To promote the entrepreneurship in the country, the Securities and Exchange Body of India (SEBI) has announced the new guidelines for angel funds in India by approving the amendments to SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”).
SEBI has provided a new framework under which angel investors will be allowed to register as Alternative Investment Funds (AIFs) under a separate sub-category ‘Angel Funds’ under Category I – Venture Capital Funds which has tax pass through status.
Pass-through taxation is the type of taxation which generally applies to partnerships or pooled fund investments. This means that the partnership or the fund, itself, is not directly taxed, and the tax burden is instead passed on to the partners or the investors.
The angel investors have welcomed this move of finance minister. “For the first time, the FM seems to believe that India will grow – not so much by supporting big business houses like the Ambanis and the Tatas, but by supporting young entrepreneurs. This is a welcome shift.”, said Mahesh Murthy, Venture Capitalist, co-founder of Seedfund.
The current AIF norms have sub-categories for Venture Capital Funds, SME funds, Social Venture funds and Infrastructure funds. As a part of this, the fund will also enjoy exemption from SEBI insider trading regulation and lock in post listing of the invested company.
What’s new for Angel Investors?
As per the new norms, Individual angel investors should have early stage investment experience, or experience as a serial entrepreneur. Also, they must own assets of at least INR 2 crore.
The corporate angel investors, on the other side, shall be required to have INR 10 crore net worth or be a registered AIF/VCF.
The minimum investment by an investor shall be INR 25 lakh against INR 1 crore for other AIFs. The continuing interest by sponsor/manager in the Angel Fund be or more than 2.5% of the corpus or INR 50 lakh, whichever is lesser.
The other norms applicable on angel funds include:
Angel fund investment to be limited to Rs 50 lakh- Rs 5 crore.
Angel funds to be invested in a company for at least three years
Angel investors to invest in companies not older than three years
Investee company to be unlisted and with a maximum turnover of Rs 25 crore
The investee company may not be related to a group with a revenue of greater than Rs 300 crore.
The fund must not have any family connection with the investee company
No angel fund scheme may have more than 49 investors.
Opportunities for startup ecosystem
In order to create scope for more exit opportunities and to provide liquidity for angel investors, VC firms and others, SEBI has allowed listing of startups and SMEs in institutional trading platform (ITP) without having to make an IPO.
The minimum amount for trading or investment on the ITP will be INR 10 lakh with exemption from the requirement to offer up to 25 per cent of their stake to public through an offer document in order to get listed. However, it added that such companies will be able to only make private placements and not public issues.
With minimum investment of INR 1 crore made compulsory, more capital can be supplied to the startups in the early stage, thus opening wide opportunities for entrepreneurs.
Why these new regulations?
The tax authorities recently identified a loophole wherein using the investment route, corporates are bribing the politicians of the country. By investing a large amount in a small company owned by politician, the investor indirectly bribes the politician and in return take a very tiny stake. Also, the company will pay no tax on the investment since it’s a capital flow and not income.
What will be the effect of new regulations?
Since the conditions have now become stringent, it would be difficult for small angels to start a fund as each fund needs at least 1 crore rupees per investor.
The other rules like minimum lock in period, not more than 25% in one entity, no family connection between the fund and the company, limiting the angel investment to Rs. 5 crore, etc. will further help in reducing the abuse.
However, as per Alok Mittal, MD, Cannan India, this does not solve the startup tax issue which is a bigger impediment to growth of angel capital.
Why angels will support this move of SEBI?
The new amendments have been seen as giving birth to the Indian angel investor. Although, angel investments are prominent in India from past many years, but still they were lacking specific regulations, with which they can now put their steps into the system.