Monday, October 7, 2013

SEBI introduces ‘Angel Funds’


[The following post is contributed by CS Vinita Nairvinita@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”
-       Union Budget Speech for 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”).

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.

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.

APPLICABLE 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.

ANGEL FUND & ANGEL INVESTORS DEFINED

As per 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.”

As per 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,

(a) an 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
(ii) has experience as a serial entrepreneur[2], or
(iii) is a senior management professional with at least ten years of experience;

(b) a body 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.

COMPARATIVE ANALYSIS OF ANGEL FUNDS AND OTHER AIFS FROM REGULATORY POINT OF VIEW

REGISTRATION
Regulations applicable 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.

2012 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.

Non-Applicability 2012 Regulations to Angel Fund:

If the context otherwise requires or repugnant to the provisions of Chapter III-A

REGISTRATION FEES

Regulations applicable only to Angel Fund:

` 2,00,000

2012 Regulations applicable to  other registered AIFs:

` 5,00,000

INVESTMENTS IN ANGEL FUND AND AIFS

Regulations applicable only to Angel Fund:
- 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
- Funds to be accepted for a maximum period of three years.
- 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:
- Regulation 10- By way of issue of units to any investor whether Indian, foreign or 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.
- 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.
- 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

Non-Applicability 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

FILING OF SCHEME MEMORANDUM WITH SEBI

Regulations applicable only to Angel Fund:

Regulation 19E- At least 10 working days prior to launch of the Scheme.

2012 Regulations applicable to other registered AIFs:

Regulation 12- At least 30 days prior to launch of the Scheme

Non-Applicability 2012 Regulations to Angel Fund:

Regulation 12 not applicable

SCHEME FEES

Regulations applicable only to Angel Fund:

No Scheme Fees.

2012 Regulations applicable to  other registered AIFs:

` 1,00,000

MAXIMUM NUMBER OF INVESTORS IN A SCHEME

Regulations applicable only to Angel Fund:

Regulation 19 E (4)- 49 angel investors

2012 Regulations applicable to other registered AIFs:

Regulation 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

Non-Applicability 2012 Regulations to Angel Fund:

Regulation 10 (f) not applicable

INVESTMENTS BY ANGEL FUNDS AND AIFS

Regulations applicable 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;
(b) 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
(d) 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:

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

Non-Applicability 2012 Regulations to Angel Fund:

Regulation 15 (1) (a), (c) & (e); Regulation 16 (1) (b) and Regulation 16 (2) are not applicable

LIMIT ON INVESTMENT.

Regulations applicable 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.

Regulation 19 F (5)- Investment in one 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.

2012 Regulations 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;

Regulation 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

Non-Applicability 2012 Regulations to Angel Fund:

Regulation 15 (1) (c) and Regulation 16 (2) are not applicable

LOCK IN REQUIREMENTS

Regulations applicable only to Angel Fund:

Regulation 19 F (3)- Investment in the Venture Capital undertaking shall be locked-in for a period of three years.

2012 Regulations 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

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]

Non-Applicability 2012 Regulations to Angel Fund:

Regulation 16 (2) is not applicable

INVESTMENT IN ASSOCIATES

Regulations applicable only to Angel Fund:

Regulation 19 F (4)- Not permitted

2012 Regulations 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.

Non-Applicability 2012 Regulations to Angel Fund:

Regulation 15 (1) (e) not applicable

REQUIREMENT OF CONTINUING INTEREST BY SPONSOR OR MANAGER

Regulations applicable 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.

2012 Regulations 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.

In case of Category III  AIF the continuing interest shall be at least 5 % of the corpus or ten crore rupees, whichever is lower.

Non-Applicability 2012 Regulations to Angel Fund:

Regulation 10 (d) is not applicable

LISTING OF UNITS

Regulations applicable only to Angel Fund:

Regulation 19 H- Units of angel funds shall not be listed on any recognized stock exchange.

2012 Regulations 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.

Non-Applicability 2012 Regulations to Angel Fund:

Regulation 14 is not applicable

CONFLICT 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).

CONFLICT 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.

- CS Vinita Nair & Pooja Rawal


[1] 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
[3] 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

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