SEBI’s Proposal to Expand QIB Definition for Angel Funds - MMJC

Introduction

SEBI, India’s market regulator, has put forward a proposal to broaden the definition of Qualified Institutional Buyers (QIBs) under the SEBI (ICDR) Regulations, 2018. This change would include Accredited Investors (AIs) for the sole purpose of investing in Angel Funds. The idea behind this move is to open up more investment opportunities for start-ups while ensuring that only knowledgeable investors with a strong understanding of risk get involved. In this newsletter, we’ll break down why SEBI is making this change and what it could mean for the investment landscape.

Why the Change?

Angel Funds have become a key source of funding for India’s start-ups, helping entrepreneurs turn their ideas into reality. However, the current system for determining who qualifies as an angel investor isn’t foolproof. Many investors self-declare their eligibility, and fund managers often rely on social media or informal checks to verify credentials. This has led to situations where investors who may not fully understand the risks are participating in high-risk start-up investments.

Additionally, the Companies Act, 2013, restricts private placements to a maximum of 200 investors, but QIBs are exempt from this limit. By adding AIs to the QIB category, SEBI aims to:

• Ensure that only financially sound and well-informed investors participate in Angel Funds.
• Allow Angel Funds to accept contributions from more investors without violating private placement rules.
• Encourage greater capital inflow into start-ups while maintaining adequate investor safeguards.

SEBI’s circular in the year of 2021 (ref. no. SEBI/HO/IMD/IMD-I/DF9/P/CIR/2021/620) outlines the process for accrediting investors. It states that stock exchanges and depositories will handle accreditation, which will be valid for one year and renewable upon verification. Investors must meet certain financial criteria, including net worth and income thresholds, to qualify. This ensures that only those with sufficient financial knowledge and stability are permitted to invest in Angel Funds.

Implications of the Change

If SEBI moves forward with this proposal, it could bring several changes to the investment ecosystem:

• More Capital for Start-ups: By expanding the QIB definition to include AIs, Angel Funds can attract a larger group of investors, increasing the availability of funds for early-stage companies.
• Better Protection for Investors: Since AIs will be vetted and accredited based on strict criteria, the risk of inexperienced investors making uninformed decisions will be minimized.
• Larger Angel Funds: While the 200-investor cap per investee company will remain, Angel Funds will no longer have a limit on the number of investors they can onboard, allowing them to operate on a larger scale.
• Bringing India in Line with Global Standards: Many developed economies have similar accreditation mechanisms to ensure only financially knowledgeable investors gain access to complex investment opportunities. This move aligns India’s regulations with international best practices.
• Accredited Investors in QIB Allocation: Regulation 32 of SEBI (ICDR) Regulations, 2018, states that in an IPO, not more than 50% of the net offer can be allocated to Qualified Institutional Buyers (QIBs). If Accredited Investors (AIs) are included in the QIB category, a key question arises—will they be allowed to subscribe to this existing QIB portion, or will SEBI create a separate allocation framework for them? Clarity on this aspect will be crucial for market participants.

Conclusion
SEBI’s proposal to recognize Accredited Investors as QIBs for Angel Funds is a step towards a more robust and scalable start-up investment framework. By striking a balance between investor protection and market expansion, SEBI aims to create a well-regulated environment where both start-ups and investors can thrive.

One key concern, however, is the lack of public access to AI-related data. Transparency is crucial for investor confidence and market efficiency, and SEBI should consider making accreditation data publicly available to improve market oversight and trust.

The consultation is open for public comments until March 14, 2025. It will be interesting to see how market participants respond and what adjustments SEBI might make based on stakeholder feedback.

Below is the link for the Consultation paper:

https://www.sebi.gov.in/reports-and-statistics/reports/feb-2025/consultation-paper-on-expanding-definition-of-qualified-institutional-buyers-under-sebi-icdr-regulations-2018-to-include-accredited-investors-for-the-limited-purpose-of-investments-in-angel-funds_92102.html