Freeing up angels

For all the hype around Indian startups, the domestic venture capital ecosystem is still in its nascent stages. The bulk of the risk capital needs of the startups today is met by foreign investors, with only 10 to 15 per cent sourced from India-domiciled venture capital, private equity and angel funds — clubbed under the umbrella of Alternative Investment Funds (AIFs). While one reason for this could be the lack of risk appetite among wealthy investors, the other certainly is the complex labyrinth of rules that place many restrictions on investors in AIFs and the kind of businesses they can invest in. The Alternative Investment Policy Advisory Committee (AIPAC) chaired by NR Narayana Murthy, which was constituted to untangle these rules, submitted its recommendations last year. SEBI took up a segment pertaining to angel funds at its recent board meeting.

Drawing from the report, SEBI has now announced four key relaxations in its rules governing angel funds. One, the lock-in period of three years for investments by these funds has been shortened to one year. With early-stage ventures requiring frequent capital infusion, the longer lock-in period deterred angel funds from selling out their stakes to larger venture capital funds. This effectively kept startups from sourcing urgently needed capital, and angel investors from circulating their money. Two, the minimum ticket size for portfolio investments by angel funds has been halved from ₹50 lakh. This enables startups in the more nascent stages to tap angel investors. These funds can diversify more — a big benefit, as early-stage investing can be quite a hit-or-miss business. Three, the rule that angel investors could only invest in firms incorporated in the last three years, has been relaxed to a five-year requirement. Recently incorporated startups thus get longer window to flesh out their business ideas before they seek external investors. Finally, green-flagging up to 25 per cent overseas investment enables Indian angel funds to bump up returns and better diversify risk. While this may reduce the pool of capital available locally, allowing 200 investors in each angel fund instead of just 49 will widen the field.

While these tweaks are certainly welcome, some restrictive conditions remain. For instance, angel funds are expected to go by the official definition of ‘startups’ used by the department of industrial policy and promotion. It covers only private limited companies with an annual turnover of ₹25 crore or less, engaged in “innovation” or products and services “driven by technology or intellectual property”. Individual investors still need to meet a string of conditions — a minimum networth of ₹2 crore, prior experience in early-stage investments or serial entrepreneurship, or a ten-year stint in industry. Overall, all these requirements seem too onerous for a class of investments that is favoured only by affluent investors with high risk-taking ability. Giving angel funds a freer hand in their portfolio choices is essential to allow this nascent vehicle to take wing.

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