Sebi relaxes rules for angel funds to boost startup funding

To give a fillip to startup funding, markets regulator Sebi has relaxed its rules for investment by angel funds, including allowing them to invest in up to five-year old entities.

Besides, the lock-in requirement has been reduced from three years to one year for angel funds and their minimum investment threshold has been slashed from Rs 50 lakh to Rs 25 lakh.

Angel funds are allowed to invest in overseas venture capital undertakings up to 25 per cent of their investible corpus in line with other AIFs.

The upper limit for number of angel investors in a scheme will be increased from 49 to 200, Securities and Exchange Board of India (Sebi) said in a notification dated January 4.

The regulator has made amendment to Sebi (Alternative Investment Funds) Regulations, 2012, following which the definition of startup for angel funds investments will be similar to one of DIPP, as given in their startup policy.

Accordingly, angel funds can invest in startups incorporated within five years, which was earlier three years.

To diversify risks, Sebi has also allowed angel funds to make overseas investments, up to 25 per cent of their investible corpus, in line with other Alternative Investment Funds (AIFs).

There are many startups that require a smaller amount of validating proposition and bringing down the limit to Rs 25 lakh from Rs 50 lakh will help such companies raise funds at the initial stage of idea generations.

In order to further develop the alternative investment industry and the startup ecosystem in India, Sebi in March 2015 constituted a committee of experts drawn from the across market participants called

Alternative Investment Policy Advisory Committee under the chairmanship of N R Narayana Murthy.

AIPAC had submitted two reports to Sebi with various recommendations, including certain recommendations relating to angel funds. Considering the recommendations in the report and public comments thereon, the Sebi board, in November, had approved amendments to AIF regulations with respect to angel funds.

Angel fund, a sub-category of AIF, encourages entrepreneurship in the country by financing small startups at a stage where such firms find it difficult to obtain capital from traditional sources of finance such as banks and financial institutions.

In addition, angel funds offer mentoring to entrepreneurs as well as access to their own business networks.

Currently, 266 AIFs are registered with Sebi, of which, 84 are registered under Category I, including four angel funds.