel funds may invest only in startups that:
  • Are incorporated in India and are less than 5 years old.
  • Have a turnover below ₹25 crore.
  • Are unlisted entities.
  • Have no familial ties with the investing angel.

Regulatory Framework

Angel Funds in India are governed by the SEBI (Alternative Investment Funds) Regulations, 2012, with specific provisions added through the SEBI (AIF) Amendment Regulations, 2013.

• Category Classification:
  • Angel funds are categorized as a sub-class of Venture Capital Funds under Category I of Alternative Investment Funds (AIFs).
• Regulator:
  • Securities and Exchange Board of India (SEBI) oversees the functioning, compliance, and disclosures required by Angel Funds.

Who Are Angel Investors?

Angel investors are typically:

• High-net-worth individuals (HNIs) or corporates with domain expertise and industry insights.
• Early-stage backers who provide capital, mentorship, and business networks.
• Strategic supporters focused not just on financial returns but also on nurturing innovation and entrepreneurial success.