Sebi proposes reforms for angel funds, lowering entry barriers and enhancing investor flexibility

The Securities and Exchange Board of India (Sebi) has proposed sweeping changes to the regulatory framework governing angel funds under Alternative Investment Funds (AIF), aiming to boost investor participation and provide more flexibility to fund managers. Among the key amendments, Sebi seeks to limit investments to accredited investors, reduce the minimum investment threshold per startup from ₹25 lakh to ₹10 lakh, and halve the lock-in period from one year to six months.

These proposals are part of a broader review, with Sebi inviting public feedback on the changes until 28 November. Industry experts largely view the amendments as an opportunity to lower compliance costs, expand access, and attract a wider pool of investors into India’s growing angel fund ecosystem.

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Angel Funds, a subset of Category I AIFs, have gained prominence as a primary source of capital for nascent startups, channelling investments from high-net-worth individuals (HNIs) who back early-stage ventures with high growth potential. 

Sebi has registered 82 angel funds to date, collectively managing over ₹7,000 crore, illustrating their expanding role in India’s financial landscape.

Need for continued oversight

The removal of Angel Tax in the 2024 Union Budget fuelled debate over whether angel funds still needed regulatory oversight, especially as direct investments by angel investors in startups became more attractive. However, Sebi argues that angel funds provide distinct advantages, including professional management, streamlined operations, and easier access to startup opportunities, warranting their continued inclusion under AIF regulations.

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In its consultation paper, Sebi has proposed several amendments to address industry concerns and enhance angel funds’ operational efficiency. Notably, Sebi suggests limiting angel fund investments to accredited investors who meet a specified net-worth criterion, certified by third-party accreditation agencies, ensuring that participants understand the inherent risks of early-stage investments.

Proposed reforms

Sebi has also proposed lowering the minimum investment for each startup from ₹25 lakh to ₹10 lakh while increasing the maximum investment cap from ₹10 crore to ₹25 crore. These adjustments aim to make angel funds more accessible and offer fund managers greater flexibility in structuring investments.

Another significant proposal is to require each angel fund investment to involve at least three investors, excluding the manager or sponsor, to prevent the funds from becoming single-investor vehicles and ensure broader participation.

The regulator is also proposing to reduce the lock-in period for Angel Fund investments from one year to six months, provided the exit is through a third-party sale. This change would enable angel funds respond faster to market conditions.

Further, Sebi suggested that employees, directors, and advisors of the fund or its manager be allowed to invest, with a minimum contribution of ₹5 lakh to ensure alignment of interests with those of external investors.

Expanding the scope of investments, Sebi’s proposals would also permit angel funds to allocate up to 25% of their capital to unlisted companies or other funds. This shift could encourage more capital flow into the domestic startup ecosystem and strengthen India’s position as a startup hub.

Sahil Shah, partner at Khaitan & Co, called the proposals “broad and progressive,” adding that they reflect Sebi’s awareness of angel funds’ practical needs since their inception in 2013. “The changes are expansive in nature and look to broaden the scope for angel funds and their managers to raise and deploy incremental capital,” Shah said.

Brijesh Nair, co-founder, Auxano Capital, particularly welcomed the reduction in minimum investment requirements. “We want to attract Indian money into the Indian ecosystem, and if a regulation stops an investor from participating, this opening up will alter the appetite and need of customers,” he noted, adding that removing term sheet requirements simplifies documentation and eases compliance for angel funds. 

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Nair recommended keeping investor consent for each investment to maintain transparency.

Yuvraj Thakker, managing director of StoxBox, echoed these sentiments, noting that the removal of Angel Tax in the recent budget made further regulatory easing essential.