SEBI vide its press release on November 23, 2016 approved several improvements in the SEBI (Alternative Investment Funds) Regulation, 2012 (AIF Regulations) pertaining to Angel Funds suggested by the Alternative Investment Policy Advisory Committee (AIPC) under the chairmanship of Mr. N. R. Narayana Murthy.
It is of utmost importance to understand who Angel Investors are and what they do before we analyze the effect of the proposed changes in the present milieu of corporate finance in India. Angel Investors constituting an angel fund are private investors who are highly affluent individuals, willing to finance new businesses in exchange of convertible debt or ownership in the equity of the startup. Unlike venture capitalists these high net worth individuals invest their own funds in bulk investments made by them. Though studies show that usually an angel funded startup is less likely to fail than companies that rely on other sources of funding, angel investments entail a much higher degree of risk because if the startup eventually fails, the bulk of investment falls in jeopardy.
In India, angel investments are covered under the AIF Regulations. An alternative investment fund as defined in Section 2(1)(b) of the Regulations describes an AIF as any privately pooled investment that may be pooled in from national or foreign sources not qualifying as Mutual Funds or Collective investment Schemes. These angel Investors can invest in three categories of investment funds:
Category 1: Pertains to new businesses, Small and Medium Size Enterprises, Social Joint Ventures. Investments under this category attracts concession and incentives from the Government. This category also includes Venture Capital Funds etc.
Category 2: This category pertains to operational requirements for daily needs of Debt Funds and Private Equity Funds.
Category 3: Pertains to short term returns and undertake high stakes of investment such as Hedge Funds etc.
Fundraising under the AIF regime is done through private placements.
The Approved Changes
- The amendment changes the upper limit for the number of Angel Investor in a scheme from 49 to 200. Additionally, these Angel Funds will be allowed to invest in startups that are not more than 5 years old.
- The minimum investment amount by an angel fund in any venture capital undertaking is reduced from INR 5 Million to INR 2.5 Million. Moreover the lock in period for their investment has been reduced from 3 years to 1 year, thereby enabling them to exercise exit options within a year of their investment.
- Furthermore, these angel funds can invest in overseas venture capital undertakings upto 25% of their investible corpus in line with other AIFs.
It is a common practice among some notable Angel Investors in India to invest by organizing angel groups or networks or through online equity crowdfunding. Angel Investors who qualify as Accredited Investors as per SEBI’s 2014 Consultation paper on crowdfunding will inevitably bear the brunt of SEBI’s antagonistic letter diametrically opposing the functioning of Equity Crowdfunding Platforms.
As the result of lack of clarity and nebulous understanding of the term “Equity Crowdfunding Platform” Angel Investors may pull back from investing in startups through crowdfunding which is a much viable method of procuring funds by startups in the present business environment. Until any genial clarification is released by SEBI, the proposed AIF Regulation amendments may not straight out ensure ease of doing business and procurement of funds by startups.