A New Category of SEBI registered Funds for Economically Weaker States

The SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) was brought in to help structure the angel investment / VC investment ecosystem, avoid double taxation and create a vehicle for high risk investments in innovation and startups.

Since 2012, SEBI registered Category-I AIFs have invested nearly Rs. 40,000 crore out of Rs. 46,000/- crore raised (Rs. 85,000/- crore committed). This “risk capital” has been instrumental in kick starting the huge startup “wave” in India, which has been further fuelled by TV shows such as “Shark Tank” and today most young folks in India want to be founders, raise money, build businesses.

My state Bihar, and many other eastern states have missed out unfortunately on this “bus”. AIFs have less than Rs 5/- crore invested in Bihar Startups (and that too may be an over statement). There are virtually No AIFs which have a mandate to invest in Bihar, that were created to focus investments in building infrastructure, capability and capacity in Bihar.

As such, there has been virtually no investments in much needed logistics for agriculture and agro-processing even though Bihar is a leading producer of multiple agri-based products; negligible in early stage startups focussing on local marketplaces going digital — eCommerce, EdTech, Handicrafts, processed speciality foods etc. The private sector has taken a “Bihar Bypass” since 1992 and only started taking note of its 14 cr population and rising aspirations / expectations since 2022.

One challenge in meeting the rising aspirations and expectations is the high entry bar defined by SEBI for category-I AIFs and especially the sub-category of Angel Funds. These high financial limits makes it very hard for a Bihar focussed Angel Fund to be created by Bihar diaspora.

[Quote from SEBI Policy]

An Angel fund, as per SEBI, can raise funds by way of issue of units to angel investors. However, the definition and restrictions on “Angel” investor is unfriendly to the needs of economically weaker states, like Bihar, Odisha, West Bengal, NE etc.

“Angel investor” means any person who proposes to invest in an angel fund and satisfies one of the following conditions, namely,

(a) an individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who:

(i) has early stage investment experience, or

(ii) has experience as a serial entrepreneur, or

(iii) is a senior management professional with at least ten years of experience;

(‘Early stage investment experience’ shall mean prior experience in investing in start-up or emerging or early-stage ventures and ‘serial entrepreneur’ shall mean a person who has promoted or co-promoted more than one start-up venture.)

(b) a body corporate with a net worth of at least ten crore rupees; or

© an AIF registered under these regulations or a VCF registered under the SEBI (Venture Capital Funds) Regulations, 1996.

Angel funds shall accept, up to a maximum period of 3 years, an investment of not less than `25 lakh from an angel investor.

[END Quote]

Given these conditions, it is not practical to expect Bihar diaspora to

i) invest Rs. 25 lakhs minimum over 3 years into the fund, and/or;

ii) have net worth of Rs. Two crore excluding the value of principal residence, and/or

iii) expect local Bihar enterprises to have net worth of ten crores

As such, even interested Bihar diaspora and corporates cannot come together and create an “Angel Fund” which is recognized by SEBI and work towards risk investments and startup culture promotion in Bihar (and other economically weaker states). And external angel funds are not yet interested in Bihar given low economic conditions. This then perpetrates the economic weakness and does not give room for Bihar to escape from the historic economic weakness trap.

I think SEBI and finance ministry, in their wisdom should consider another category of AIF, or Angel Funds, which are aligned to the special needs of our economically weaker states. A requirement of Rs. 5 lakh investment over 3 years, reduction of net worth to Rs. 50 lakhs for individual and Rs. 2 cr for corporate bodies will enable many new “Angel Funds” to be created which will change the dynamics of innovation and startup risk in the state.

As safeguards, additional requirements of investing only in Bihar (or specified weaker states), % allocation guidelines etc may be created to safeguard against rogue fund managers. But the shackles of current Cat-I AIF must be removed for our poorer states to fully participate in the startup movement.

I hope and pray that on this #StartupDay, leaders and managers at our regulatory bodies will take note, deliberate and give our economically weaker states some new instruments to break away from the historic poverty.