The devils that angels fear

Of regulation and tax, they might submit to one to escape another

Angel investors are the earliest-stage investors in a business and often take the highest risk. They play a key role in the start-up ecosystem by being the first port of call to validate business ideas. Their investments often go into getting the business up and running, rather than focus on growth or making profits.

In developed markets such as the US, angel investing is a full-time occupation for many. But, in India a large number of these investors are people have their own businesses or high-pressure jobs and double up as investors. 

They are at times organised as a network to gather and examine investible ideas, but invest individually and do not pool money.

While the Securities Exchange Commission, the American stock market regulator, allows individuals with a certain net worth to be registered as an angel investor, the Securities and Exchange Board of India (Sebi) framework is slightly different and still evolving.

Under the Alternative Investment Regulations, an “Angel fund” is a sub-category of Venture Capital Fund under Category I. An Alternative Investment Fund (AIF) raises funds from angel investors and invests in accordance with the provisions of Chapter III-A of AIF Regulations. 

In the case of an angel fund, it shall only raise funds by way of issue of units to angel investors. “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 (c) an AIF registered under these regulations or a VCF registered under the Sebi (Venture Capital Funds) Regulations, 1996. 

Angel funds shall accept, for a period not exceeding three years, an investment of not less than Rs 25 lakh from an angel investor, Sebi says. Thus, Sebi can register a fund in which investment management is centralised but is not comfortable with an arrangement where funds are not pooled initially and invested individually. There are doubts if such an arrangement would fall within Sebi’s jurisdiction. 

On the other hand, Sebi has been issuing notices to independent crowd sourcing platforms, which have helped entrepreneurs raise funds. Angels are now keen to come under the regulatory framework, so that they are able to better present their case before their other devil – the income tax department. 

There has been much hue and cry about “angel tax”, which several entrepreneurs have been asked to pay on the funds received from angels. The tax goes up to 30 per cent.  The application of the concept of fair value of an enterprise yet to be born would mean that the entire investment becomes taxable.

In November, a committee formed by Sebi met and examined the issue of coming up with a regulatory framework, which would then help angel investments get a fair treatment both regulatorily and taxwise. 

While this is at work, an inter-ministerial body has received some seven cases, which received notices, for exemptions. Of these, the body has recommended two to the Central Board of Direct Taxes. Insiders say about 150 angel investments would have happened during the financial year. Angels would prefer a comprehensive and durable solution over case-by-case exemptions, which leads to uncertainty.