SEBI increases cap for angel investments in Indian startups

Posted on March 26, 2018

Government of India’s market regulating body, SEBI, increased the cap on angel investments on Indian startups to Rs. 10 crores from the former cap of Rs. 5 crores yesterday (25/03/2018). This move is expected to be like a shot in the arm for Indian startups which have been struggling to raise seed funds since 2015. With the notorious Angel Tax also eliminated or rectified in the budget of March 2018, Indian startups are expected to have a field day henceforth. However, the minimum investment that has to be made by an angel investor on Indian startups remains at Rs. 25 lakhs.

SEBI also plans on introducing the rule that an angel investor must have a minimum corpus of Rs. 5 crores in order to be able to register with SEBI as a recognized and legal angel investor. According to Business Standard, SEBI also plans to increase the maximum time period for accepting funds from an angel investor to five years from the present limit of three years. This rule, if enforced, will further ease the burden on Indian startups on raising seed funds. VC firms will also have more time to identify promising Indian startups and invest in them if this rule is brought into effect. The decision on implementing the above-mentioned rule will be taken at the SEBI meeting scheduled this week.

Angel Fund is a sub-category of Alternative Investment Funds (AIFs). Angel investors fund startups at their nascent stage where they find it difficult to obtain funds from traditional sources such as banks or fintech or VC firms. The possibility of obtaining seed funds from angel investors is what encourages entrepreneurs to start their own business. Angel investors also mentor entrepreneurs and provide them access to their own business networks. This boosts the business of many startups. Currently, 398 AIFs are registered with SEBI, out of which 114 are registered under Category 1, including eight angel investors. SEBI is also looking to amend SEBI norms (Registrars to issue and share Transfer Agents) and SEBI regulations (Bankers to Issue Agents) that will enable registrars as well as bankers to issue and maintain records of accounts and documents for a minimum period of eight years after completion of the relevant transactions. The Government of India should bring about more reforms to the startup ecosystem in India to make it as robust as those in developed nations.