SEBI Sets Angel Investment parameters – Game Changer for ecosystem

“Angel Investments”, the name was all too self-assuming, without any explicit definition anywhere defining,  where the next door neighbor who helped fund her maid’s five figure capital for her Idli-Dosa-Meduvada Startup Stall to the millionaire who invested in a Green Fuel Initiative called themselves Angel Investors.

But, hold your thought the dynamics of “Angel Funding” would transform with SEBI officially coming up with a press release on 25th June 2013 which would determine the platform and its parameters of Angel funding in India.

In this article we have tried to simplify this SEBI release defining Investors and also Investee Company:

Who would be eligible Angel Investors?  

Angel Funds’ are to be included in the definition of “Venture Capital Funds” under the SEBI (Alternative Investment Funds) Regulations, 2012.

  • It is mandatory for Individual angel investors to have early stage investment experience, or be a serial entrepreneur or a senior management professional with 10 years experience. Corporate angel investors will have to have Rs 10 crore net worth or be a registered alternative investment fund. (i.e. registered in accordance with SEBI regulations by a Certificate).
  • Angel Funds will have a corpus of at least Rs 10 crore as against Rs 20 crore for other AIFs (Alternative Investment Fund); and minimum investment by an investor shall be Rs 25 lakh (can be over a period of 3 years) as against Rs 1 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 lakh, whichever is lesser.

Certain Restrictions Apply

What would be construed as Angel Investments?

SEBI has put various restrictions, more stringent being, conditions for ensuring investments are genuine angel investments, and investment is permissible only on the cumulative satisfaction of the following:

(i) Investee companies should be incorporated in India and less than 3 years old;

(ii) Should not have a turnover not exceeding Rs.25 crore;

(iii) Should be unlisted

(iv) Are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of Rs 300 crore, and

(v) Have no family connection with the investors proposing to invest in the company.

Further, investment in an investee company by an angel fund shall be not less than Rs.50 lakh and not more than Rs.5 crore and the lock-in period for the same is 3 years.

Though the term “related” in the point d is not defined, it is to be understood in commercial parlance being either group companies/suppliers/debtors i.e. stakeholders that may influence one’s own business.

Are there any Income Tax Implications?

Angel Funds’ are to be included in the definition of “Venture Capital Funds” under the SEBI (Alternative Investment Funds) Regulations, 2012 and hence if you are an angel investor as per the SEBI Definition you get exemptions granted to Venture Capital Fund under section 10 (23FA)  of the Income Tax Act, 1961.

10(23FA) grants exemption to Venture Capital Funds from Dividend and Long Term Capital Gains from investments made by way of equity shares in a venture capital undertaking on satisfying conditions specified by the Central Government, investment being in Software/Information Technology/Production of Basic drugs in the pharmaceutical sector/bio-technology/sectors notified by the Central Government/production of substance for which patent  has been granted by National Research Laboratory or any other scientific research institution approved by the DST.

What happens when an investment made is less than 50 Lakhs?

Investment less than the threshold of Rs.50 Lakhs is however not prohibited but obviously would not be become  eligible “ Angel Investments”  in view of the SEBI requirement, thus the benefits extended will not be available.

To Conclude:

This move would surely throw some order and discipline in the eco-system, and would also set an entry barrier for anyone and everyone to become an Angel Investors, which in the long run would help overall startup ecosystem.

The intention of government would have been to have watchful eyes and closer to the other governance measures that seek to keep tab of flow of money in and out of the economy like the I-T Department, Ministry of Corporate Affairs, FEMA, Prevention of Money Laundering Act etc, however the restriction of investment in the company not more than 3 years old and minimum investment amount of Rs. 50 Lacs, seems to be over done.

Startups and other businesses feel free to visit Taxmantra.com for comprehensive accounting, legal, regulatory, taxation and other compliance related assistance. Alok can be reached out at alokpatnia@taxmantra.com.