Angel Funds in India: SEBI Regulations, Eligibility, & Investment Rules Explained

While the startup economy in India is experiencing unprecedented growth with soaring valuations, increasing profits, better product-market fit for new ventures, and evolving business models, both Indian and foreign investors have reaped significant returns from homegrown startups. Some major Indian startups, now publicly listed, have delivered more than 20X returns to early-stage investors. This brings us to the point of this article – what are the different models for investing in Indian ventures and what is the legal framework governing them? Let’s explore.

Overview of Investment Funds in India under SEBI

The Securities Exchange Board of India (SEBI) is the statutory body that looks after both private and public investing landscape in India. For the purpose of this article, we will focus on SEBI (Alternative Investment Funds) Regulations, 2012 [“Regulations”]. The various types of investment funds defined under the Regulations are summarized below:

Alternative Investment Fund (“AIF”) is an umbrella term encompassing all privately pooled investment vehicles that collect funds from investors for investing according to a defined investment policy. They exclude mutual funds, collective investment schemes, and family trusts.

These AIFs are further divided into different types of funds under the Regulations which include –

1. Debt Funds – Invest in debt instruments.
2. Hedge Funds – Use complex trading strategies and derivatives.
3. Infrastructure Funds – Target infrastructure-related ventures.
4. Private Equity Funds – Focus on equity in private companies.
5. SME Funds – Invest in small and medium enterprises.
6. Social Impact Funds – Channel capital into social enterprises.
7. Venture Capital Funds – Primarily back early-stage and innovation-driven startups, including Angel Funds.

This article sheds light on angel funds which have been provided for in Chapter III-A of the Regulations.

Defining Angel Fund 

Angel Fund means a Category I-Alternative Investment Fund (Cat. I AIFs invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which are considered as socially or economically desirable) that raises funds from angel investors.

Who Qualifies as an Angel Investor? 

Angel Investor means any person who proposes to invest in an angel fund and satisfies one of the following conditions:

1. Individual Investor having net tangible assets of at least INR 2 crore, excluding their principal residence, and possesses either early-stage investment experience (prior experience in investing in start-up or emerging or early-stage ventures) or have been a serial entrepreneur (having promoted or co-promoted multiple start-ups), or holds a senior management position with at least ten years of experience.
2. Body Corporate with a net worth of at least INR 10 crore.

3. AIFs registered under the Regulations or funds registered under erstwhile Venture Capital Fund Regulations 1996. 

How are Angel Funds Registered?

Angel Funds are registered under Chapter II of the AIF Regulations. Salient features of the same include:

1. Application

   Application to be made in Form A appended to the Regulations at SEBI’s Head Office along with an application fees of INR 1,00,000/- payable electronically.

2. Eligibility

   • The founding document (MoA, Trust Deed, or LLP Agreement) must permit AIF activities and prohibit public solicitation of investmentand must be registered under applicable laws.
   • The applicant, sponsor, and manager must be‘fit and proper persons’ as per SEBI (Intermediaries) Regulations, 2008.
   • The key investment team must include:
     1. At least one member with SEBI-specified certification.
     2. At least one professionally qualified person in finance, business, commerce, or related fields.
   • Adequate infrastructure and manpower to manage operations.
   • Clearly defined investment objective, target investors, corpus, strategy, and tenure at the time of registration.
   • Disclosure of any prior registration refusal by SEBI for the applicant or related entities.

3. Registration Fees

   Registration Fees of INR 2,00,000/- to be paid on successful registration to obtain the certificate of registration.

Fundraising Rules for Angel Funds

Angel funds can raise funds only from angel investors through the issuance of units and must adhere to the following requirements:

1. Minimum corpus – INR 5 crore;
2. Minimum investment per investor – INR 25 lakh;
3. Tenure – Maximum five years;
4. Fundraising Mechanisms – Must be raised through private placement using a placement memorandum (as provided in the Regulations); and
5. If the angel fund is incorporated as a company, the provisions of the Companies Act, 2013 shall also apply;
6. Investor Cap per Scheme – Maximum 200 angel investors.

Investment Norms for Angel Funds

1. Angel Funds are allowed to invest in startups which that are not affiliated with large industrial groups (large industrial groups mean a group with turnover over INR 300 crore) or family members of the investing angel investors;
2. Each investment must be between INR 25 lakh and INR 10 crore;
3. Must be locked in for at least one year;
4. Angel funds cannot invest in their associates;
5. Cannot allocate more than 25% of their total investments across all schemes to a single venture.
6. May invest in companies incorporated outside India, subject to guidelines from SEBI and the RBI

Duties of Sponsor and Manager

1. The sponsor of an angel fund must ensure that all angel investors meet the eligibility criteria as discussed above;
2. Either the sponsor or manager must maintain a continuing interest in the fund of at least 2.5% of the corpus or INR 50 lakh, whichever is lower, and this cannot be through a waiver of management fees.
3. The manager must obtain prior written approval from each angel investor before making any investment in a venture capital undertaking.
4. The manager or sponsor shall disclose their investment in the AIF to the angel investors.

Final Thoughts

Angel Funds have emerged as a structured and regulated route for high-net-worth individuals and institutions to participate in the growth of India’s vibrant startup ecosystem. By ensuring compliance with SEBI’s regulatory framework, angel funds provide transparency, investor protection, and accountability while enabling early-stage companies to access much-needed capital. For eligible investors with experience and appetite for risk, angel funds offer an opportunity to support innovation and potentially earn high returns.