The new norms would help in encouraging entrepreneurship in India by financing small start-ups at a stage where they find it difficult to obtain funds from traditional sources of funding such as banks or financial institutions
Market regulator Securities and Exchange Board of India (SEBI) on Monday notified new norms for angel investors, who provide funding to companies at their initial stages. With the new norms, SEBI aims to encourage entrepreneurship in the country by financing small start-ups.
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, a gazette notification said.
In order to ensure investment by angel funds is genuine, the SEBI has restricted investment by such funds between Rs50 lakh and Rs5 crore.
Among other norms included, angel funds can make investments only in those companies which are incorporated in India. These funds needs to be invested in a firm for at least three years, can invest in companies not older than 3 years.
Further, investee company needs to be unlisted and with a maximum turnover of Rs25 crore and this firm may not be related to a group with a revenue of more than Rs300 crore.
Angel funds are required to have a corpus of at least Rs10 crore and minimum investment by an investor should be Rs25 lakh.
SEBI said, “The manager or sponsor shall have a continuing interest in the angel fund of not less than 2.5% of the corpus or Rs50 lakh, whichever is lesser, and such interest shall not be through the waiver of management fees”.
The regulator also stipulated that the fund must not have any family connection with the investee company and that no angel fund scheme have more than 49 investors.
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).
Under SEBI guidelines, AIFs already have sub-categories such as Venture Capital Funds, Social Funds and SME Funds.
Angel fund is likely to be a separate sub-category.
Regarding raising of funds by an individual investor, the person need to have an experience of 10 years and should possess assets of at least Rs2 crore.
In case an investor is a corporate entity, it need to either have a net worth of Rs10 crore or registered as AIF/ VCF with SEBI.
Here are the salient features of angel fund norms...
a. Angel Funds have been included in the definition of 'Venture Capital Funds' and a separate Chapter has been inserted specific to such funds. Angel funds shall raise funds only from angel investors.
b. In view of the high-risk investments of such funds, certain conditions have been imposed on investors. For instance, individual angel investors shall be required to have early stage investment experience/ experience as a serial entrepreneur/ be a senior management professional with 10 years’ experience. They shall also be required to have net tangible assets of at least Rs2 crore. Corporate angel investors shall be required to have Rs10 crore net worth or be a registered AIF/VCF.
c. Angel Funds shall have a corpus of at least Rs10 crore (as against Rs20 crore for other AIFs) and minimum investment by an investor shall be Rs25 lakhs (may be accepted over a period of maximum three years) as against Rs1 crore for other AIFs. Further, the continuing interest by sponsor/manager in the Angel Fund shall be not less than 2.5% of the corpus or Rs. 50 lakhs, whichever is lesser.
d. For ensuring investments are genuine angel investments, angel funds shall invest only in venture capital undertakings which are not more than three years old, have a turnover not exceeding Rs25 crore, are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of Rs300 crore, and have no family connection with the investors proposing to invest in the company.
e. Further, investment in an investee company by an angel fund shall be not less than Rs50 lakhs and more than Rs5 crore and shall be required to be held for a period of at least three years.
