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SEBI’s Angel Fund Norms A Good Step But Need Tweaking: K.Ganesh – StartupCentral


sc-largeSEBI’s move to define investment guidelines for angel funds is very welcome move.

After some ill-conceived moves like tax on startup investments in the earlier budget, attempts to change policy with retrospective effect, etc. which dismayed the investor community, angel investors and entrepreneurs, this shows clear thinking and some thought out attempt to clarify  and address some key issues.

The fact that angel investors are being recognized as a distinct category is good. This will mean that going forward, angel investors can in an organized manner represent themselves, be involved in policy making and give feedback on proposed measures in future.

Positives

  • Enabling startups and SMEs to list on the institutional trading platform (ITP) will mean more exit opportunities. This has been one of the biggest dampeners to early stage investment and proliferation of the startup eco system in India when compared with Silicon Valley in the US. While we need to wait and see how this works and whether the ITP succeeds, the initiative is very welcome. Worldwide success of such platforms have been muted.
  • By laying boundary conditions, the government has tried to address the abuse of the angel investment route for questionable money transfer transactions (for instance between an industrial group and politicians where the industrial group invests huge amounts as angel investment for a negligible stake in a company promoted by politicians). So some of the qualifying criteria mentioned are welcome.
  • By classifying angel funds as alternate investment funds (AIF), angel funds can enjoy pass through taxation benefits and avoid double taxation.

kganesh
Negatives

 

  • Some of the limits and restrictions mentioned don’t make sense. For instance, the Rs 25 lakh minimum amount required by an angel investor to invest in a  fund will exclude lots of people who want to invest a lower amount but still want to have a play or participate in the startup phase. To have Rs 25 lakh of post-tax money means Rs 37.5 lakh in pre-tax earnings. Why have this at all? Even if a fresh engineer wants to invest Rs 1 lakh, as long as the angel fund is willing to accommodate, it should be fine.
  • There are incubators and accelerators who put in as little as Rs 5 lakh in a seed startup or a paper business plan but they do so in multiple companies and many a time exit within three years at The Series A or Series B stages.  So, the restriction that, “ investment in an investee company by an angel fund shall be not less than Rs 50 lakh and not more than Rs 5 crore and shall be required to be held for a period of at least three years” does not make sense. Even many angel investors and funds exit at the Series A or Series B stages in less than three years – either because they want liquidity to invest the same in other  startups or they are forced by Series B investor to exit as the Series A investor does not want too many shareholders or names in the cap table and wants the equity between the founders and Series A only.
  • Excluding relatives makes no sense at all. The first port of call for angel investment is friends and relatives. Why would I not angel fund my brother or in-law since I know them well, trust them and am willing to help and mentor them and I know their full strengths and weaknesses. This will encourage round-tripping wherein I ask someone else to invest in a startup founded by my family member and in turn I invest in their family member’s startup.

I do hope some tweaking and modifications on these regulations are done based on the feedback received. I would have also liked to see some more incentives to promote angels investments by giving tax concessions for angel investments since it is highest category of risk (as an investment class). As an angel, when I exit and make money, I am happy to pay the tax but, it is likely that majority of angel investments will be write-offs. Against this back drop , the government should recognize the role played by angels and startups in providing employment and creating opportunities which cannot be done by traditional, established companies which more often than not have a freeze on hiring, are looking to cut costs and reduce manpower. Therefore, treating this as socially beneficial investments and allowing tax benefit during the year of investments but recouping when exits happens will be a welcome measure.

The original post was published here.

Author Bio: K Ganesh is a serial entrepreneur, angel investor and mentor to several startups across the country. He started his entrepreneurial journey in 1996 with IT&T and went on to successfully start and exit companies such as CustomerAsset and TutorVista. Last year, Ganesh and his wife Meena Ganesh, a fellow serial entrepreneur and co-founder in CustomerAsset and TutorVista, set up Growth Story, an early stage investment entity funded from their personal resources. Connect with K Ganesh at Growth Story.

(c) StartupCentral 2013


  • Deepak Mittal

    The initial norms have been laid true to the spirit of an angel investor who intends to carry angel investment with significant professional approach and interest, in my view, it is therefore reasonable to exclude accidental angels from the family etc. They are by all means an angel and shareholders but will not enjoy some of the benefits which an angel would as per the definition of the guideline.
    It is unlikely that the round tripping will happen in present day startup trend because the law will eventually catch up, it is easy to identify such transactions with simple algorithms and most promoters want to remain clean in their transactions these days given the fact that many hope to raise funds from an institutional investor.

    For the sake of discussion, the incubators and accelerators are well exactly those, and perhaps not qualified to be an angel as per this guideline. A counter view in favour of keeping them out of the scope of this guideline is that their increased exposure, possible short tenure of a typical investment and higher element of speculative approach makes them ineligible for reaping the benefits that can accrue to an Alternate Investment Fund. I invite comments on this topic for further debate, while I agree to most of the other points you’ve mentioned.

    The other limits such as 50 Lakh of minimum investment etc. is necessary to give an initial structure and creates a controlled observation window to better understand the extent of benefits that an angel investor who could register as an Alternate Investment Fund shall enjoy. It would be great if the Angel investments by any company in the new venture can enjoy tax benefits or be treated differently for taxation, while taxing on an exit would be an extreme and most beneficial for the investor, a balanced approach could be to treat it on a variable percentage starting with a small percentage the first year and increasing it gradually subsequently with the option to write it off anytime and book it as a loss, option 2 could be to simply write off or capitalize fully at the end of say the same 3 year period until when it can be shown as a deferred tax liability on the balance sheet. Finance guys may have a better head to account for it.

    I think the key challenge with the regulators would be to find a balance between the current tax norms and tax revenues vs the extent to which the SOPs can offered in favour of economic growth, that this route is not abused as new legal options often emerge which can be exploited, regulators have perhaps chosen a safer path by keeping the entry barriers high initially. Hope they remain open to amending it based on feedback and statistical data.

  • Pihu Mukherjee

    very informatic discussion thax a lot