In the dynamic world of alternative investments, the Securities and Exchange Board of India (SEBI) plays a pivotal role in ensuring regulatory compliance. In a recent communication dated January 24, 2024, Mrs. Gandhimadhy Varadarajan, Deputy General Manager of the Alternative Investment Fund and Foreign Portfolio Investor Department Division of Policy and Development, responded to a letter from Lets Venture Advisors LLP. The letter, bearing reference AFD/PoD/OW/2024/3685 and dated September 07, 2023, sought informal guidance under the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003. The queries primarily revolved around the provisions for Angel funds under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.
Key Points from Lets Venture Advisors LLP’s Letter
Registration and Tenure of LV Angel Fund
- LV Angel Fund is registered with SEBI as a Category I – Venture Capital Fund – Angel Fund since September 06, 2018.
- The Fund, completing five years by September 06, 2023, faces a situation where angel investors under-utilize the threshold amount of INR 25 Lakh within the stipulated five-year period.
- Instances occur where the Fund invests in a start-up, and due to various reasons, the start-up undergoes restructuring, resulting in a new legal entity. The Fund receives an offer to mirror its shareholding in the new entity by investing a nominal amount, often less than INR 25 Lakh.
Compliance Challenges
- The Fund files a term sheet as required by SEBI, but changes in investment particulars may necessitate revisions post the launch of the scheme.
- The queries posed by Lets Venture Advisors LLP seek clarification on various regulatory aspects, including the extension of the five-year period for accepting funds, compliance with minimum investment amounts during entity mirroring, obligations related to filing revised term sheets, and the possibility of creating sub-schemes.
SEBI’s Response
Response to Query I: Extension of 5-Year Period
SEBI, in its response, categorically states that Regulation 19D(3) of AIF Regulations, governing the maximum period of five years for angel funds to accept investments, does not allow for any extension beyond this timeframe.
Response to Query II: Minimum Investment Amount in Entity Mirroring
SEBI clarifies that while Regulation 19F(2) stipulates a minimum investment of INR 25 Lakh in a venture capital undertaking/start-up, this requirement may not be applicable if the Fund is mirroring its shareholding in a new entity and no fresh investment is being made.
Response to Query III: Obligations Regarding Revised Term Sheets
SEBI emphasizes that any changes in the term sheet, especially those related to investment terms, require prompt submission. The Fund is obligated to submit the revised term sheet, detailing material changes, before making any investment based on the altered terms.
Response to Query IV: Creation of Sub-Schemes
SEBI refrains from providing a response to Query IV due to the absence of citation of applicable legal provisions and the lack of reference to ‘sub-schemes’ in the AIF Regulations.
Conclusion
In navigating the intricate landscape of alternative investments, clear communication with regulatory bodies is essential. SEBI’s response provides insights into the interpretation of specific regulations concerning angel funds. Fund managers and investment advisors should take note of these clarifications to ensure compliance with SEBI regulations. This informal guidance serves as a valuable reference for entities operating in the alternative investment space and reinforces the importance of staying abreast of regulatory nuances.
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DEPUTY GENERAL MANAGER
ALTERNATIVE INVESTMENT FUND AND FOREIGN PORTFOLIO INVESTOR DEPARTMENT DIVISION OF POLICY AND DEVELOPMENT
AFD/PoD/OW/2024/3685
January 24, 2024
Mrs. Gandhimadhy Varadarajan,
Lets Venture Advisors LLP,
Investment Manager of LV Angel Fund,
No. – 51, Indiqube Penta,
5th Floor, Wing – B, Richmond Road,
Shanthala Nagar,
Bangalore – 560025.
Dear Sir,
Sub: Request for Informal Guidance by way of interpretive letter under the provisions of the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 in connection with provisions for Angel funds under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012
Ref: Your letter dated September 07, 2023
1. In your letter / communication under reference, you have, inter-alia, stated the following –
1.1. LV Angel Fund (“Fund”) is registered with SEBI as a Category I – Venture Capital Fund – Angel Fund with Registration No. IN/AIF1/18-19/0585 dated September 06, 2018.
1.2. The Fund being registered on September 06, 2018 will be completing 5 years’ tenure by September 06, 2023. The Fund has certain angel investors who have under-utilized the threshold amount of INR 25 Lakh within the period of five years as mentioned in Regulation 19D (3) of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’).
1.3. There have been scenarios where the Fund has invested into a start-up complying with the minimum amount requirement under Regulation 19F(2) of AIF Regulations and the start-up owing to several reasons (such as flipping to foreign jurisdictions, change in business line etc.,) restructure to form a new legal entity. As the original investors of the start-up, the Fund gets an offer to mirror the shareholding in the newly incorporated entity, by investing a nominal amount which will be less than INR 25 Lakh. Consequent to the mirroring of shareholding, the Fund gets the original shareholding percentage in the new legal entity and the Fund’s shareholding in the old entity will be zeroed down. To comply with the regulation 19F(2) of AIF Regulations, the Fund often rejects the offer to participate in the new company or subscribe INR 25 Lakh to get shares which are valued for just a few thousands rupees.
1.4. The Fund, being an Angel Fund, files the term sheet specified in Annexure 15 of Master Circular dated July 31, 2023 for AIFs, containing all the material information within ten days of launching the scheme. There have been scenarios where changes in a few particulars like amount of investment, addition or deletion of investors, total capital commitment by investors or any other particular mentioned under Annexure 15 of the Master Circular, result in change or modifications in the commercial arrangements after the launch of scheme or filing of term sheet.
2. In this context, you have sought an interpretive letter under the Securities and Exchange Board of India (Informal Guidance) Scheme 2003 (‘Informal Guidance Scheme’) from SEBI on the following queries –
Query I: Can the time limit provided under the Regulation 19D(3) i.e., 5 years, be extended any further?
Query II: Whether the minimum investment amount in a start-up of INR 25 Lakh as per Regulation 19F(2) of AIF Regulations is to be complied with in cases when the fund mirrors its shareholding in the new entity?
Query III: When does the obligation to file the revised term-sheet arise? Whether it arises with every minor change incorporated in the details of the term sheet or with relevant material change? Further, is there any specific time period within which the revised term sheet can be filed?
Query IV: Can we create sub schemes under each existing Schemes which shall comply with all the AIF Regulations?
Our Comments:
3. The submissions made in your letter have been considered and without necessarily agreeing with your analysis, our view on the queries raised in your letter are as under:
Response to Query I:
3.1. Regulation 19D(3) of AIF Regulations states as under:
“Angel funds shall accept, up to a maximum period of five years, an investment of not less than twenty-five lakh rupees from an angel investor.”
3.2. AIF Regulations do not specify any provision for extension of the 5-year period for accepting funds from angel investors specified under Regulation 19D(3) of AIF Regulations. Therefore, the said 5-year period cannot be extended any further.
Response to Query II:
3.3. Regulation 19F(2) of AIF Regulations states as under:
“Investment by an angel fund in any venture capital undertaking shall not be less than twenty-five lakh rupees and shall not exceed ten crores rupees.”
3.4. In terms of Regulation 19F(2) of AIF Regulations, the minimum amount to be invested in a venture capital undertaking/start-up is INR 25 Lakh. Therefore, whenever an Angel fund makes a new or fresh investment in a separate entity (venture capital undertaking/startup), it shall not be less than INR 25 Lakhs. However pursuant to an initial investment made in a venture capital undertaking/start-up, if the Fund is receiving any shares in another venture capital undertaking/start-up due to reasons such as restructuring and no new transaction of fresh investment is being made, then the requirement of minimum INR 25 Lakhs investment may not be applicable.
Response to Query III:
3.5. As per para 15.3 of the Master Circular dated July 31, 2023 for Alternative Investment Funds:
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- Angel funds may launch schemes subject to filing of a Term Sheet in the format as specified in Annexure 15.
- Such Term Sheet shall contain material information regarding the scheme.
- Such Term Sheet shall be filed with the Board within ten days of launching the scheme.
3.6. As per part C of Annexure 15 of the Master Circular dated July 31, 2023, Angel Funds are required to submit details of only material changes in the term sheet, in the following format:
| Provisions in the PPM / last Term sheet | Material change | Rationale for change | Date of intimation to SEBI / date of approval from SEBI |
3.7. Considering that changes in term sheet are pursuant to change in terms of investment, Angel Funds are required to submit the (revised) term sheet and material changes in the same, if any, as soon as the said change has happened and in any case, before making any investment pursuant to the revised terms of investment.
Response to Query IV:
3.8. As per paragraph 8(iv) of the Informal Guidance Scheme, SEBI may not respond to requests where the applicable legal provisions are not cited by the applicant. Since the applicable legal provisions are not cited and the AIF Regulations do not have any reference to the concept of ‘sub-schemes’, no response has been provided for Query IV.
4. The above position is specific and based on the information / representation in your letter under reference. Different facts or conditions might entail a different interpretation. This letter does not express decision of the Board on the queries referred in your letter.
5. You may note that the above views are expressed only with respect to the clarification sought in your letter under reference with respect to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 and do not affect the requirements or applicability of any provisions of law, including the Securities and Exchange Board of India Act, 1992, and the rules, regulations, guidelines or circulars framed thereunder that are administered by the Securities and Exchange Board of India; or of the laws administered by any other authority.
Yours faithfully,
Sanjay Singh Bhati
