1.

Introduction:

The Securities and Exchange Board of India (SEBI) issued the Alternative
Investment Fund Regulations, 2012 (‘AIF Regulations’) to regulate the
activities of AIFs in India, last amended on June 15, 2023.

An AIF can be understood as a fund that is usually set up as trust or LLP or

company or a body corporate and is a privately pooled investment vehicle
that collets funds from Indian or foreign investors for investing it as per
defined investment policy for the advantage of its investors.

Below is the diagrammatic presentation of how a typical AIF is structured:

Documentation required in setting up an AIF:

The AIF Regulations intend to establish funds through Trust, Company,

LLP, or Body Corporate. Usually, the Trust is preferred over other modes.
Typically, the parties involved in the Trust are the Fund, the Sponsor, the
Trustee, and the Investment Manager. Some of the documents that need
to be executed are:

 An indenture of trust for the settlement of the trust by the settlor;

 The investment management agreement for delegation of
authority to manage the fund and the payment of management fee
to the AMC / investment manager;
 The contribution agreement is for the investors, who are required
to execute these agreements, agreeing to invest into the fund from
 time to time (as per the terms agreed in the commitment letter), as
and when investment opportunities arise;
 The Private Placement Memorandum (PPM) sets out the key
terms of AIF, investment focus and strategy, and details of the fund
management team.

1. Categorization of AIFs:

The categorization of AIFs may range from private listed companies to

public listed companies. This categorization is basically formulated to
bifurcate the risk factor associated with the investment i.e., the nature of
categories and the type of fund set up ranges to investment from less
riskier investments in private entities to high risk investments in public
limited companies.

Cat I AIF: Invests in-

 start-up;
 early stage ventures;
 social ventures;
 small or medium enterprises; or
 infrastructure or other sectors or areas which the government or
regulators consider as socially or economically desirable and
shall include venture capital funds, SME Funds, social venture funds,
infrastructure funds, special situation funds.

Cat II AIF: Funds which does not undertake leverage or borrowing other
than to meet day-to-day operational requirements and as permitted in AIF
regulations. Funds such as-

 Private Equity funds; or

 Debt funds.

Cat III AIF: Funds which employs diverse or complex trading strategies
and may employ leverage including through investment in listed or
unlisted derivatives.

 Hedge funds;
 funds with short term returns; or
 other open-ended funds

The 15th June amendment introduced a new fund named Corporate Debt
Market Development Fund (‘CDMDF’) under Chapter III-C which shall form
part of Regulation 3(4) (d) as specified Alternative Investment Fund under
Regulation 19 of AIF regulations.

2. Introduction of Angel Funds:

Angel funds have always existed in the landscape. They provide platform
and encourage entrepreneurship in the country by financing small start-
ups at a stage where such start-ups find it difficult to obtain funds from
traditional sources of finance such as banks, financial institutions, etc.
Further, such funds provide mentoring to the entrepreneurs as well as
access to their own business networks.

Angel funds were formally recognized in the Budget announcement for FY

2013-14 as “Angel investors bring both experience and capital to new
ventures. SEBI will prescribe requirements for angel investor pools by
which they can be recognized as Category I AIF venture capital funds”
Thus, on 16th September, 2013, SEBI notified Securities and Exchange
Board of India (Alternative Investment Funds) (Amendment) Regulations,
2013

3. Angel funds under AIF Regulations:

Angel funds are a type of Category I AIFs that invest in startups which are
not promoted or sponsored by or related to an industrial group whose
group turnover exceeds three hundred crore rupees and are not
companies with family connection with any of the angel investors who are
investing in the company.

A pictorial presentation of Angel funds under AIF Regulation can be seen

as:
Chapter III-A of AIF Regulations provides for legal framework for angel
funds in India. This includes:

a. Investment Criteria:

As per Regulation 19A an “angel investor” means a person who proposes

to invest in an angel fund and satisfies one of the following conditions:

 an individual investor who has net tangible assets of at least 10

crore rupees excluding value of his principal residence, and who: (i)
has early stage investment experience, or (ii) has experience as a
serial entrepreneur, or (iii) is a senior management professional with
at least ten years of experience;
 a body corporate with a net worth of at least 10 crore rupees.
 an Alternative Investment Fund registered under these
regulations or a Venture Capital Fund registered under the SEBI
(Venture Capital Funds) Regulations, 1996.

As per Regulation 13 of AIF Regulations Category I and II Alternative

Investment Fund or schemes launched by such funds shall have a
minimum tenure of 3 years.

b. Investment in Angel Fund:

Angel funds raise funds by way of issue of units to angel investors with
following conditions specified under AIF Regulation:

 An Angel Fund shall have a corpus of at least 5 crore rupees.

 Angel funds shall accept, up to a maximum period of 5 years, an
investment of not less than 25 lakh rupees from an angel investor.
 Angel fund shall raise funds through private placement by issue of
information memorandum or placement memorandum.
 Where an Angel Fund has been formed as a Company, the
provisions of Companies Act 2013 shall apply.

c. Investment by Angel Funds:

As stated above Angel Funds invest in startups which are not promoted
or sponsored by or related to an industrial group whose group turnover
exceeds three hundred crore rupees and are not companies with family
connection with any of the angel investors who are investing in the
company.

*What qualifies as Startup?

“startup” means a private limited company or a limited liability

partnership which fulfills the criteria for startup as specified by the
Department of Promotion of Industry and Internal Trade (DPIIT), through
circular February 19, 2019.
  Investment by an Angel Fund in any venture capital undertaking
shall not be less than 25 lakh rupees and shall not exceed 10 crore
rupees.
 Investment by an angel fund in the venture capital undertaking shall
be locked-in for a period of 1 year.
 Angel funds shall not invest in associates.
 Angel funds shall not invest more than 25% of the total investments
under all its schemes in one venture capital undertaking.
 An angel fund may also invest in the securities of companies
incorporated outside India subject to such conditions or guidelines
issued by RBI.

d. Schemes of Angel Funds:

The angel fund may launch schemes after filing of a term sheet with the
Board. The term sheet shall contain material information regarding the
scheme and must be in the format and time period as may be specified by
the Board.

SEBI on June 29th 2018 issued the format of filling the term sheet by
angel funds and specified that such term sheet shall contain material
information regarding the scheme and shall be filed with the board within
10 days of launching the scheme. This is to note that for every investment
there is a new scheme filed whereas in Cat I AIF a scheme launched shall
invest in multiple portfolio entities and placement memorandum shall
state the investment strategy A scheme of angel fund shall not have more
than 200 angel investors.

e. Obligations of Sponsors and Managers of Angel Funds:

 The sponsor shall ensure that the angel investors satisfy the
conditions specified in sub-regulation (2) of regulation 19A. i.e.,
Angel investor criteria.
 The manager or sponsor shall have a continuing interest in the
angel fund of not less than 2.5% of the corpus or 50 lakh rupees,
whichever is lesser, and such interest shall not be through the
waiver of management fees.
 The manager of the angel fund shall obtain an undertaking from
every angel investor proposing to make investment in a venture
capital undertaking, confirming his approval for such an investment,
prior to making such an investment.

4. SEBI’s two cents on Angel Funds:

SEBI through its informal guidance has clarified various aspects that
remained unclear with respect to Angel funds under AIF Regulations:
Whether an LLP not meeting net worth criteria of Rs. 10 Crores be eligible
as an angel investor even though each partner of the LLP satisfies the
minimum net worth criteria and qualify as “angel investors” in their
individual capacity?

- In this regard, SEBI through an Informal guidance dated 17th September,

2020clarified that an LLP and its partner(s) are distinct persons, if the LLP
does not meet the minimum net worth criteria of Rs. 10 Crores, then it
would not be eligible as an angel investor even though each partner of the
LLP satisfies the minimum net worth criteria and qualify as “angel
investors” in their individual capacity.

In other words, SEBI does not enable the manager to look through an
entity to assess whether it is eligible.

Is the corpus applicable on each scheme of angel fund or at angel fund

level?

- In this regard, SEBI through an Informal guidance dated 29th December,

2020 clarified that minimum corpus of five crore Indian rupees must be
maintained at the fund level for an angel fund, i.e. aggregating all
schemes under such angel fund.

Whether manager and the sponsor together can maintain the continuing
interest of 2.5% of the corpus or fifty lakh rupees whichever is lesser at
the Angel Fund level?

- SEBI through an informal guidance dated 29th December 2020 clarified

that the sponsor and manager of an Angel Fund together can maintain a
continuing interest in an angel fund of at least 2.5% of the corpus or 50
lakh Indian rupees, whichever is less. It was a welcome move given that it
provided the fund manager with the flexibility to also consider
investments made by both the sponsor and investment manager towards
the fulfilment of continuing interest obligation.

Is it Manager’s responsibility to obtain undertaking from the angel

investors confirming their approval before investing in an VC
undertaking ?

- In this regard, SEBI through an informal guidance clarified that the

manager of an angel fund is required to obtain an undertaking from the
angel investors confirming their approval before investing the amount in
any VCU thereby providing them an option to selectively participate in not
only schemes but also each investment.

Whether investors of Angel Fund have right of wavier under Regulation

19G?
- In this regard, SEBI through an informal guidance dated 17th September,
2020 clarified that there is no provision in the AIF Regulations which
provide for waiver of the said right. SEBI does not view such a waiver
favorably from an investor protection standpoint.

However, the industry expects that a right which has been given to an
investor presumably for the benefit of the investor, should also have the
ability to waive such a right especially if the investor finds such a right
unnecessary or burdensome. However, waiver of statutory rights is
typically subject to certain limitations and it has to be seen whether there
is an element of public interest involved.

5. Registration:

An applicant may apply for registration as an angel fund in accordance

with the provisions of Chapter II of AIF Regulations. In cases where an AIF
has already been registered under AIF regulations and has not made any
investments, may apply for conversion of its category into an angel fund
under the provisions of Chapter III-A and the provisions of Chapter II shall
apply as they apply to a fresh registration. Registration fees of an angel
fund is INR 2,00,000/-. Additionally, regulation 19H provides that the units
of angel funds shall not be listed on any recognised stock exchange.

Below is the procedure of registration of an angel fund:

Step 1- The applicant has to visit the www.siportal.sebi.gov.in and file

application for grant of registration as an AIF. The system generates a
login ID for the applicant on receipt of the application for registration as
an Alternative Investment Fund. On creation of the login SI portal, the
Login ID and Password is automatically sent to the applicant through the
system.

Step 2- On receipt of the Login ID and Password, the applicant must fill up
all the details by clicking “Fresh Registration” under the tab “AIF” given
on the SEBI portal and pay required Application fees of Rs. 200,000/- +
18% Goods & Services Tax (GST) through online mode available on SI
Portal or by way of bank draft in favour of “The Securities and Exchange
Board of India”, payable at Mumbai. The applicant is encouraged to make
the requisite payment through the online mode only.

Step 3- The applicant is required to submit information as specified under

First Schedule of SEBI (AIF) Regulations, 2012 and other information as
specified below in the table.

Step 4- The applicant needs to provide the details in various fields of the
SIPortal and wherever specific fields are not provided, the applicant needs
to upload the documents on the SIPortal under ‘optional attachments’.
Instructions on how to fill the details is available under every field and the
same can be accessed by clicking the “Blue Question Mark” on the top
right hand corner of every page. Once all the details are filled up, the
applicant to submit the online application form by clicking the “Final
Submit” button.

Step 5- Once the applicant submits the online application, the same is
received by SEBI. The status of the application can be tracked by the
applicant using the application number allotted for each application after
the final submission.

Step 6- For ease of processing the application, the applicant also needs to
make a physical submission of the application to SEBI containing all the
documents/information.

Checklist :

The list of various documents/ information required to be

submitted/uploaded by the applicant at the time of filing application on
the SIPortal for registration as an Alternative Investment Fund are
provided at https://www.sebi.gov.in/sebi_data/faqfiles/nov-
2022/1667476171429.pdf

6. Angel Financing vs. Venture Capital Funding:

1. Angel investing is carried out during the early stage of the business,
venture capital is typically done at the growth stage of the
company.
2. Angel investors could be individuals or groups of investors, venture
capital firms are professionally managed firms.
3. Angel investing is driven by the perceived competence of the
founding members and the business idea, venture capital is driven
by valuations and prospects of the business.

7. Benefits associated with setting up an Angel Fund:

 Angel funding is early-stage funding, which essentially means that

you are among the first people to chance upon the idea, and the
possibility of upside is huge.
 This type of funding is a more flexible and less formal means of
raising finance, hence the paperwork is minimal.
 Angel investors have better control over the business and can act as
guides or mentors to ensure that the business takes shape in a way
that is conducive to its success in the future.
 For an angel investor, there is the opportunity to apply his/her
existing skillsets for the growth of a new business idea and the
opportunity to learn new skills is high.
 Reduced cost of registration and time period of registration
The two most important things start ups need in order to survive and grow
are Finance ( risk/ equity capital) and business mentoring and advice. This
is where Angel Investors come in.

 Angel Investors are mostly successful entrepreneurs, business

professionals who have “been there, done that”
 They invest their personal monies in the start up ventures
 More importantly they mentor the founders, give them operational
and strategic advice and also connect them to their own business
networks for help in getting business, access to technology, etc.
This is something that friends and family find it hard to do.
 Importantly, Angels also help start ups raise further monies from
VCs, who are more disposed to funding companies which have been
invested into and mentored by Angels.
 Angel Investors invest virtually the same amount of money as VCs
but in and in many more start ups than VCs, in countries where
there are enabling policies.
 In US, Angels invested ~ $ 23 bill in 67,000 ventures and VCs
invested ~ $ 26 bill in 3,700 ventures in the same year.
 This also creates the right pyramid, where angels take high risk with
their personal monies and invest in a large number of start ups. The
failure rate is high but VCs step in to help scale the promising ones.
You cannot harvest what you don’t sow.

9. Conclusion

Angels significantly increase the chances of a start up’s success and are
the critical bridge between founders’ own resources and mainstream VC
Funding which can help them grow.

With respect to certain sectors where technology takes time to develop

and grow; the definition of ‘Startups’ which is limited to a period of 10
years from the date of incorporation should have a wider scope so as to
cover beneficial though time taking developments under its ambit.