The Securities and Exchange Board of India (SEBI) has proposed to enable angel funds to tap into a wider pool of accredited investors by expanding the definition of qualified institutional buyers (QIB), and removing the 200-investors cap.
Allowing angel funds to scale up by attracting more discerning investors, the regulator has proposed to amend the definition of QIBs to include accredited investors—for the limited purpose of offering investment opportunities and allotment of investments by angel funds.
“A parallel can be drawn between QIBs and AIs with respect to their financial strength, resources and sophistication and to carry out due diligence of private offerings. AIs, on account of their financial resources, are expected to be aware of the inherent risks in illiquid early stage investment and carry out necessary due-diligence before making an investment,” Sebi said.
In November, SEBI had proposed to only allow accredited investors to invest in angel funds. Instead the regulator has proposed an adjustment to include accredited investors as defined by the alternate investment fund (AIF) regulations.
“This represents a strategic shift rather than a dilution of regulatory intent. The underlying rationale remains ensuring that only investors with sufficient financial sophistication, risk appetite, and due diligence capabilities participate in angel fund investments,” Tushar Kumar, an advocate at the Supreme Court of India said.
By conferring QIB status upon AIs, SEBI seeks to resolve the regulatory incongruity under the Companies Act, 2013, where private placement offers are capped at 200 investors, except in cases involving QIBs. Consequently, angel funds might now be able to solicit investments from a significantly broader pool of accredited investors without violating private placement norms.
Investor limit
SEBI has further suggested eliminating the 200-investor cap per investment by an angel fund, which was designed to prevent an offering from assuming the characteristics of a public issue.
However, once AIs are classified as QIBs, their participation inherently carries an elevated degree of financial acumen and risk assessment capacity, thereby mitigating regulatory concerns surrounding large-scale private placements, Kumar said.
“This would be beneficial for the start-up ecosystem, as it would facilitate angel funds to scale up by raising capital for start-ups in a regulated environment from a large number of AIs,” the regulator said in a draft paper, inviting public comments by March 14.
The regulator has clarified that the definition of QIBs remains intact in the context of public markets as AIs may not have strong governance mechanisms that QIBs are expected to have in place for listed securities. So for the purposes of public markets where QIBs have a key role to play in price discovery for the larger public, AIs shall not be considered as QIBs, Sebi said.
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