The Securities and Exchange Board of India (SEBI) issued a circular on September 10, 2025, which outlines a revised regulatory framework for Angel Funds under the Alternative Investment Funds (AIF) Regulations, 2012. These amendments, notified on September 09, 2025, aims to improve the ease of doing business, enhance risk reduction, and provide operational clarity to Angel Funds. The following details the specific conditions and modalities introduced by this circular.
A. Fund Raising by Angel Funds
Effective immediately, Angel Funds registered after September 10, 2025, are mandated to on-board and offer investment opportunities exclusively to Accredited Investors. For Angel Funds registered on or before September 10, 2025, a transition period is provided: they must implement this mandate by September 08, 2026, and during this period, they are permitted to offer investment opportunities to no more than 200 non-Accredited Investors. Post-September 08, 2026, these existing funds are prohibited from accepting new contributions for investee companies from non-Accredited Investors. It is important to note that existing non-Accredited Investors can continue to hold their investments already made in the Angel Fund as per their fund documents. Managers of Angel Funds are responsible for ensuring that, at the time of accepting any contribution for an investee company, the investor meets the criteria for an Accredited Investor, either by possessing a valid accreditation certificate or by qualifying as a deemed Accredited Investor as per Regulation 2(1)(ab) of the AIF Regulations.
An “Accredited Investor” includes an individual, Hindu Undivided Family, family trust, or sole proprietorship with an annual income of at least two crore rupees, or a net worth of at least seven crore fifty lakh rupees (with not less than three crore seventy-five lakh rupees in financial assets), or an annual income of at least one crore rupees and a minimum net worth of five crore rupees (with not less than two crore fifty lakh rupees in financial assets). Body corporates must have a net worth of at least fifty crore rupees, and trusts (other than family trusts) must also have a net worth of at least fifty crore rupees. Partnership firms qualify if each partner independently meets the eligibility criteria. Certain entities, such as the Central and State Governments, developmental agencies, Qualified Institutional Buyers, Category I foreign portfolio investors, sovereign wealth funds, and multilateral agencies, are deemed Accredited Investors and do not require a separate certificate.
Regarding the first close, Angel Funds must declare it no later than 12 months from the date SEBI communicates that the Private Placement Memorandum (PPM) has been taken on record. Existing Angel Funds that have not yet declared their first close must do so by September 08, 2026. Failure to comply with these timelines necessitates refiling the PPM with SEBI and paying the requisite fees. Furthermore, Angel Funds must on-board at least five Accredited Investors before declaring their first close.
B. Investments by Angel Funds
Angel Funds are now permitted to make investments directly into investee companies, without the need to launch separate schemes for this purpose. Consequently, provisions of the AIF Regulations that were previously applicable to a scheme of an AIF will now apply to the Angel Fund at the fund level, unless explicitly stated otherwise. The requirement for filing term sheets with SEBI for launching schemes and making investments has been discontinued. However, Angel Funds are still obligated to maintain records of all term sheets for each investment, including details of participating investors and their contributions.
Angel Funds are now permitted to make follow-on investments in their existing investee companies, even if these companies are no longer classified as startups. These follow-on investments are subject to specific conditions: the post-issue shareholding percentage of the Angel Fund in the investee company must not exceed its pre-issue shareholding percentage. The total investment by an Angel Fund in a single investee company, including all follow-on investments, cannot exceed INR 25 Crore. Contributions for follow-on investments must be accepted only from investors who initially contributed to the existing investment in that company, and these contributions must be pro-rata to their original contribution. If an investor chooses not to participate to the full extent of their pro-rata rights, their share may be offered to other existing investors who contributed to that specific investment.
Investments made by an Angel Fund in an investee company are subject to a one-year lock-in period. This lock-in period is reduced to six months if the exit from the investment is through a sale to a third party. This reduced lock-in does not apply if the exit involves a buy-back by the investee company or a purchase by its promoters or their associates. Any such third-party sale must also comply with the terms of the investee company’s Articles of Association.
For overseas investments, the 25% limit, as prescribed under the AIF Master Circular, will now be calculated based on the total investments (at cost) held by the Angel Fund as of the date of the application to SEBI for overseas investment. All other conditions and modalities for overseas investments specified in Chapter 7 of the AIF Master Circular remain applicable to Angel Funds.
C. Offering and Allocation of Investment Opportunities by Angel Funds
The manager of an Angel Fund is required to disclose a defined methodology in the PPM for allocating investments among investors who approve such investments. The manager must strictly adhere to this methodology, and it cannot provide any discretion to the manager for case-by-case allocation. Existing Angel Funds must incorporate such a methodology into their PPMs, and it will apply to all investments made post-October 15, 2025.
Investors in an Angel Fund generally have pro-rata rights in an investment and its distributed proceeds, corresponding to their contribution to that investment. However, this pro-rata requirement does not apply to the extent that returns or profits on investments are shared with the manager, sponsor, or their employees/directors/partners, such as through carried interest or additional return, as per their contribution agreements.
D. Other Obligations
All existing Angel Funds will now be officially registered as “Category I AIF – Angel Funds,” moving from their previous sub-category status under Venture Capital Funds.
An annual audit of compliance with the terms of the PPM will be mandatory for Angel Funds with total investments (at cost) exceeding INR 100 Crore, commencing from Financial Year 2025-26.
Angel Funds are required to report necessary information, including investment-wise valuation and cash flow data, to benchmarking agencies for performance measurement, starting from Financial Year 2025-26. Any mention of past performance in the fund’s PPM or marketing materials must be accompanied by the performance versus benchmark report provided by these agencies.
Henceforth, any limits or conditions applicable to Angel Funds under the AIF Regulations and related circulars, which were previously calculated based on ‘corpus’ or ‘investable funds’, will now be calculated based on the total investments made by the Angel Fund (at cost). This adjustment also applies to specific due diligence thresholds, which will be calculated at each investment level, based on the investor’s contribution to that particular investment, rather than the fund’s overall corpus. Finally, the trustee or sponsor of the AIF must ensure that the ‘Compliance Test Report’ prepared by the manager includes adherence to the provisions of this circular.
Conclusion
These amendments signify SEBI’s commitment to refining the regulatory landscape for Angel Funds in India. By imposing a strict focus on accredited investors, streamlining investment procedures, and enhancing transparency in allocation and reporting, SEBI aims to fortify investor protection and cultivate a more structured and efficient environment for early-stage capital formation. The shift to total investments (at cost) as the basis for various calculations provides a clearer and more consistent metric, while the explicit recognition of carried interest clarifies the remuneration structures for fund managers. These changes are akin to providing a clear, detailed map for navigating the dynamic terrain of early-stage investing, ensuring that all participants can proceed with greater certainty and transparency.
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