Sebi likely to ease rules for angel funds

May tighten compensation pacts between PE players and management of listed firms, after board meeting today

Capital market regulator Securities and Exchange Board of India (Sebi) is likely to relax guidelines governing angel funds in the country. The regulator could also introduce more checks and balances for compensation agreements between private equity (PE) firms and senior management or promoters of a listed company. The announcements are likely after Sebi board meeting on Wednesday in Mumbai.

According to sources, Sebi is likely to halve minimum investment by an angel fund in startup from Rs 50 lakh to Rs 25 lakh. Sebi is also likely to allow angel funds to invest in five-year-old startups. Current regulations allow an angel fund to invest in a company incorporated during the preceding three years from the date of investment. Also, to diversify risks, angel funds will be allowed to invest in foreign startups. Such investments can only be up to 25% of their corpus. The lock-in period for investments made by angel funds will also be relaxed from three years to only one year.

Experts say relaxations could boost angel funds and startups. 

Angel funds are covered under Sebi's alternative investment funds (AIFs) regulations, introduced by the regulator in 2012. An angel fund is a sub-category of venture capital funds, which come under Category-I AIFs.

The relaxations that may be proposed by Sebi board are aimed at improving ease of doing business and boosting enterprise in the country, said sources.
 

Meanwhile, Sebi board is expected to introduce more checks and balances for PE firms entering compensation agreements with senior management or promoters of a listed company. Through such agreements, a PE investor agrees to share a part of its profits with promoters or key management personnel if a set of objectives are met. Usually, the objectives relate to company performance, financial or stock. 

For instance, a PE investor might promise 10% of its profit to a chief executive if the stock price of the company doubles in two years. 
 

Although such agreements are common globally, such incentives can set off malpractices in order to achieve the targets. Therefore, Sebi is likely to ask companies to disclose all such agreements to shareholders and get their approval.