India’s startup ecosystem is witnessing explosive momentum, attracting substantial investments and generating outsized returns, particularly for early-stage backers. With many domestic ventures now listed and delivering exceptional exits, some over 20X, investor interest in structured, legally compliant funding models is at an all-time high. This article explores one such framework: Angel Funds, as governed under Indian law.
TYPES OF INVESTING FUNDS AND THE GOVERNING LAW
The Securities and Exchange Board of India (SEBI) is the principal authority regulating both public and private investments in the country. One of its key regulatory frameworks is the SEBI (Alternative Investment Funds) Regulations, 2012, which defines and governs various categories of investment vehicles.
Alternative Investment Fund (“AIF”) is an umbrella term encompassing all privately pooled investment vehicles that collect funds from investors for investing according to a defined investment policy. They exclude mutual funds, collective investment schemes, and family trusts.
These AIFs are further divided into different types of funds under the Regulations which include –
a) Debt Funds: Focused on debt securities of listed or unlisted companies or in securitized debt instruments;
b) Hedge Fund: Employs diverse or complex trading strategies and invests and trades in securities having diverse risks or complex products including listed and unlisted derivatives;
c) Infrastructure Fund: Focused on unlisted securities or partnership interest or listed debt or securitized debt instruments of companies or SPVs formed for the purpose of operating, developing or holding infrastructure projects;
d) Private Equity Fund: Primarily invests in equity or equity linked instruments or partnership interests of companies according to the stated objective of the fund;
e) SME Fund: Focused on unlisted securities of companies which are SMEs (Small and Medium Enterprise under the MSMED Act) or securities of those SMEs which are listed or proposed to be listed on a SME exchange or SME segment of an exchange;
f) Social Impact Fund: Invests in securities of social ventures or social enterprises and which satisfies the social performance norms laid down by the fund;
g) Venture Capital Fund: This most widely used term represents funds that invest in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and includes an angel fund.
This article sheds light on angel funds which have been provided for in Chapter III-A of the Regulations.
MEANING OF ANGEL FUND
Angel Fund means a Category I-Alternative Investment Fund (Cat. I AIFs invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which are considered as socially or economically desirable) that raises funds from angel investors.
MEANING OF ANGEL INVESTOR
Angel Investor means any person who proposes to invest in an angel fund and satisfies one of the following conditions:
1. Individual Investor having net tangible assets of at least INR 2 crore, excluding their principal residence, and possesses either early-stage investment experience (prior experience in investing in start-up or emerging or early-stage ventures) or have been a serial entrepreneur (having promoted or co-promoted multiple start-ups), or holds a senior management position with at least ten years of experience.
2. Body Corporate with a net worth of at least INR 10 crore.
3. AIFs registered under the Regulations or funds registered under erstwhile Venture Capital Fund Regulations 1996.
REGISTRATION OF ANGEL FUNDS
Angel Funds are registered under Chapter II of the AIF Regulations. Salient features of the same include:
1. Application to be made in Form A appended to the Regulations at SEBI’s Head Office along with an application fees of INR 1,00,000/- payable electronically.
2. Eligibility:
a) The founding document (MoA, Trust Deed, or LLP Agreement) must permit AIF activities and prohibit public solicitation of investment and must be registered under applicable laws.
b) The applicant, sponsor, and manager must be ‘fit and proper persons’ as per SEBI (Intermediaries) Regulations, 2008.
c) The key investment team must include:
i. At least one member with SEBI-specified certification.
ii. At least one professionally qualified person in finance, business, commerce, or related fields.
d) Adequate infrastructure and manpower to manage operations.
e) Clearly defined investment objective, target investors, corpus, strategy, and tenure at the time of registration.
f) Disclosure of any prior registration refusal by SEBI for the applicant or related entities.
3. Registration Fees of INR 2,00,000/- to be paid on successful registration to obtain the certificate of registration.
INVESTMENT IN ANGEL FUNDS
Angel funds can raise funds only from angel investors through the issuance of units and must adhere to the following requirements:
1. minimum corpus of INR 5 crore;
2. investment from each investor of at least INR 25 lakh;
3. accepting investments for a maximum period of five years;
4. funds must be raised through private placement using a placement memorandum (as provided in the Regulations); and
5. if the angel fund is incorporated as a company, the provisions of the Companies Act, 2013 shall also apply;
6. each scheme is limited to a maximum of 200 angel investors.
INVESTMENT BY ANGEL FUNDS
1. Angel Funds are allowed to invest in startups which that are not affiliated with large industrial groups (large industrial groups mean a group with turnover over INR 300 crore) or family members of the investing angel investors;
2. Each investment must be between INR 25 lakh and INR 10 crore;
3. Must be locked in for at least one year;
4. Angel funds cannot invest in their associates;
5. Cannot allocate more than 25% of their total investments across all schemes to a single venture.
6. May invest in companies incorporated outside India, subject to guidelines from SEBI and the RBI.
SPONSOR OBLIGATIONS
1. The sponsor of an angel fund must ensure that all angel investors meet the eligibility criteria as discussed above;
2. Either the sponsor or manager must maintain a continuing interest in the fund of at least 2.5% of the corpus or INR 50 lakh, whichever is lower, and this cannot be through a waiver of management fees.
3. The manager must obtain prior written approval from each angel investor before making any investment in a venture capital undertaking.
4. The manager or sponsor shall disclose their investment in the AIF to the angel investors.
CONCLUSION
Angel Funds have emerged as a structured and regulated route for high-net-worth individuals and institutions to participate in the growth of India’s vibrant startup ecosystem. By ensuring compliance with SEBI’s regulatory framework, angel funds provide transparency, investor protection, and accountability while enabling early-stage companies to access much-needed capital. For eligible investors with experience and appetite for risk, angel funds offer an opportunity to support innovation and potentially earn high returns