Sebi guidelines: God's homework is inadequate, say angels

The investor community says the move by the Securities and Exchange Board of India (Sebi) to bring angel funds under the Alternative Investment Funds Regulations is a mix of good and negatives.

Many investors are wary of guidelines that stipulate investment thresholds, exit restrictions and experience criteria, among others. Most do feel the move would give a fillip to creation of angel fund pools, a positive for the nascent system of start-ups.

A general consensus is the move would help wealthy individuals to get more active in setting up angel funds.

However, the commercial viability and effectiveness of such funds would depend on how these rules are interpreted and implemented, say investors. Given the riders in the regulation, sector players are waiting for the rules to get notified before assessing the full impact of the move.

“It is a good start. It recognises the contribution of angel funds in creation of jobs at a time when the manufacturing and services sectors are optimising on personnel costs, and hiring less,” says serial entrepreneur K Ganesh, who has angel-funded many start-ups. “However the guidelines need to be tweaked to make these more practical.” Sebi basically creates three categories of angel investors – individual, corporate and angel funds. An individual angel investor must have a net worth of Rs 2 crore, along with 10 years of senior management or professional experience. The minimum net worth for corporates and angel funds has been pegged at Rs 10 crore. The minimum investment of an individual to an angel fund has to be Rs 25 lakh. Angel funds are permitted to invest only in unlisted companies which are not more than three years old, with a turnover not exceeding Rs 25 crore. The fund cannot invest in ventures promoted by friends and family members of promoters of the fund. The minimum investment by an angel in a venture has to be Rs 50 lakh, with a minimum holding period of three years.

From an income tax standpoint, by treating angel funds as a Category One Venture Capital fund, experts say they should enjoy a tax pass-through status under current law. These fund pools are also likely to avoid what is popularly dubbed a ‘Start-up Tax’, though clear guidelines on these are still awaited.  The most common criticism among the investor community is on the minimum investment clause of Rs 50 lakh and the three-year lock-in period before exit by an angel investor in a venture. “These should be decided through market forces, not Sebi guidelines” says Ravi Kiran, co-founder, VentureNursury, an angel-funded start-up accelerator.

THE RULE BOOK

Giving wings to angels

• Sebi recognises three kinds of angel investors – individual, corporate & angel funds
• Minimum net worth for individual investors: Rs 2 crore
• Mandatory 10 years of early stage investment experience/experience as serial entrepreneur/senior management professional

Corporate angel investors

• Minimum net worth: Rs 10 crore

Angel funds

• Minimum net worth: Rs 10 crore
• Minimum investment by an investor in the fund: Rs 25 lakh (over a three-year period)

Investment guidelines

• Angel fund can only invest in unlisted company, not more than three years old
• Turnover of investee company should not exceed Rs 25 crore
• Not promoted, sponsored or related to an investment group in excess of Rs 300 crore
• Investee company should be unrelated to investors
• Minimum investment should be Rs 50 lakh-Rs 5 crore
• Minimum holding period of an investment: three years

(Source: Sebi guidelines for angel funds under Alternative Investment Funds Regulations, 2012)

Anand Lunia, another serial entrepreneur and angel investor, says funds often need to put less than Rs 50 lakh to help test the business viability of a venture, stepping up the investment gradually in line with the need of the business model. “A start-up might get over-funded with this clause, which is not good for its health,” says Arvind Mathur, who runs an investment advisory firm. Agrees Mahindra Swarup, president, Indian Private Equity and Venture Capital Association: “The minimum investment clause negates the risk-taking essence in angel investment.”  Also, the experience-related eligibility criteria for individual angel investors have drawn a lot of flak. Not recognising funds raised by a start-up from friends and family sources does not go down well with investors and entrepreneurs. “Family and friends are generally the first port of call for almost all start-ups,” says Ganesh.