Angel funds approach Sebi, raise the issue of high depository fees

Several angel funds have approached the Securities and Exchange Board of India (Sebi) and raised the issue of high depository fees, which is impacting their profitability, people familiar with the matter said.

Angel funds, which fall under the Category-I of Alternative Investment Funds (AIFs), invest in startups and raise money from angel investors.

AIFs are pooled investment vehicles that cater to high-networth investors and institutions.

According to the recent changes by the market regulator, schemes with a corpus of Rs 500 crore or above had to credit the units to the demat accounts of investors by January 31. Schemes with a corpus of less than Rs 500 crore are to comply by May 10.

The depository costs include a one-time entry fee, account maintenance charges, and corporate action charges.  According to sources, the funds have raised issues with the high corporate action charges.

“AIF as an issuer of units has to pay corporate action charges for every instruction they are giving concerning demat. This will be a challenge for angel funds which have more than 500 investors, as for them these costs would run into lakhs,” said a trustee managing an angel fund.

“The ISIN, which is created per scheme per share class, is one of the corporate actions. Accordingly, it becomes a costly affair for the angel fund which runs multiple schemes with multiple share classes,” they added. 

The angel funds have to pay these charges on every capital call, allotment, and distribution, among other such actions. With a higher number of investors, these charges pile up to a substantial sum.  

“Angel funds with over thousands of investors involved over several investments have specifically raised the issue. The charge sheet by depositories has Rs 20 crore as the minimum fund size. Thus, everyone is at the highest slab applicable to begin with,” said another person with direct knowledge of the matter.

“Angel funds are structured in a way that every deal is its scheme and investors can have differential rights. There is a lot more variability compared to any other AIF which has a much lesser number of investors. Angel funds are a lot more complicated,” they added.

Sources said that though the issue has been discussed with the market regulator, these charges are not related to Sebi, as there is little relief the funds might get. 

Emailed queries to Sebi remained unanswered till the time of going to the press.