INTRODUCTION
Angel funds play a pivotal role in early-stage startup financing in India, operating under a unique regulatory substructure within the broader framework of AIFs. In March 2025, SEBI issued an informal guidance to FirstPort Capital Angel Fund, clarifying several regulatory ambiguities. Concurrently, SEBI had released a Consultation Paper in November 2024 to propose reforms in the regulatory framework applicable to such funds. The juxtaposition of these two developments is critical for stakeholders aiming to align with current compliance requirements while anticipating future regulatory shifts.
KEY CLARIFICATIONS IN SEBI’S INFORMAL GUIDANCE
- Restriction on Pre-emptive Rights in Non-Startups
SEBI clarified that angel funds cannot purchase shares in portfolio companies through pre-emptive rights, rights issues, or renounced rights issues once the company ceases to qualify as a “startup” under the Department for Promotion of Industry and Internal Trade (DPIIT) criteria. The 2024 Consultation Paper acknowledged that this restriction hampers the ability of angel funds to safeguard their initial investments. It proposed conditional flexibility for follow-on investments, especially limiting such rights to those investors who had participated in the original investment. Until these proposals materialize into binding law, fund managers are advised to include protective clauses in investment agreements or reassess investments in companies nearing the maturity threshold.
- Inclusion of Fees and Expenses in Committed Capital
Angel funds typically operate through multiple investment-specific schemes, incurring both fund-level and scheme-level expenses. SEBI’s guidance allows fund managers the discretion to determine whether fees such as joining or annual charges can be treated as part of the investors’ committed capital. This flexibility is essential for operational structuring and provides clarity for fund documentation and investor communication.
- Ineligibility of Trusts as Angel Investors
SEBI reinforced that a trust cannot qualify as an angel investor unless it is registered as an AIF or a Venture Capital Fund (VCF). This interpretation deviates from earlier reliance on the Ministry of Corporate Affairs’ 2014 circular, which had enabled corporate trustees to act as LLP partners on behalf of trusts. SEBI’s stricter view emphasizes the need for regulatory registration to confer investor status on trusts, regardless of the corporate structure of their trustees.
- SEBI’s Non-Response Due to Policy Considerations
In a particular instance, SEBI refrained from offering a viewpoint on the allocation of proceeds in cases of partial exits where some investors opt out of proportionate distribution. The probable reason is that related policy proposals are still under deliberation, as reflected in the 2024 Consultation Paper. This instance highlights how pending policy changes can limit the scope of informal guidance.
DISTRIBUTION NORMS FOR ANGEL FUNDS
While Regulation 20(21) of the AIF Regulations requires distributions to be made pro-rata to the capital commitment, angel funds have been specifically exempted. This is due to the inherently varied nature of contributions across investors in different schemes. The Consultation Paper proposes that distribution rights should instead be tied to individual contributions in a particular investment. SEBI’s abstention from clarifying distribution mechanics underlines the transitional nature of the current regulatory environment.
CONCLUSION
The informal guidance provided by SEBI serves as an interim interpretative framework for angel fund managers navigating compliance challenges. However, the evolving regulatory landscape, as signaled by the November 2024 Consultation Paper, may lead to substantive legal changes. Until such proposals are enacted, fund managers must align with the positions outlined in the guidance while proactively restructuring fund documentation and investment strategies to remain future-ready.
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