Authored by Anish V
In a move to improve ease of doing business, the Securities and Exchange Board of India (“SEBI”) has amended the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) on the 9th of September, 2025. The Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2025 (“Amendment”) through which the AIF Regulations were amended, primarily focusses on enhancing risk reduction and providing operational clarity to ‘Angel Funds’ (as defined under the AIF Regulations). The Amendment contains changes to two important aspects covered by the AIF Regulations, i.e., regulating co-investments, and modifications to provisions regarding Angel Funds. In this regard, SEBI has issued a circular titled ‘Revised regulatory framework for Angel Funds under AIF Regulations’ (“Circular”) setting out specific conditions and modalities with respect to various modifications contained in the Amendment.
While the Amendment introduces modifications on numerous aspects, the Circular, specifically addresses three facets of the amended provisions: (i) raising of funds; (ii) investments; and (iii) offer and allocation of investment opportunities.
Raising of Funds
1. Pursuant to amendments in Regulations 19A(1), 19A(2) and 19D(1) of the AIF Regulations, only persons qualifying as ‘Accredited Investors’ under Regulation 2(1)(ab) of the AIF Regulations (apart from KMPs / managers of Angel Funds) are permitted to invest in Angel Funds. Accordingly, the Circular clarifies that Angel Funds registered after this Circular may on-board and offer investment opportunities solely to ‘Accredited Investors’.
2. For Angel Funds already registered with SEBI, the Circular provides a deadline of 8 September 2026, to implement this mandate, subject to the restriction that no more than 200 (Two Hundred) non-accredited investors may be on-boarded during this period. Existing investors shall continue under the terms of the Private Placement Memorandum and/ or the fund documents. Further, the manager of the Angel Fund is obligated to ensure, at the time of on-boarding, that each investor is an ‘Accredited Investor’ at the time of contribution.
3. Newly inserted sub-regulations (6) and (7) of Regulation 19D of the AIF Regulations mandate Angel Funds to on-board a minimum of five Accredited Investors prior to declaring first close. The Circular further prescribes that the first close shall be declared by an Angel Fund within 12 months from the date of filing the Private Placement Memorandum (“PPM”) with SEBI. Existing Angel Funds yet to declare their first close shall do so on or before 8 September 2026.
Investments
1. Amended Regulation 19E prohibits Angel Funds from launching schemes for soliciting funds or making investments. The Circular specifies that all investments shall be made directly from the Fund, and there is no requirement of launching separate schemes for investing. Accordingly, provisions earlier applicable at the scheme level shall now apply at the Fund level, unless otherwise stated. The requirement of filing of term sheets with SEBI has been dispensed with, though Angel Funds are obligated to maintain the term sheets and detailed records, including investor lists and their contributions.
2. Follow-on investments under Regulation 19F (1) (in investee entities which are no longer start-ups) are permitted subject to the following conditions prescribed by the Circular: (i) post-issue shareholding percentage of the Angel Fund shall not exceed pre-issue shareholding percentage; (ii) total investment, including additional investment, shall not exceed ₹25,00,00,000/- (INR Twenty-Five Crores Only); and (iii) additional contributions may only be drawn from investors who participated in the initial round, on a pro-rata basis. If any investor opts out, their portion may be offered to other participating investors, who participated in the initial round.
3. Regulation 19F (3) prescribes a lock-in for the investments by an Angel Fund in investee companies. The Circular specifies a lock-in period of 1 (one) year, which will be reduced to 6 (six) months in case of exit of the investment by sale to a third party. Further, in line with Regulation 19F (7), Angel Funds may invest in companies incorporated outside India, subject to RBI and other SEBI guidelines.
Offer and Allocation of Investment Opportunities
1. Regulation 14G (4) requires disclosure, in the PPM, of a defined methodology for allocation of investment opportunities. The Circular mandates that managers strictly adhere to such methodology, and they shall have no discretion on a case-to-case basis. Existing Angel Funds must incorporate the methodology in their PPM, and all allocations made on or after 15 October 2025 shall follow the methodology so disclosed.
2. Regulation 19G (6) provides that investors shall have rights in investments and distributions on a pro-rata basis to their contribution, subject to SEBI’s specifications. The Circular clarifies that this pro-rata requirement does not apply to arrangements where returns or profits are shared by an investor with the manager, sponsor, or their affiliates.
