The Budget 2013 proposes to allow angel investor pools to organize themselves into Category I Alternate Investment Funds (AIF). So how will this benefit the new venture ecosystem?
What does this mean? How is it different from current scenario?
Angel investors, who are currently investing into new ventures directly, will now be able to invest as a part of a single entity structured as a Category I Alternate Investment Fund (AIF). A Category I AIF Fund is a common classification for funds that invest in start-up or early stage ventures
How does it benefit angel investors?
Angel investors currently organize themselves into networks, take their individual calls on investment and then invest directly into companies as individual shareholders.
While we still need to see the details of this change, no major benefits or incentive seem to accrue to angel investors with this change.
A minor benefit will be the ability to invest as a single entity in new ventures instead of individual investors, which will facilitate monitoring, company interface and exits
A critical change for the VC funds investing in start-ups
The current AIF regulations require each investor to commit to a minimum investment size of INR 1 crore. This is a severe limitation for funds operating in the seed, angel and Series A stage investments for three reasons:
Most investors look at much smaller amounts at the initial venture stage, between INR 25-50 lakhs every year
This minimum size restriction inhibits the basic spirit of angel investing where the investor looks to invest smaller amounts in risky businesses, deploying not just money but also expertise and networks to help build new ventures into large companies
The seed stage ecosystem itself is evolving and might not be able to absorb large amounts of capital at once
The SEBI guidelines will however have to tackle some key points mentioned in the AIF Regulations to make this effective:
Minimum investment of INR 1 Crore: If current minimum amount of INR 1crore is maintained, this move will fail to take off. The move will benefit only if the combined pool is treated as a single investor and there a minimum cap of INR 1 crore for each investment can be applied
Minimum corpus size issues: The rules have to address the two points of minimum corpus size of INR 20 crores and the management commitment of 2.5% of the corpus. Both these are not applicable in an angel network investment as there is no defined corpus and no management since members make their own investment choices
Separate Entity for each investment: The structure will work only if investors are allowed to form a separate legal entity for each investment they make. If the guidelines require the network to form a common corporate structure for all their investments, this will fail to take off as only some, and not all, of the angels invest in each specific venture. This will also need provisions for easy dissolution of the entity once the angel group exits the investment
Taxation Pass through: The Budget also mentions that new tax pass-through change for the Category I AIF fund will also apply to angel investors. This will be critical as currently angel investors do not have to tackle this issue as they invest directly into the companies
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