Amendments to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, Executive summary

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1 23 September 2013 August 2013 EY Regulatory Alert Amendments to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 Executive summary Regulatory Alerts cover significant regulatory news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest regulatory issues. For more information, please contact your Ernst & Young advisor This Regulatory Alert summarizes the Notification dated 16 September 2013 issued by Securities and Exchange Board of India (SEBI) notifying SEBI (Alternative Investment Funds) (Amendments) Regulations, 2013 amending the SEBI (Alternative Investment Funds) Regulations, These amendments shall come into force on the date of publication in the Official Gazette. The Notification has introduced a new category Angel Funds within the definition of Venture Capital Funds under Category I- Alternative Investment Funds, as well as prescribed the registration requirements, investment parameters and other conditions for Angel Funds. Further, the Notification also makes provisions for obtaining in-principle approval by the applicants.

2 Background SEBI vide Notification 1 dated 16 September 2013, amended the SEBI (Alternative Investment Funds) Regulations, 2012 (Regulations) to include Angel Funds in the definition of Venture Capital Fund (VCF) under Category I- Alternative Investment Funds (AIF). The Notification has introduced a new category of Angel Funds within the definition of VCF under Category I- AIF, as well as prescribed the registration requirements, investment parameters and other conditions for Angel Funds. Further, the Notification also makes provisions for obtaining in-principle approval by the applicants. residence) and who: has early stage of experience 2 ; or has experience as a serial entrepreneur 3 ; or is a senior management professional with minimum 10 years of experience A body corporate with minimum net worth of INR 100 million; An AIF registered under these Regulations or a VCF registered under SEBI (Venture Capital Fund) Regulations, Investment Conditions by Angel Funds The key highlights of the Notification are: Introduction of Angel Funds A new category, namely, Angel Funds has been included within the definition of the sub-category VCF under Category I -AIF by the SEBI vide its Notification dated 16 September Meaning of Angel Funds An Angel Fund is defined as a Fund which raises funds from angel investors and invests in accordance with the Regulations. The definition of angel investors and the prescribed investment conditions are outlined below: Angel Funds are permitted to invest only in Venture Capital Undertakings (VCU): incorporated during preceding three years from the date of such investment; with a turnover of less than INR 250 million; not promoted/ sponsored by or related to an industrial group 4 whose group turnover 5 exceeds INR 3,000 million; and Angel Investors Any person who proposes to invest in an Angel Fund and satisfies one of the following conditions: Individual Investor with net tangible assets of atleast INR 20 million (excluding value of his principal 1 Notification No. LAD-NRO/GN/ /24/ prior experience in investing in start-up or emerging or early-stage ventures 3 person who has promoted or co-promoted more than one start-up venture 4 Includes a group of body corporates with the same promoter(s)/promoter group, a parent company and its subsidiaries, a group of body corporates in which the same person/ group of persons exercise control, and a group of body corporates comprised of associates/subsidiaries/holding companies 5 total revenue of the industrial group

3 are not companies with family connection 6 with any of the angel investors investing in the company Investment by an Angel Fund in any VCU shall be a minimum of INR 5 million and shall be capped at INR 50 million. Lock-in period for investments by Angel Funds shall be three years. Angel Funds shall not invest in associates. Investments by Angel Funds in one VCU shall not exceed 25% of total investments under all its schemes for ensuring the genuineness of investments. An Angel Fund has to comply with this condition at the end of its tenure. Conditions for registration of Angel Funds An applicant to apply for registration as an Angel Fund (including schemes 6 Company with family connections Where Angel investor is an individual: Any company promoted by such individual or his relative; or Any company where individual or his relative is a director; or Any company where person or his relative has control, or shares or voting rights entitling them 15% or more of the shares or voting rights in the company Where Angel investor is a body corporate: A subsidiary or holding company of the investor; or Any company being a part of same group or which is under the same management of the investor; Any company where body corporate or its directors/ partners have control or shares or voting rights entitling them 15% or more of the shares or voting rights in the company launched by such Angel Funds) in accordance with provisions for registrations of an AIF as applicable to other AIFs under these Regulations. An AIF registered under these Regulations may apply for conversion to an Angel Fund provided that it has made no investments. Further, provisions in relation to registration of an AIF under the Regulations would apply as it applies to a fresh registration. Registration fees for an Angel Fund is INR 0.2 million. Conditions for investment In Angel Funds Only angel investors can subscribe to units issued by Angel Funds. An Angel Fund shall have a minimum corpus of INR 100 million. An investment of minimum INR 2.5 million shall be accepted for a maximum period of three years. Schemes by Angel Funds Funds can be raised by way of private placement. Angel Funds may launch a scheme provided the scheme memorandum 7 is filed atleast 10 working days prior to launch of the scheme with SEBI. The payment of scheme fees would not apply to schemes launched by Angel Funds. SEBI may provide its comments on the scheme memorandum prior to the launch which would be incorporated 7 To contain all material information pertaining to investments proposed under such scheme

4 by the applicant in the scheme memorandum. A scheme of an Angel Fund should be restricted to maximum 49 Angel investors. Obligation of Sponsors and Managers of an Angel Fund Sponsors to ensure that investors satisfy the conditions to qualify as angel investors. Manager or Sponsor to have a continuing interest in an Angel Fund of minimum 2.5% of the corpus or INR 5 million whichever is less. The interest in Angel Fund should not be contributed by way of waiver of management fees. The Manager should obtain an undertaking from every angel investor proposing to invest in VCU, confirming his approval for such investment, prior to making such an investment. Prohibition on listing Units of Angel Funds shall not be listed on any recognised stock exchange. Provisions relating to In-principle approval SEBI may grant an in-principle approval for an Angel Fund to the applicant, without the registration of the trust deed (in case the Fund is proposed to be set-up as a trust) or incorporation of the Limited Liability Partnership (LLP) (in case the Fund is proposed to be set-up as a LLP) on satisfaction of the eligibility criteria as prescribed under the Regulations. The applicant shall comply with requirement of Regulations, the trust deed or incorporation of a LLP, as the case may be, within six months from date of in-principle approval. Upon compliance, SEBI may grant a certificate of registration. An AIF, to whom in-principle approval is granted, may accept commitments from investors but should not accept any money till the certificate of registration is granted by SEBI. Acceptance of grants by Social Venture Funds A Social venture Fund to accept a minimum amount of INR 2.5 million from any person provided that no profits/ gains shall accrue to the provider of such grants. Fund of Category III AIF may invest in Category I and II AIF. Comments The introduction of Angel Funds within the definition of VCF by the market regulator, SEBI, is a welcome move to encourage entrepreneurship and finance small businesses by way of notifying new norms for angel investors, who provide funding to companies at their initial stages.

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