[Posted by Umakanth Varottil]
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[The following post is
contributed by CS Vinita Nair – vinita@vinodkothari.com & Pooja Rawal – pooja@vinodkothari.com from Vinod Kothari
& Company, Practising Company Secretaries]
contributed by CS Vinita Nair – vinita@vinodkothari.com & Pooja Rawal – pooja@vinodkothari.com from Vinod Kothari
& Company, Practising Company Secretaries]
“Angel investors bring both experience and capital to new ventures. SEBI
will prescribe requirements for angel investor pools by which they can be
recognised as Category I AIF venture capital funds”
will prescribe requirements for angel investor pools by which they can be
recognised as Category I AIF venture capital funds”
– Union Budget Speech for
2013-14 of P. Chidambaram (Hon’ble Finance Minister)
2013-14 of P. Chidambaram (Hon’ble Finance Minister)
In a country like India,
having a strong base for new ventures to set up their business was always the
need of the hour. And this need would have been met only with the help of Angel
Investors. Having known this, the Finance Minister made the above statement.
Furthermore, in pursuance of the budget speech 2012-13, SEBI amended the Securities
and Exchange Board of India (Alternative Investment Funds) Regulations, 2012
(“2012 Regulation”), which now will be known as Securities
and Exchange Board of India (Alternative Investment Funds) (Amendment)
Regulations, 2013 (“Regulation”).
having a strong base for new ventures to set up their business was always the
need of the hour. And this need would have been met only with the help of Angel
Investors. Having known this, the Finance Minister made the above statement.
Furthermore, in pursuance of the budget speech 2012-13, SEBI amended the Securities
and Exchange Board of India (Alternative Investment Funds) Regulations, 2012
(“2012 Regulation”), which now will be known as Securities
and Exchange Board of India (Alternative Investment Funds) (Amendment)
Regulations, 2013 (“Regulation”).
NEED FOR ANGEL INVESTORS IN
INDIA
It is not surprising
that entrepreneurs newly formed companies find it difficult to obtain loans from banks, financial institutions
(FIs), etc. This is mainly because in India the procedure and
criteria for obtaining loans through traditional sources like banks are too
complicated. The problem doesn’t end here, even if the funds are obtained from
the banks or FIs, the entrepreneur is either not capable of or has less than enough
experience to deploy these funds in an appropriate manner.
that entrepreneurs newly formed companies find it difficult to obtain loans from banks, financial institutions
(FIs), etc. This is mainly because in India the procedure and
criteria for obtaining loans through traditional sources like banks are too
complicated. The problem doesn’t end here, even if the funds are obtained from
the banks or FIs, the entrepreneur is either not capable of or has less than enough
experience to deploy these funds in an appropriate manner.
And, that is where the
importance of having angel investors comes into picture. Angel investors are
not investors with golden wings who only provide funds to the new ventures; but
with their knowledge and experience, they tend to contribute in deploying those
funds in a manner profitable to the company.
importance of having angel investors comes into picture. Angel investors are
not investors with golden wings who only provide funds to the new ventures; but
with their knowledge and experience, they tend to contribute in deploying those
funds in a manner profitable to the company.
APPLICABLE
PROVISIONS UNDER THE REGULATIONS
PROVISIONS UNDER THE REGULATIONS
An
altogether new Chapter has been inserted in the Regulation known as CHAPTER
III –A: ANGEL FUNDS, provisions
whereof shall be applicable to angel funds and schemes launched by such angel
funds. Furthermore, some provisions of 2012 Regulation still
remain applicable to Angel Funds, their sponsors and managers and angel
investors and some are exempted.
altogether new Chapter has been inserted in the Regulation known as CHAPTER
III –A: ANGEL FUNDS, provisions
whereof shall be applicable to angel funds and schemes launched by such angel
funds. Furthermore, some provisions of 2012 Regulation still
remain applicable to Angel Funds, their sponsors and managers and angel
investors and some are exempted.
ANGEL FUND & ANGEL INVESTORS DEFINED
As per
Regulation 19A (1) of the Regulation:
Regulation 19A (1) of the Regulation:
“angel fund” means a sub-category of Venture Capital Fund under Category
I- Alternative Investment Fund that raises funds from angel investors and
invests in accordance with the
provisions of this Chapter.”
I- Alternative Investment Fund that raises funds from angel investors and
invests in accordance with the
provisions of this Chapter.”
As per
Regulation 19A (2) of the Regulation:
Regulation 19A (2) of the Regulation:
“angel
investor” means any person who proposes to invest in an angel fund and
satisfies one of the following conditions, namely,
investor” means any person who proposes to invest in an angel fund and
satisfies one of the following conditions, namely,
(a) an
individual investor who has net tangible assets of at least two crore rupees
excluding value of his principal residence, and who:
individual investor who has net tangible assets of at least two crore rupees
excluding value of his principal residence, and who:
(i) has early stage investment experience[1],
or
or
(ii) has experience as a serial entrepreneur[2],
or
or
(iii) is a senior management professional with at least ten
years of experience;
years of experience;
(b) a body
corporate with a net worth of at least ten crore rupees; or
corporate with a net worth of at least ten crore rupees; or
(c) an
Alternative Investment Fund registered under these regulations or a
Venture Capital Fund registered under
the SEBI (Venture Capital Funds) Regulations, 1996.
Alternative Investment Fund registered under these regulations or a
Venture Capital Fund registered under
the SEBI (Venture Capital Funds) Regulations, 1996.
COMPARATIVE
ANALYSIS OF ANGEL FUNDS AND OTHER AIFS FROM REGULATORY POINT OF VIEW
ANALYSIS OF ANGEL FUNDS AND OTHER AIFS FROM REGULATORY POINT OF VIEW
REGISTRATION
Regulations applicable
only to Angel Fund:
only to Angel Fund:
Regulation 19C In accordance with provisions of Chapter II of 2012 Regulations
An already
registered AIF which has not made any investment, may apply for conversion of
its category into an Angel Fund.
registered AIF which has not made any investment, may apply for conversion of
its category into an Angel Fund.
2012
Regulations applicable to other registered AIFs:
Regulations applicable to other registered AIFs:
Regulation
3- In accordance with provisions of Chapter
II of 2012 Regulations as Category I, Category II or Category III AIFs.
3- In accordance with provisions of Chapter
II of 2012 Regulations as Category I, Category II or Category III AIFs.
Non-Applicability
2012 Regulations to Angel Fund:
2012 Regulations to Angel Fund:
If the
context otherwise requires or repugnant to the provisions of Chapter III-A
context otherwise requires or repugnant to the provisions of Chapter III-A
REGISTRATION
FEES
FEES
Regulations applicable
only to Angel Fund:
only to Angel Fund:
` 2,00,000
2012
Regulations applicable to other
registered AIFs:
Regulations applicable to other
registered AIFs:
`
5,00,000
5,00,000
INVESTMENTS
IN ANGEL FUND AND AIFS
IN ANGEL FUND AND AIFS
Regulations applicable
only to Angel Fund:
only to Angel Fund:
–
Regulation 19D –By way of issue of units only to the angel investors
Regulation 19D –By way of issue of units only to the angel investors
– Corpus of atleast rupees 10 crores
– Minimum investment of twenty five lakh rupees for
investors
investors
– Funds to be accepted for a maximum period of three
years.
years.
–
Regulation 19 D (4)- Funds to be raised through private placement by
issue of information memorandum or placement memorandum.
Regulation 19 D (4)- Funds to be raised through private placement by
issue of information memorandum or placement memorandum.
2012
Regulations applicable to other registered AIFs:
Regulations applicable to other registered AIFs:
– Regulation 10- By way of issue of units to any investor whether Indian, foreign or
non-resident Indians
non-resident Indians
– Corpus of atleast rupees 20 crores
– Minumum investment of one crore rupees for
investors. In case of Employees or directors of AIF or Manager, minimum shall
be twenty five lakh rupees.
investors. In case of Employees or directors of AIF or Manager, minimum shall
be twenty five lakh rupees.
– Regulation 13- Category I and II AIFs (close ended) or schemes launched by such funds
shall have a minimum tenure of three years. Category III AIF may be open ended
or close ended. Extension of tenure of close ended AIF permitted upto 2 years
subject to approval of two thirds of unit holders by value of their investment
in AIF.
shall have a minimum tenure of three years. Category III AIF may be open ended
or close ended. Extension of tenure of close ended AIF permitted upto 2 years
subject to approval of two thirds of unit holders by value of their investment
in AIF.
–
Regulation 10 (g) – The fund shall not solicit or collect funds except
by way of private placement
Regulation 10 (g) – The fund shall not solicit or collect funds except
by way of private placement
–
Regulation 11- Alternative Investment Fund shall raise funds
through private placement by issue of Information memorandum or placement
memorandum, by whatever name called
Regulation 11- Alternative Investment Fund shall raise funds
through private placement by issue of Information memorandum or placement
memorandum, by whatever name called
Non-Applicability
2012 Regulations to Angel Fund:
2012 Regulations to Angel Fund:
Clauses (a), (b), (c), (d) and (f) of Regulation 10 are not
applicable. If the context otherwise requires or repugnant to the provisions
of Chapter III-A
applicable. If the context otherwise requires or repugnant to the provisions
of Chapter III-A
FILING
OF SCHEME MEMORANDUM WITH SEBI
OF SCHEME MEMORANDUM WITH SEBI
Regulations applicable
only to Angel Fund:
only to Angel Fund:
Regulation
19E- At least 10 working days prior to launch of the
Scheme.
19E- At least 10 working days prior to launch of the
Scheme.
2012
Regulations applicable to other registered AIFs:
Regulations applicable to other registered AIFs:
Regulation 12- At least 30
days prior to launch of the Scheme
days prior to launch of the Scheme
Non-Applicability
2012 Regulations to Angel Fund:
2012 Regulations to Angel Fund:
Regulation
12 not applicable
12 not applicable
SCHEME FEES
Regulations applicable
only to Angel Fund:
only to Angel Fund:
No Scheme Fees.
2012
Regulations applicable to other
registered AIFs:
Regulations applicable to other
registered AIFs:
`
1,00,000
1,00,000
MAXIMUM
NUMBER OF INVESTORS IN A SCHEME
NUMBER OF INVESTORS IN A SCHEME
Regulations applicable
only to Angel Fund:
only to Angel Fund:
Regulation 19 E (4)- 49 angel investors
2012
Regulations applicable to other registered AIFs:
Regulations applicable to other registered AIFs:
Regulation
10 (f)- 1000 investors.
10 (f)- 1000 investors.
Provided
that the provisions of the Companies Act, 1956 shall apply to the AIF, if it is
formed as a Company
that the provisions of the Companies Act, 1956 shall apply to the AIF, if it is
formed as a Company
Non-Applicability
2012 Regulations to Angel Fund:
2012 Regulations to Angel Fund:
Regulation
10 (f) not applicable
10 (f) not applicable
INVESTMENTS BY ANGEL
FUNDS AND AIFS
FUNDS AND AIFS
Regulations applicable
only to Angel Fund:
only to Angel Fund:
Regulation 19 F (1)- Investments permitted only in Venture Capital Undertakings which:
(a)
have been incorporated during the preceding 3 years from the date of
such investment;
have been incorporated during the preceding 3 years from the date of
such investment;
(b)
have a turnover of less than 25 crore rupees;
have a turnover of less than 25 crore rupees;
(c)
are not promoted or sponsored by or related to an industrial group whose group
turnover exceeds 300 crore rupees; and
are not promoted or sponsored by or related to an industrial group whose group
turnover exceeds 300 crore rupees; and
(d)
are not companies with family connection with any of the angel investors who are
investing in the company.
are not companies with family connection with any of the angel investors who are
investing in the company.
2012 Regulations
applicable to other registered AIFs:
applicable to other registered AIFs:
Subject to Regulation 15 –General Investment
Conditions; Regulation 16 –
Conditions for Category I AIFs; Regulation
17 – Conditions for Category II AIFs; Regulation
18 – Conditions for Category III AIFs
Conditions; Regulation 16 –
Conditions for Category I AIFs; Regulation
17 – Conditions for Category II AIFs; Regulation
18 – Conditions for Category III AIFs
Non-Applicability
2012 Regulations to Angel Fund:
2012 Regulations to Angel Fund:
Regulation
15 (1) (a), (c) & (e); Regulation 16 (1) (b) and Regulation 16 (2) are not
applicable
15 (1) (a), (c) & (e); Regulation 16 (1) (b) and Regulation 16 (2) are not
applicable
LIMIT
ON INVESTMENT.
ON INVESTMENT.
Regulations applicable
only to Angel Fund:
only to Angel Fund:
Regulation 19 F (2)- Investment in any
venture capital undertaking shall not be less than 50 lakh rupees and
shall not exceed 5 crore rupees.
venture capital undertaking shall not be less than 50 lakh rupees and
shall not exceed 5 crore rupees.
Regulation 19 F (5)- Investment in one
Venture Capital undertaking to not exceed 25% of the total investments under
all its schemes.
Venture Capital undertaking to not exceed 25% of the total investments under
all its schemes.
The compliance of the
same is to be ensured at the end of the tenure.
same is to be ensured at the end of the tenure.
2012 Regulations
applicable to other registered AIFs:
applicable to other registered AIFs:
Regulation
15 (1) (c) – Category I and II AIFs shall not invest more than 25% of the
investible funds in one Investee Company;
15 (1) (c) – Category I and II AIFs shall not invest more than 25% of the
investible funds in one Investee Company;
Regulation
15 (d) – Category III AIFs shall not invest more than 10% of the investible
funds in one Investee Company
15 (d) – Category III AIFs shall not invest more than 10% of the investible
funds in one Investee Company
Regulation 16 (2) – Additional investment
conditions applicable to Venture Capital Funds
conditions applicable to Venture Capital Funds
Non-Applicability
2012 Regulations to Angel Fund:
2012 Regulations to Angel Fund:
Regulation
15 (1) (c) and Regulation 16 (2) are not applicable
15 (1) (c) and Regulation 16 (2) are not applicable
LOCK
IN REQUIREMENTS
IN REQUIREMENTS
Regulations applicable
only to Angel Fund:
only to Angel Fund:
Regulation 19 F (3)- Investment in the Venture Capital undertaking shall be locked-in for a
period of three years.
period of three years.
2012 Regulations
applicable to other registered AIFs:
applicable to other registered AIFs:
Regulation
16 (2) (b) (iii)- Investments by Category I AIFs in preferential allotment,
including through qualified institutional placement, of equity shares or equity linked instruments of a listed company is
subject to lock in period of one year
16 (2) (b) (iii)- Investments by Category I AIFs in preferential allotment,
including through qualified institutional placement, of equity shares or equity linked instruments of a listed company is
subject to lock in period of one year
Regulation
16 (2) (d) and (3) (c) and Regulation 17
(f)[3]– Investments
in companies listed on SME Exchange or SME
segment of an exchange is subject to lock in period of one year from the date of investment.[4]
16 (2) (d) and (3) (c) and Regulation 17
(f)[3]– Investments
in companies listed on SME Exchange or SME
segment of an exchange is subject to lock in period of one year from the date of investment.[4]
Non-Applicability 2012
Regulations to Angel Fund:
Regulations to Angel Fund:
Regulation
16 (2) is not applicable
16 (2) is not applicable
INVESTMENT
IN ASSOCIATES
IN ASSOCIATES
Regulations applicable
only to Angel Fund:
only to Angel Fund:
Regulation 19 F (4)- Not permitted
2012 Regulations
applicable to other registered AIFs:
applicable to other registered AIFs:
Regulation 15 (1) (e)- Permitted
with the approval of seventy five percent of investors
by value of their investment in the AIF.
with the approval of seventy five percent of investors
by value of their investment in the AIF.
Non-Applicability 2012
Regulations to Angel Fund:
Regulations to Angel Fund:
Regulation
15 (1) (e) not applicable
15 (1) (e) not applicable
REQUIREMENT
OF CONTINUING INTEREST BY SPONSOR OR MANAGER
OF CONTINUING INTEREST BY SPONSOR OR MANAGER
Regulations applicable
only to Angel Fund:
only to Angel Fund:
Regulation 19 G- The manager or sponsor shall have a continuing interest of atleast 2.5%
of the corpus or rupees fifty lakh whichever is lesser.
of the corpus or rupees fifty lakh whichever is lesser.
2012 Regulations
applicable to other registered AIFs:
applicable to other registered AIFs:
Regulation 10 (d)
The manager or sponsor shall have a continuing interest of at least 2.5%
of the corpus or rupees five crore whichever is lower.
of the corpus or rupees five crore whichever is lower.
In case of Category III AIF the
continuing interest shall be at least 5 % of the corpus or ten crore rupees,
whichever is lower.
continuing interest shall be at least 5 % of the corpus or ten crore rupees,
whichever is lower.
Non-Applicability 2012
Regulations to Angel Fund:
Regulations to Angel Fund:
Regulation
10 (d) is not applicable
10 (d) is not applicable
LISTING
OF UNITS
OF UNITS
Regulations applicable
only to Angel Fund:
only to Angel Fund:
Regulation 19 H- Units of angel funds shall not be listed on any recognized stock
exchange.
exchange.
2012 Regulations
applicable to other registered AIFs:
applicable to other registered AIFs:
Regulation 14
Units of close ended AIF
may be listed on stock exchange subject to a minimum tradeable lot of rupees 1
crore. Listing shall be permitted only after final close of the fund or scheme.
may be listed on stock exchange subject to a minimum tradeable lot of rupees 1
crore. Listing shall be permitted only after final close of the fund or scheme.
Non-Applicability 2012
Regulations to Angel Fund:
Regulations to Angel Fund:
Regulation
14 is not applicable
14 is not applicable
CONFLICT
WITH COMPANIES ACT, 2013 AND COMPANIES ACT, 1956
WITH COMPANIES ACT, 2013 AND COMPANIES ACT, 1956
The Regulations limit
the number of angel investors to 49 as Angel Funds are allowed to raise funds
only through private placement. Under section 42 of Companies Act, 2013 private
placement can be done to a maximum of 50. The draft rules issued allow
companies to undertake private placement to a maximum of 200 persons in a
financial year. Formerly, 2012 Regulations was extremely liberal in defining
1000 investors per scheme as the limit for private placement. However, the
Regulations have inserted a proviso to the effect that where the AIF is formed
as a Company, the provisions of the Companies Act, 1956 shall apply. The
Regulations seem to have relied on section 67(3) of Companies Act, 1956 and
accordingly specifies limit of 49 angel investors for each scheme of Angel Fund
as per Regulation 19E (4).
the number of angel investors to 49 as Angel Funds are allowed to raise funds
only through private placement. Under section 42 of Companies Act, 2013 private
placement can be done to a maximum of 50. The draft rules issued allow
companies to undertake private placement to a maximum of 200 persons in a
financial year. Formerly, 2012 Regulations was extremely liberal in defining
1000 investors per scheme as the limit for private placement. However, the
Regulations have inserted a proviso to the effect that where the AIF is formed
as a Company, the provisions of the Companies Act, 1956 shall apply. The
Regulations seem to have relied on section 67(3) of Companies Act, 1956 and
accordingly specifies limit of 49 angel investors for each scheme of Angel Fund
as per Regulation 19E (4).
CONFLICT
BETWEEN MAXIMUM PERIOD OF INVESTMENT AND MINIMUM LOCK IN PERIOD
BETWEEN MAXIMUM PERIOD OF INVESTMENT AND MINIMUM LOCK IN PERIOD
While Regulation 19D (3) restricts angel funds from accepting investments
from angel investors for a period beyond 3 years, Regulation 19F (3) specify a
minimum lock in requirements of investment made by an angel fund in the Venture
Capital undertaking for a period of 3 years. It is not clear how the angel
funds will address this twin requirement. The 2012 Regulations, on the
contrary, specify that Category I and II AIFs or schemes launched by such funds
shall have a minimum tenure of three years. If angel fund is a sub-category of
Venture Capital Fund under Category I AIF, there should not be such disconnect
in drafting of investment period requirement by SEBI.
from angel investors for a period beyond 3 years, Regulation 19F (3) specify a
minimum lock in requirements of investment made by an angel fund in the Venture
Capital undertaking for a period of 3 years. It is not clear how the angel
funds will address this twin requirement. The 2012 Regulations, on the
contrary, specify that Category I and II AIFs or schemes launched by such funds
shall have a minimum tenure of three years. If angel fund is a sub-category of
Venture Capital Fund under Category I AIF, there should not be such disconnect
in drafting of investment period requirement by SEBI.
–
CS Vinita Nair & Pooja Rawal
[1]
shall mean prior experience in investing in start-up or emerging or early-stage
ventures
shall mean prior experience in investing in start-up or emerging or early-stage
ventures
[2] shall
mean a person who has promoted or co-promoted more than one start-up venture
mean a person who has promoted or co-promoted more than one start-up venture
[3]
Applicable to Venture Capital Funds, SME funds and Category II AIFs
respectively.
Applicable to Venture Capital Funds, SME funds and Category II AIFs
respectively.
[4] In
order to be exempt from regulation 3 and 3A of SEBI (Prohibition of Insider
Trading) Regulations, 1992
order to be exempt from regulation 3 and 3A of SEBI (Prohibition of Insider
Trading) Regulations, 1992
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