[Deergha Meena is a 5th year student at NALSAR University of Law]
In its 210th board meeting held on June 18, 2025, the Securities and Exchange Board of India (“SEBI”) has approved a significant overhaul of the regulatory framework for angel funds, proposing amendments to both the SEBI (Alternative Investment Funds) Regulations, 2012, (“AIF Regulations”) and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). This strategic revamp aims to foster sustainable capital formation within the Indian startup ecosystem while simultaneously reinforcing investor protection measures. A cornerstone of the new framework mandates that all angel investors must now qualify as “accredited investors” (AI) under the revised AIF Regulations. Furthermore, to facilitate broader capital access for angel funds without infringing on the private placement norms stipulated by the Companies Act, 2013, the ICDR Regulations will be amended to categorize AIs as “qualified institutional buyers” (QIBs) solely for the purpose of investing in angel funds.
Regulatory Background: Angel Tax and Investor Base
The foundation for these sweeping changes was meticulously laid through two key consultation papers published by SEBI and the recommendations of Alternative Investment Policy Advisory Committee. The first consultation paperdated November 13, 2024 evaluated the continued necessity of specific regulations for angel funds, particularly after the Government’s moves to mitigate the “angel tax”. It sought public feedback on critical areas such as mandating AIs as the sole eligible investor class and proposed the removal of the specified minimum investment amount and commitment period for angel investors. Key proposals encompassed adjustments to minimum corpus requirements and investor onboarding thresholds, while it also addressed aspects like investment lock-in periods, fairness in investment allocation, and sought views on introducing performance benchmarking and unit listing.
Following this comprehensive review, SEBI issued a second, more focused, consultation paper on February 21, 2025 titled “Expanding definition of QIBs under the ICDR Regulations, 2018, to include Accredited Investors for the limited purpose of investments in Angel Funds”. This paper recognized inadequate investor verification and directly addressed the conflict between angel funds’ operational need to broaden their investor base and section 42(2) of the Companies Act, 2013, which caps private placement offers at 200 non-QIB investors. Thus, it proposed classifying AIs as QIBs for angel funds to bypass the concerned cap and access a larger pool of sophisticated capital.
Key Approvals by the Board
SEBI’s approved reforms for angel funds introduce several key enhancements:
- Firstly, angel investors must now be AIs, replacing the previous self-declaration based criteria defined in 2013 with outdated economic thresholds of INR 2 crore net worth for individuals as had been defined under regulation 19A(2)(a) of the AIF Regulations, to ensure independent verification of investor status and align with current market indicators;
- Secondly, AIs will be categorized as QIBs for the limited purpose of angel fund investments via an ICDR amendment, overcoming the prior limitation where angel funds could offer opportunities to a large number of investors beyond Companies Act thresholds by allowing contributions from more than 200 AI investors without triggering public offer norms;
- Thirdly, under regulation 19F(2), investment limits in investee companies are relaxed from the earlier INR 25 lakh – 10 crore to INR 10 lakh – 25 crore, offering greater flexibility to reflect the growth of the angel ecosystem and increasing interest in early-stage investments;
- Fourthly, the 25% concentration limit under regulation 19(F)(5) on total investments in a single investee company is removed, addressing the previous difficulty in adhering to this requirement and allowing funds to allocate more capital to high-conviction opportunities;
- Fifthly, sponsors/managers must maintain a minimum continuing interest in each investment of the angel fund, at the higher of 0.5% of the investment amount or INR 50,000, shifting from the earlier practice of 2.5% corpus or INR 50 lakhs, whichever was lesser as per regulation 19(G)(2).
Furthermore, follow-on investments are now permitted in portfolio companies even if they are no longer classified as startups, enhancing continued support. Moreover, angel funds are mandated to offer each investment opportunity to all investors and allocate based on explicitly disclosed methods in the private placement memorandum (PPM), thereby preventing the potential for unequal treatment among investors due to fund manager discretion.
Critical Insights: QIB Status and Threshold Specific Reforms
SEBI’s move to treat AIs as QIBs for angel funds fundamentally dilutes QIB’s risk-mitigation intent. Globally, QIB status is reserved for institutions with robust governance and due diligence (e.g., banks, pension funds). Extending this to individuals, based on wealth, bypasses essential fiduciary oversight and professional controls, thereby exposing the early-stage market to higher, less scrutinized risk-taking and potentially increasing systemic risk.
The abolition of the 25% cap on single-company investments by angel funds is unsound from a portfolio risk management perspective. Diversification is critical for high-variance startups with high failure rates. Without this cap, funds can take concentrated, catastrophic bets, uniquely exposing investors to severe losses if a single investment fails. This is especially concerning given the absence of mandatory independent risk oversight, marking a backward step against global private fund regimes that typically advocate for strong diversification.
SEBI’s requirement that sponsors/managers maintain a minimum continuing interest of 0.5% of investment amount or INR 50,000 is materially below the earlier threshold under the said regulations. A substantial ‘skin in the game’ from the sponsor or manager is universally recognized for ensuring genuine alignment of interests with investors and promoting disciplined fund management. For large investments in the high-risk, high-fee angel investing environment, SEBI’s low sponsor/manager commitment provides negligible interest alignment.
Potential Measures: Towards a More Aligned Angel Investment Landscape
While these measures undeniably enhance investor protection by verifying financial capacity and risk appetite and simultaneously improve the ease of doing business for funds, there exists further avenues for refinement. This stems from the proposition to extend regulatory foresight to the very startups receiving capital, advocating for a more efficient alignment of investment capital with specific opportunities.
Startup Categorization and Investor Sub-Categorization within AIs
This aspect considers the highly differentiated and specialized risk profiles inherent in diverse startups. The proposed startup categorization framework, coupled with investor sub-categorization within AIs, directly addresses this nuanced “suitability gap”. By systematically classifying startups based on objective criteria such as technological complexity (e.g., deep-tech, platform-as-a-service), stage of development (e.g., pre-revenue, early-traction, scaling), or industry-specific risk (e.g., highly regulated pharmaceuticals vs. consumer e-commerce), SEBI or a designated agency could provide pre-defined risk profiles for these underlying assets. Concurrently, investor sub-categorization within AIs would involve identifying demonstrable expertise, a track record, or specialized industry knowledge pertinent to these startup categories. Such granular risk alignment fundamentally safeguards investors by channelling their capital into opportunities demonstrably suitable for their specific capabilities and risk tolerance, thereby fortifying the foundational principles of investor protection.
Comparatively, Australia’s Early-Stage Venture Capital Limited Partnerships (ESVCLPs) regime demonstrates how a regulatory framework can successfully channel capital to early-stage, innovative companies through targeted eligibility criteria, tax incentives, and robust oversight. While it does not implement sector-wise or suitability-based allocation of investors, it provides a strong foundation for investor protection and efficient capital allocation principles that can be further enhanced by introducing more advanced suitability and categorization features, as proposed for India’s SEBI AIF framework. India’s International Financial Services Centres Authority (IFSCA), through the IFSCA (Fund Management) Regulations, 2025, itself mandates accredited investors, sets startup eligibility, and caps exposure, demonstrating that targeted regulatory filters improve protection, transparency, and capital allocation by aligning risk with investment capacity.
Maximizing Returns: Disclosures and Diligence
The implementation of optimized disclosure and due diligence strategies, structured through a tiered system, encompasses: (i) adaptive disclosure frameworks, and (ii) enhanced due-diligence and regulatory facilitation.
The first component of the framework would mandate enhanced disclosures for startups with higher inherent risk or complexity, ensuring general Ais receive critical, category-specific information (e.g., IP status for deep-tech ventures). Conversely, startups engaging with a “preferred pool” of specialized Ais would benefit from streamlined due diligence, leveraging investor expertise to accelerate funding and fair valuation, fuelling startup growth and returns. Subsequent measures would proactively prevent value erosion by requiring mandatory disclosure of misalignment when complex startups seek capital from non-specialized Ais. This explicit risk warning, often requiring formal acknowledgment, promotes fully informed capital allocation. Accreditation agencies, with an expanded mandate to categorize startups, would standardize key data and decentralize verification, ensuring consistent, high-quality information flow. This minimizes SEBI’s direct regulatory burden while enhancing suitability-driven investments and optimizing ecosystem outcomes.
Forward Outlook
In conclusion, SEBI’s recent reforms commendably advance India’s angel investment landscape, boosting investor protection and ease of business. Yet, the analysis suggests certain aspects, notably the AI-QIB classification and relaxed concentration limits, warrant continued scrutiny for their broader implications. To foster a truly mature ecosystem, the proposed framework centered on nuanced investor-startup categorization and adaptive disclosures aims for deeper suitability and optimized returns. While conceptually robust, such transformative fund-level measures inherently present implementation complexities, underscoring the need for strategic pursuit for sustained growth.
– Deergha Meena