Significant Amendments to SEBI’s Regime for Angel Funds

The Securities and Exchange Board of India (“SEBI”) has issued the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025 (“Sept 2025 Amendments”) to amend the SEBI (Alternative Investment Funds) Regulations, 2012 (“SEBI AIF Regs”) as per the decisions taken by SEBI’s Board on June 18, 2025. Some of the Sept 2025 Amendments modify Chapter IIIA of the SEBI AIF Regs which sets out the regulatory regime for angel funds. Subsequently on September 10, 2025, SEBI released a circular (“Circular”) which gets into the granular details of the new regulatory regime and prescribes the compliances for Angel Funds under the new regime.

For angel funds, there are no surprises in the notified Sept 2025 Amendments which are largely in line with the decision taken by SEBI’s Board on June 18, 2025. The key amendments to the regulatory regime for angel funds inducted by the Sept 2025 Amendments and the Circular can be summarised as follows:

Eligible Investors in Angel Funds

Henceforth, only Accredited Investors or key management personnel of the fund or its manager can invest in an Angel Fund. Though the definition of ‘Angel Investors’ has been retained, henceforth, an angel investor is essentially an Accredited Investor. SEBI’s Circular mandates investment managers to verify that a contributor is accredited either by a valid accreditation certificate or by meeting the “deemed accredited”^[i] criteria specified in Regulation 2(1)(ab) of the SEBI AIF Regs.

Minimum Corpus and Minimum Commitment requirements removed

Previously, angel funds were required to maintain a minimum corpus of INR 5 crore. Also, angel funds could not accept commitment of less than INR 25 lakh from any angel investor. Both these requirements have been removed by the Sept 2025 Amendments. An Angel Fund is now required to onboard at least five accredited investors before its first close and first close has to be declared within 12 months from SEBI’s communication taking the PPM on record. If the first close is not achieved within this prescribed period, the placement memorandum must be re-filed with SEBI along with a fee of INR 1 Lakh. This new rule has been instituted since there is no longer any minimum corpus for an angel fund.

Requirement to launch a scheme for each investment scrapped

Previously, each investment by an angel fund constituted a separate scheme and a term sheet had to be filed with SEBI for each scheme. Each scheme could have up to 200 investors. The construct of scheme has been removed from the SEBI AIF Regulations, and angel funds are no longer required to file a term sheet with SEBI. However, angel funds are still required to maintain records of term sheets for each investment, including the list of investors who participate in that investment and their contribution to the investment. The revamped Regulation 19E of the SEBI AIF Regs now explicitly states that angel funds shall not launch any schemes for soliciting funds or for making investments. All operations are consolidated at the fund level. The cap of 200 investors per scheme has also been removed.

Investment thresholds and lock-in period revised

Earlier, an angel fund could not invest less than INR 25 lakh or more than INR 10 crore in any investee company. Now, the limits are INR 10 lakh minimum and INR 25 crore maximum per investee company. The lock-in period of one year for each investment by an angel fund has been reduced to six months in case the angel fund is exiting by selling its stake to a third party. However, if the exit is on account of a company buy-back or if the angel fund is selling its stake to the promoters of the investee company, the lock-in period shall be one year.

Follow-on Investments

Angel funds are now permitted to make follow-on investments in their existing portfolio companies even if these have ceased to qualify as startups, subject to the following:

• Follow-on investments are allowed to the extent the post-issue shareholding percentage of the angel fund in the investee company does not exceed the pre-issue shareholding percentage; and
• The total investment in an investee company by an angel fund, including follow-on investments, shall not exceed the maximum limit specified for investments by angel funds in their investee companies, that is INR 25 Crore; and
• Angel Funds shall accept contribution for follow-on investment only from the investors who had contributed to the existing investment in the investee company and pro-rata to their contribution in the existing investment. However, in case an investor opts not to participate in the follow-on investment to the extent of its pro-rata rights, the same may be offered to the remaining investors who had contributed to the existing investment.

Continuing interest of Manager or Sponsor revised

The requirement for the fund’s investment manager or sponsor to maintain a continuing interest in the Angel Fund has been modified. Earlier, this requirement was 2.5% of the fund’s corpus or INR 50 lakh, whichever was lower and had to be met at the fund level. Now, the investment manager or sponsor must have a stake in each investment of the angel fund, which should be 0.5% of the investment amount or INR 50,000, whichever is higher.

New rules relating to allocation methodology introduced

Investment Managers are required to disclose and offer each investment opportunity to all the angel investors of the angel fund. From now, allocation methodology for the purpose of allocating the investment among angel investors who provide approval for such investment is to be disclosed in the PPM. SEBI requires investment managers to strictly adhere to the such methodology for allocating the investment among consenting investors and not provide any discretion to the investment manager for allocation of investments on a case-to-case basis.

Returns or distributions from an investment are to be shared pro-rata to investor contributions for such investment, except where an investor has contractually agreed to share returns (such as carried interest/additional return) with the manager or sponsor of the AIF or the employees/directors/partners of the manager of AIF in terms of the contribution agreement.

Re-Categorization

All existing Angel Funds shall be considered to be registered as Category I AIF – Angel Funds, instead of being a sub-category under Category I AIF – Venture Capital Funds.

PPM Annual audit and performance benchmark reporting requirement applicable to Angel Funds

Until now, Angel Funds were exempt from the requirement of conducting an annual audit of compliance with their PPM and from reporting to benchmarking agencies. With effect from FY 2025–26, Angel Funds whose total investments (at cost) exceed ₹100 crore will be required to undergo an annual PPM compliance audit. Further from FY 2025-26, Angel Funds must also comply with the performance benchmarking framework, including reporting investment-wise valuation and cash-flow data to benchmarking agencies and providing benchmark comparison reports wherever past performance is disclosed.

Provisions for existing Angel Funds

The Circular has specified transitional rules for Angel Funds registered on or before the date the Circular was issued (that is, September 10, 2025). Existing Angel Funds shall:

• implement the new regime on or before September 08, 2026 and shall not offer any investment opportunity in a scheme/investment to more than 200 non-Accredited Investors during this interim period;
• not accept any new contributions from non-accredited investors after September 08, 2026;
• allow their existing investors to continue to hold their existing investments as per the terms of the PPM and/or fund documents of the Angel Fund;
• declare their first close on or before September 08, 2026, if they haven’t done so already; and
• amend their PPMs to disclose the allocation methodology and allocations for any investments after Oct 15, 2025 must follow that methodology strictly.

The SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025 can be found here.

SEBI’s circular dated September 10, 2025 can be found here.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com or write to our authors:

Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com

Paridhi Jain, Associate – Email – paridhijain@elp-in.com

[i] The Central Government, State Governments, developmental agencies set up under the aegis of the Central Government or the State Governments, funds set up by the Central Government or the State Governments, QIBs, Category I FPIs, sovereign wealth funds, multilateral agencies and any other entity as may be specified by SEBI from time to time, are deemed to be accredited investors and are not required to obtain a certificate of accreditation.