Sebi's relaxed norms for angel funds may not spur investments

The new norms for angel funds may not spur new funds as investors find it more efficient to invest through private syndicates like angel networks, say angel investors and venture capitalists.

The Securities and Exchange Board of India (Sebi) had relaxed norms for angel funds, lowering the minimum corpus needed for an angel fund from Rs 100 million to Rs 50 million, raising the threshold of investments in a start-up from Rs 50 million to Rs 100 million, among other changes.

‘'This is a good move to liberalise the scheme. Until now, very few funds were designated as angel funds because of the restrictions (see Regime Still). Of course, there are a few more roadblocks left for it to be the investment vehicle of choice,” says Sushanto Mitra, founder and chief executive officer, Lead Angels, an angel investment forum. 

While the changes are welcome, they are not in sync with the realities on the ground. Take the lower threshold of Rs 50 million for setting a new angel fund. ‘‘It is more of a notional increase and may not spur angel funds,” said Alok Mittal, an angel investor. A Rs 50 million fund, which say invests an average Rs 2.5 million in 20 companies, is a small fund and may not be viable. 

‘‘With an annual expense budget of say Rs 100,000-150,000, you can hardly get investment managers. If you want to do small ticket size, it is better to do syndication and become a part of the cap table rather than organise as a fund,” added Mittal.  

‘‘Angel funds are not what they seem to be. Angel investing is all about deal-by-deal participation and not about  putting money into a blind pool and having a fund manager decide,” says Rehan Yar Khan, managing partner, Orios Venture Partners. 

However, angel funds can work for passive investors. 

Angel investing through syndicates like Indan Angel Network or Mumbai Angels has been robust and grown sharply in India without a fund structure. ‘‘Àngel investors find it more efficient to go through the syndicate and don't see the need to organise themselves as a fund,” said an investor.

This explains why India has hardly any angel funds. Also, what an angel funds should be doing is being done by micro VC funds such as Blume Ventures and Kae Capital, who invest Rs 10-15 million initially.  

Sebi also doubled the maximum investment amount in a venture by an angel fund to Rs 100 million, from Rs 50 million earlier, which will lend more flexibility to these funds. The minimum investment an angel fund can make is Rs 2.5 million while the same for a VC firm is Rs 10 million. 

Micro VC firms may invest between Rs 20 million and Rs 100 million in a deal — the reason they are not registered as angel funds is that they can go after larger deals as well as do smaller deals. It is more easy for them to organise as VC funds than angel funds, says an investor.