Should angel-investor pools or angel funds continue to be regulated by Sebi?
The market regulator has proposed several changes to overhaul the regulatory framework of angel funds, in a consultation paper issued on Wednesday, November 13.
In the paper, the Securities and Exchange Board of India (SEBI) has asked if the funds need to be regulated at all, following the abolition of angel taxes in Budget 2024-2025.
Besides taking it out of SEBI's purview, the regulator has proposed several other changes including allowing only accredited investors to invest in angel funds, broadening the investor base for angel funds by lowering the floor (minimum investment requirement) and raising the ceiling (maximum investment limit) and so on.
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Angel funds have been regulated as Category I-AIF - VC Funds. The regulatory framework had been put in place to provide exemptions from angel tax. That is, the tax exemptions were given only to angel funds that raised capital from certain kind of investors and for certain kinds of startups.
With angel-tax being done away with altogether, this framework is no longer relevant. In fact, direct investment in startups may be preferred without having to worry about the compliance costs.
Therefore, the regulator has asked if angel funds need to under the supervision of SEBI at all.
But the Alternative Investment Policy Advisory Committee (AIPAC) pointed out the positives of keeping the funds regulated. As the consultation paper said, "the AIPAC recommended maintaining Angel Funds as a regulated structure, recognizing their importance in professionally managing Angel Investors' capital and their critical role in funding start-ups. AIPAC members also highlighted that besides AIFs, there may not be any other legitimate avenues for pooling funds to invest in start-ups."
The paper noted that angel funds have come to be an important funding source for startups and the funds have grown impressively over the past few years. As of March 31, 2024, there are 82 Angel Funds registered with SEBI under the AIF Regulations, with a total of Rs 7,053 Crore in commitments and Rs 3,343 Crore in investments. The Angel Fund industry has experienced significant growth over the past five years, with a compound annual growth rate (CAGR) of 106 percent in investment.
(This copy will be updated.)
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