The Securities and Exchange Board of India (SEBI) recently announced a major overhaul to the regulatory framework for Angel Funds under the Alternative Investment Funds (AIF) Regulations, 2012. This new framework, introduced in 2025, aims to enhance transparency, improve operational clarity, and encourage investor participation. In this article, we’ll explore the key changes, new compliance measures, and the impact on Angel Funds and investors.
Key Changes in the Revised Framework
1. Fund Raising and Investor Requirements
Accredited Investors Only
Under the new regulations, Angel Funds (registered after September 10, 2025) can only onboard Accredited Investors. This is a significant shift from previous guidelines, where Angel Funds could accept investments from a broader range of investors.
Transition Period for Existing Funds
Existing Angel Funds (registered before September 10, 2025) have until September 8, 2026, to comply with the new requirement. During this transition period, they can still accept investments from non-Accredited Investors but must limit the number of such investors to 200. After September 8, 2026, non-Accredited Investors will no longer be allowed to invest in Angel Funds.
Minimum Investor Requirement
To declare the first close, Angel Funds must onboard at least five Accredited Investors. This ensures that the fund has a solid foundation of investors before progressing.
First Close Timeline
The first close for Angel Funds must be declared within 12 months from the date SEBI communicates taking the Private Placement Memorandum (PPM) on record.
2. Investment Structure and Process
Direct Investments
Angel Funds will now make investments directly in investee companies. The requirement to launch separate schemes for each investment has been discontinued, streamlining the process.
No Term Sheet Filing
The earlier mandate to file term sheets with SEBI has been removed. However, Angel Funds must still maintain records of term sheets for each investment, ensuring transparency.
Follow-on Investments
Angel Funds are allowed to make follow-on investments in companies that are no longer considered startups, provided certain conditions are met:
- Post-issue shareholding percentage does not exceed the pre-issue percentage.
- Total investment in any investee company cannot exceed ₹25 Crore.
- Contributions for follow-on investments must come from existing investors, pro-rata to their initial investment.
Lock-in Period
The lock-in period for investments is set to one year. If the exit is through a sale to a third party, the lock-in period is reduced to six months.
3. Overseas Investments
Angel Funds are permitted to invest up to 25% of their total investments in foreign companies, subject to obtaining a SEBI No Objection Certificate (NOC). This provision is designed to give Angel Funds greater flexibility in their investment choices.
4. Investment Allocation and Returns
Defined Methodology for Allocation
Angel Fund managers are now required to disclose a clear methodology for allocating investments among investors in the Private Placement Memorandum (PPM). This ensures that the allocation process is transparent and fair.
Pro-rata Rights
Investors will have pro-rata rights in investments and distributions, based on their contributions. Exceptions apply for carried interest arrangements.
5. Regulatory Classification and Compliance
Reclassification to Category I AIF
Under the revised framework, Angel Funds will now be classified as a separate sub-category under Category I AIF, rather than as a sub-category under Venture Capital Funds.
Annual PPM Audit
Angel Funds with total investments exceeding ₹100 Crore will be required to conduct an annual audit of their compliance with the PPM terms, starting from the 2025-26 financial year.
Performance Benchmarking
Angel Funds are mandated to report investment-wise valuations and cash flow data to benchmarking agencies. These reports must be included in marketing materials and the PPM.
Calculation Basis for Limits
All limits and conditions applicable to Angel Funds will now be calculated based on total investments made (at cost), rather than corpus/investable funds. This ensures a more accurate and consistent approach to regulatory compliance.
Comparative Table: Angel Funds Revised Regulatory Framework
| ASPECT | ERSTWHILE REGULATIONS | REVISED FRAMEWORK (2025) |
|---|---|---|
| Investor Eligibility and Transition Period | Angel investors defined as: (a) Individual with net tangible assets ≥ ₹2 crore (excluding principal residence) with early-stage investment experience, serial entrepreneur experience, or senior management professional with ≥10 years’ experience; (b) Body corporate with net worth ≥ ₹10 crore; (c) Registered AIF or VCF. | Angel Funds shall raise funds only from Accredited Investors by way of issuing units. |
| Minimum Commitment/Contributions from Investor | Not less than ₹25 lakh from an angel investor. | No minimum value of investment. |
| Scheme Launch / Term Sheet | Angel Fund may launch schemes subject to filing term sheet with SEBI containing material information in specified format. | Angel Funds shall not launch any schemes. Maintain records of term sheets for each investment. |
| First Close Requirements | Not specified. | Angel Funds must onboard at least five Accredited Investors before declaring first close. |
| Investment Target | Angel funds shall invest in startups that are not promoted or sponsored by an industrial group whose turnover exceeds ₹300 crore. | Angel Funds must invest only in startups not related to any corporate group whose turnover exceeds ₹300 crore. |
| Lock-in Period per Portfolio Investment | 1-year lock-in period. | 1-year lock-in period, or 6 months if exit is by sale to a third party. |
| Follow-on Investments | Not specified. | Angel Funds may make follow-on investments subject to: post-issue shareholding not exceeding pre-issue, total investment not exceeding ₹25 crore, and contributions only from existing investors. |
| Manager and Sponsor Obligations | Manager must continue interest of not less than 2.5% of corpus or ₹50 lakh. | Manager must invest at least 0.5% of the investment amount or ₹50,000 in each investment. |
| Annual PPM Audit | Not applicable. | Annual audit of compliance with PPM terms for Angel Funds exceeding ₹100 crore in investments. |
| Performance Benchmarking | Not applicable. | Angel Funds must report investment-wise valuations to benchmarking agencies. |
| Overseas Investment | Permitted with SEBI NOC upto 25% of corpus. | Permitted with SEBI NOC upto 25% of total investment (at cost). |
Conclusion
The new 2025 Angel Fund regulations introduce more stringent investor eligibility criteria, enhance transparency, and refine the investment process. These changes are designed to strengthen the Angel Fund ecosystem, ensuring better governance and risk management while opening up more investment opportunities in India’s startup ecosystem. Angel Funds will now operate with greater clarity and regulatory compliance, paving the way for sustained growth in the sector.
By streamlining compliance requirements, providing clearer rules for overseas investments, and improving investor protections, the revised framework is expected to attract more Accredited Investors, leading to greater capital inflows into India’s startup ecosystem.
For Angel Funds, it is crucial to adhere to these new regulations to maintain their registration and avoid penalties. Investors can now participate in Angel Funds with a clearer understanding of the investment process, including detailed disclosure of terms and transparent allocation methodologies.
