New SEBI Regulations might change the way of Angel Investments in India

SEBI has incorporated various new norms for the incorporation of a further tighter policy for Angel Investors, who fund start-ups at its stage of infancy. Angel funds are a subset of venture capital funds that consist of wealthy people who invest their own cash flow.

In his budget speech, Finance Minister P Chidambaram had announced that SEBI would frame guidelines for angel investor pools by which they can be registered under AIF venture capital funds (VCF). Venture capital funds comprise of people who invest money on behalf of several institutions.

Angel investors are now to be registered as Alternative Investment Funds (AIFs) with Rs. 2,000,000. It is a newly created class of pooled-in investment vehicles for real estate, private equity and hedge funds, as said by a gazette notification.

According to the SEBI guidelines, AIFs have sub-categories such as Venture Capital Funds, Social Funds and SME Funds. Angel fund is likely to be a new separate sub-category in its manuscript.

Investments by angel investors have been confined between Rs. 50 lakhs and Rs. 5 crore. Angel funds can be invested in firms within the India only. These funds needs to be invested in a firm for at least three years, can invest in companies not older than 3 years.

Moreover, funds can be invested only in unlisted companies. It must also be considered that such companies must have a maximum turnover Rs.25 crore turnover. This firm may not be associated with any group with an income exceeding Rs 300 crore.

The minimum corpus requirement for Angel funds is Rs.10 crore and the minimum investment is Rs. 25 crore.

It was also stipulated that the fund have must no family connection with the investee company and that angel fund schemes must not have more than 49 investors.

For individual investors, the person must be seasoned for atleast a decade in this field and must be in possession of tangible assets worth atleast Rs. 2 crore apart from his primary residence.

For corporate investors, registration with AIF/VCF with SEBI and having a net worth of Rs. 10 crore is a compulsion.

Some corporate delegates say that there might be “operational hurdles” in the financial administration system of angel fund schemes for further stringent policy.

Bhavin Shah, partner, KPMG, said the move would create hurdles in calculating the internal rate of return (a measure of profitability or returns). “This will add to the administrative burden for fund managers and create operational challenges” he said.

Darshan Upadhyay, partner at Economic Laws Practice, said, “It appears this regulation will require an approval from all investors for making an investment. This may create operational hurdles. For example, what if one investor refuses? Can the manager drawdown the commitments from others who have approved and go ahead with the investment?” he asked.

But the prodigy of financial experts say that the new norms will boost entrepreneurship in the country by financing small start-ups at a stage where it is difficult to obtain funds from traditional sources of funding such as banks and financial institutions.

And we the people, thinking the SEBI to not be a stalemate, think it to be prudent enough to know how to override its own fences.