Raising Equity for Startups - SEBI Stipulates New Guidelines For Angel Investors

SEBI, the market regulator has come up with new guidelines to boost investment in early budding enterprises. The regulator has tightened its hold on the investor and the investment through its new norms for angel investors who finance small startups at a stage where such start ups find it difficult to obtain funds from traditional sources of finance such as banks, financial institutions.

The regulations-

• Angel investors are allowed to be registered as Alternative Investment Funds (AIFs) - a newly created class of pooled-in investment vehicles for real estate, private equity and hedge funds. Under Sebi guidelines, AIFs already have categories such as Venture Capital Funds, Social Funds and SME Funds. Angel fund is likely to be a sub-category under Category I – Venture Capital Funds who raise funds from angel investors and make investments in start-ups/early stage companies.

Investments by Angel Investors

To ensure that the investment by such angel funds is genuine 'angel investment' in India i.e. Investment is genuinely made in Indian start-ups and early stage companies, angel funds are allowed to make investment only in investee companies that ;

• are incorporated in India and are not more than 3 years old; and
• have a turnover not exceeding R 25 Cr; and
• are unlisted, and
• are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of R300 Cr, and
• has no family connection with the investors proposing to invest in the company.

The investment limit by the angel fund in the company is floored by R50 lakh and capped by R5 Cr with a lock-in period of 3 years .

Raising of Angel Funds

Angel investment being risky, inorder to ensure that only investors who have prior experience/ adequate awareness of such investments and who have sufficient capital invest in such funds, the regulator has specified that;

• If the investors are individuals, they shall be required to have early stage investment experience/ experience as a serial entrepreneur/ be a senior management professional with atleast 10 years experience and also be required to have tangible net assets of atleast R2 Cr excluding the value of the investor's primary residence.
• If investors are corporate, they shall either have a net worth of atleast R10 Cr or shall be an AIF/VCF registered with SEBI.

• The Angel Fund shall not have more than 49 investors to ensure that investment in an investee company is not akin to a public issue.

• Angel funds are required to have a a corpus of at least R10 Cr with the minimum investment amount being relaxed from R1 Cr to R25 Lac.
• In case a Social Venture Fund raises funds through grants, a minimum amount of R25 Lacs is required for raising funds through grants so that small investors are not provider of such grants and that no profits or gains shall accrue to the provider of such grants

Other

• The definition of manager has been expanded to include that the manager shall undertake investments only after obtaining approval from angel investors before making any investment. In order to ensure the same, it has been made mandatory for the manager to take an undertaking of approval from every investor before making any investment.The mandatory minimum sponsor/manager contribution (currently as per the AIF Regulations- 2.5% of corpus/ R5 Cr whichever is lesser) is relaxed to 2.5% of the corpus/ Rs. 50 lakhs, whichever is lesser.
• Listing of Angel Fund units is not allowed.
• The registration fees is reduced for such funds from R5 lac to R2 Lacs.

While big Indian businesses complain about the rupee and the macroeconomic situation, intrepid entrepreneurs are launching new companies that deliver products and services on mobile internet devices, improve access to financial services, energy, education or healthcare. India is in the middle of a startup boom.

The government’s norms would hopefully further provide impetus to nurture and flourish the startup industry.