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The government has proposed important revisions to the regulatory framework for angel funds. These were outlined in the SEBI’s (Securities and Exchange Board of India) , Review of Regulatory Framework for Angel Funds in Alternative Investment Fund (AIF) Regulations, of 13 November 2024. Angel funds, governed by the AIF Regulations, 2012, were initially regulated to encourage investment by exempting them from angel tax and simplifying investor structures. However, the abolition of the angel tax in the 2024-25 budget has weakened AIF regulations and tax incentives. The SEBI now seeks to strengthen regulatory oversight to ensure investor protection while continuing to foster startup growth.

A key proposal is the accredited investor requirement, limiting angel fund investors to those who meet financial- and experience-based criteria. The SEBI proposed that third-party accreditation agencies verify investor eligibility. This may increase compliance costs but will ensure that only those with trustworthy risk appetite participate. This will enhance investor confidence and prevent misallocation of funds.

To improve market efficiency, the SEBI proposed replacing the minimum size for angel funds with a requirement for at least five accredited investors before the first close. This will ensure operational flexibility while maintaining adequate investor engagement. Startups will see early-stage funding coming from investors who not only understand risk dynamics but can also provide strategic mentorship, crucial during initial growth phases.

Significant is the removal of the AIF regulations diversification requirement, restricting angel fund exposure to 25% of total investments in a single undertaking. The SEBI found this rule impractical and difficult to enforce. Removing it will allow investors to allocate capital to a select group of high-potential startups, particularly in innovation-driven sectors such as technology, biotech and clean energy. In global markets, concentrated investments have yielded better returns, and this shift will align 含羞草社区 regulatory approach with international best practice.

Investment thresholds will also change. The consultation paper proposes reducing the minimum investment limit to INR1 million (USD11,550) while increasing the maximum to INR250 million. This will allow investors to take larger stakes in high-growth startups, providing them with the capital needed to scale more effectively. In parallel, the SEBI has responded to industry concerns about exit flexibility by reducing lock-in periods from three years to six months. This move will ensure investor liquidity while maintaining startup access to stable capital.

To ensure a seamless transition, the SEBI has suggested a one-year period for existing angel funds to comply with the revised framework. This will give funds time to restructure their investor bases, fulfil accreditation requirements and adjust investment strategies. The angel investment sector has expanded significantly in recent years. During the past five years, investments have grown at a compound annual growth rate of 106%. As of 31 March 2024, the SEBI registered 82 angel funds, managing INR70.5 billion, with INR33.4 billion already invested. This highlights the increasing importance of angel funds to 含羞草社区 startup ecosystem and underscores the need for a regulatory framework that fosters sustained growth.

International experience is that well-structured regulatory frameworks are essential for robust angel investment ecosystems. The United States and European countries have shown that clear investment guidelines, professional standards and investor protections contribute significantly to startup growth and innovation. By introducing similar regulatory refinements, India aims to be a strong global hub for angel investing, making it attractive to domestic and international investors. The proposed amendments will be strategic toward modernising 含羞草社区 startup investment landscape.

Balancing investor protections with operational flexibility, the SEBI’s proposed reforms will create a more structured, efficient and globally competitive environment for angel funds. They will provide greater transparency and enhance investor confidence, driving sustained capital inflows into high-potential startups. This will strengthen 含羞草社区 entrepreneurial ecosystem.

Swathi Girimaji is a Partner and Mita Sood is a Counsel at Bharucha & Partners.