To give a fillip to start-up funding, the Securities and Exchange Board of India (SEBI) has relaxed its rules for investment by angel funds, 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.
What is ‘Alternative Investment Funds’?
Anything alternate to traditional form of investments (such as stocks, bonds etc.,) gets categorized as alternative investments.
Alternative Investments Funds come under the SEBI (Alternative Investment Fund) Regulations 2012.
Who is an 'Angel Investor'?
Angel fund, a sub-category of AIF, encourages entrepreneurship in the country by financing small start-ups at a stage where such firms find it difficult to obtain capital from traditional sources of finance such as banks.
An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for ownership equity or convertible debt.
The capital angel investors provide may be a one-time investment to help the business propel and carry the company through its difficult early stages. Essentially, angel investors are the opposite of venture capitalists.
Example of a successful Angel Investor –Mike Markkulais an American entrepreneur who was an angel investor and second CEO of Apple Computer, Inc., providing early critical funding and managerial support.
What’s in the latest SEBI circular?
The regulator has made amendment to SEBI (AIF) Regulations, 2012, following which thedefinition of start-up for angel funds investments will be similar to one of Department of Industrial Policy & Promotion (DIPP), as given in their start-up policy.
Accordingly, angel funds can invest in start-ups 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% of their investible corpus, in line with other AIFs.
There are many start-ups that require a smaller amount of validating proposition. So, 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.
Also, the minimum tenure of angel funds’ investments in start-ups has also been lowered from three years to one year. And the upper limit for the number of angel investors in a scheme has been increased from 49 to 200.
Why this amendment is much needed?
In order to further develop the alternative investment industry and the start-up ecosystem in India, SEBI, in March 2015 constituted a committee of experts called Alternative Investment Policy Advisory Committee under the chairmanship of N.R.Narayana Murthy.
Considering the recommendations in the report, the SEBI board, in November, had approved amendments to AIF regulations with respect to angel funds.
The amendments are part of SEBI’s larger efforts to encourage young entrepreneurship in the country, and provide founders with access to private and eventually public funds.
