India angel funds to see more tax benefits, easier exit opportunities

The securities exchange has outlined various measures such as reducing the amount of administration and red tape, which will help grow the startup ecosystem.

SEBI (Securities and Exchange Board of India) has made some interesting decisions, much needed and eagerly anticipated for the Indian startup ecosystem.

What does it offer for startups in India? Well, to say the least, it's certainly positive by the way of encouraging more startups and investors to keep doing their job better. 

Following its meeting in Mumbai on Tuesday, it announced the following changes:

No need IPO to list on Institutional Trading Platform

According to SEBI, one of the major problems faced by Indian startups today is the lack of exit opportunities for existing investors and very little access to new investors. To help provide better visibilty, a wider investor base and greater fund raising capabilities to such companies, SEBI approved the proposal to amend the regulations to permit the listing of startups and SMEs in Institutional Trading platform (ITP) without having to make an IPO.

In such a case these companies shall be accessible for investment to informed investors only. And hence the minimum amount for trading or investment on ITP will be 1 million rupees (US$16,500).

Without getting too technical, essentially they won't have to offer up to 25 percent of its shareholding to the public in order to get listed. Hence, the listing can be done without an IPO and expenses associated with it. Although at the same time such companies who are listed on the ITP won't be permitted to raise capital though they can continue to make private placements.

What of course this helps with is to give a greater bandwidth to the existing investor to find alternate buyers than just relying on their own network in the investment community. Standardized norms of entry for companies, eligibility criteria, continuous disclosure requirements, simplified exit rules and corporate governance norms will be prescribed.

More requirements, more flexibility

One of the things that was announced in the Budget for FY 2013-14 by Union Finance minister on the angel investor pools was approved amendments to SEBI (Alternative Investment Funds) Regulations, 2012.

This helped providing a framework for registration and regulation of angel pools under a sub category "Angel Funds" under Category I - Venture Capital Funds. This would actually mean angel funds would get the treatment they deserve in terms of investment companies to actually get treated as angel funds. As of now, it is only the Category I Fund which is eligible for the pass-through status. By bringing in the angel fund as a sub-category under this, the tax benefits will now be available for them as well.

Individual angel investors shall be required to have early stage investment experience/ experience as a serial entrepreneur/ be a senior management professional with 10 years experience. This would go in the interests of startups and the interest of the investing angel fund for sure. Not that this wasn't so evident up until now and how valuable this is from the implementation point

Another thing announced in the amendments is that they shall also be required to have net tangible assets of at least 20 million rupees (around US$331,000) angel funds shall have a corpus of at least 100 million rupees (US$1.6 million) as against 200 million rupees (around US$3.2 million) for other AIFs) and minimum investment by an investor shall be 2.5 million rupees (around US$42,000) (may be accepted over a period of maximum 3 years) as against 10 million rupees (around US$165,000) for other AIFs.

Further, the continuing interest by sponsor/manager in the angel fund shall be not less than 2.5 percent of the corpus or 5 million rupees (around US$83,000) whichever is lesser.

For ensuring investments are genuine angel investments, angel funds shall invest only in investee companies which:

A. Are incorporated in India and are not more than 3 years old and,

B. Have a turnover not exceeding 250 million rupees (around US$4.15 million),

C. Are unlisted, and finally are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of 3 billion rupees (around US$50 million) without any family connection with the investors proposing to invest in the company.

Further to this, investment in an investee company by an angel fund shall be not less than 50 million rupees (Around US$83,000) and not more than 500 million rupees (around US$ 8.3 million) and shall be required to be held for a period of at least 3 years.  This is something that could have actually been more for sure, especially to help the angel investors raise more funds and follow up to help startups succeed.

One of the good things this amendment has done especially ensuring that there are clearly categorized and created different parameters for angel funds such as the reduction of the corpus to 100 million rupees (around US$1.6 million) as compared to 200 million rupees (around US$ 3.2 million) for other categories. Also the acceptance of the ticket size of 2.5 million rupees (US$42,000) is over a 3-year period instead of being upfront. This way a lot of angel funds would be encouraged to set up in India as they would see the process easier for them to actually streamline themselves.

What do you think about these announcements? Are you happy with them?