SEBI issues frameworks for Angel Funds and Co-Investment Vehicles under the SEBI (AIF) Regulations

In a bid to address industry feedback regarding co-investment opportunities and to streamline operations, enhance ease of doing business and reinforce risk management for angel funds, the Securities and Exchange Board of India (SEBI) has notified the Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2025 on September 8, 2025 (Amendment Regulations).

The Amendment Regulations were followed up with detailed circulars setting forth: (i) operational modalities governing the launch of co-investment schemes (CIV Schemes) by alternative investment funds (AIFs) to provide co-investment opportunities to accredited investors dated September 9, 2025 (CIV Circular); and (ii) the revised regulatory framework governing angel funds dated September 10, 2025 (Angel Funds Circular).

Key highlights of the framework governing CIV Schemes introduced under the Amendment Regulations are outlined below:

1. Framework for Co-Investment and CIV Schemes:

• • • The Amendment Regulations permit Category I and Category II AIFs to launch CIV Schemes exclusively for accredited investors in addition to the extant co-investment route available through portfolio managers in terms of the provisions of the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020 (PM Regulations).

• • • CIV Scheme is defined as a scheme launched by Category I or Category II AIF which facilitates co-investment by investors of such AIF in unlisted securities of an investee company where such AIF is making or has made an investment.

• • • In terms of the Amendment Regulations, managers may offer co-investment opportunities to investors either through the portfolio management services (PMS) route by registering under the PM Regulations or through CIV Schemes.

2. Conditions for launch of CIV Schemes:

• • • Only Category I and Category II AIFs can launch a CIV Scheme for accredited investors (angel funds are excluded).

• • • Each CIV Scheme is required to maintain and hold separate bank and demat accounts with ring-fenced assets.

• • • A CIV Scheme shall be investment specific i.e., separate CIV Schemes must be launched for each co-investment. Accordingly, a CIV Scheme can be wound up post exit from that co-investment.

• • • There are restrictions on investing in units of other AIFs and a CIV Scheme shall not invest in more than one investee company.

• • • An investor’s exposure to a single investee company across all CIV Schemes is capped at three times the amount that investor has contributed to the AIF’s investment in that company. This cap does not apply to select investors such as sovereign wealth funds, development financial institutions, State Industrial Development Corporations, and entities owned by the Government (Central, State or of a foreign country).

• • • The manager is required to file a shelf placement memorandum (Shelf PPM) along with payment of an amount of INR 1,00,000 as fee, with SEBI through a merchant banker for each CIV Scheme in the manner and format as prescribed by SEBI. As part of the Shelf PPM which is required to be filed prior to the co-investment opportunity being offered to investors, the manager should disclose, inter alia, the principal terms (such as classes of units, allocation methodology, expenses, distribution), conflicts of interest due to additional investment through the CIV Scheme, and governance structure applicable to co-investment.

• • • Only accredited investors of eligible AIFs shall be eligible to make co-investments in terms of the Shelf PPM. Excused, excluded or defaulting investors are prohibited from making co-investments in an investee company through a CIV Scheme.

• • • The terms of any co-investment must not be more favourable than the terms of investment by the AIF itself in the investee company. Additionally, co-investors are required to exit the co-investment in the investee company at the same time as the AIF’s exit, ensuring alignment of exit timelines.

• • • CIV Schemes shall not engage in any kind of leverage, grant investors pro-rata rights and provide pro-rata distribution of proceeds to investors. Further, it shall be ensured that expenses associated with co-investment are apportioned between the AIF scheme and the CIV Scheme in the ratio of their investments in the investee company.

• • • Compliance with the CIV Circular shall be reported by the AIF manager to the trustee and sponsor as part of the annual compliance test report.

• • • The manager is obligated to ensure that the CIV Scheme is not being utilised for indirect or direct abuse i.e. for investments that are prohibited for the investor or the investee company. Further, CIV Schemes are prohibited from making investments that would trigger additional disclosures in the event the investor would have made the investment directly and not through the CIV Scheme.

• • • A CIV Scheme is exempt from several regulatory requirements, including the minimum corpus threshold of INR 20,00,00,000, sponsor’s ongoing interest obligations, placement memorandum filings and disclosures, minimum tenure and extension criteria, diversification rules, investment conditions applicable to Category I and Category II AIFs, and a range of other specific investment and operational limits prescribed under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations , 2012 (AIF Regulations).

Key highlights of the revised regulatory framework governing angel funds introduced under the Amendment Regulations are outlined below:

1. Mandatory fund-raising from Accredited Investors:

• • • Only accredited investors or key management personnel or the manager of the fund can invest in an angel fund. Angel funds seeking registration after September 10, 2025, shall be required to onboard only accredited investors while existing angel funds are allowed a transition period until September 8, 2026. During this time, existing angel funds shall not offer an investment opportunity to more than 200 non-accredited investors and no fresh investments will be accepted from non-accredited investors post September 8, 2026.

• • • The Angel Funds Circular requires managers to, at the time of accepting investment, verify that an investor qualifies as an accredited investor – either by holding a valid accreditation certificate or by meeting the criteria for deemed accredited investor as specified in AIF Regulations.

2. Declaration of first close and onboarding of Accredited Investors: 

• • • Angel funds are required to onboard at least five accredited investors before declaring their first close, which must be done within 12 months of SEBI taking on record and approving the private placement memorandum (PPM) (i.e., by September 8, 2026) for existing angel funds. 

• • • However, if the declaration of first close is not done within the aforesaid timeline, then the fund must refile its PPM with SEBI along with a fee of INR 1,00,000.

3. Investments by Angel Funds: 

• • • Angel funds shall make all investments in investee companies directly without launching schemes. Angel funds are not required to file term sheets with SEBI, however, they must maintain detailed records of term sheets and investor contributions in respect of each investment and comply with scheme-level provisions of AIF Regulations at the fund level. 

• • • Follow-on investments in investee companies which are no longer start-up companies are permitted provided the angel fund’s shareholding does not exceed the pre-issue shareholding, the total investment in the investee company does not exceed INR 25,00,00,000 and that there is participation from investors that were part of the original investment in the company, on a pro-rata basis.

• • • Angel fund investments are subject to a one-year lock-in which can be reduced to six months in the event of the fund’s exit by way of third-party sale (excluding share buy-back or purchase of shares by the investee company’s promoters or its associates), subject to provisions of the investee company’s articles of association.

• • • Overseas investments in line with the RBI and SEBI guidelines are permitted with the 25% limit being reckoned based on total investments held by the angel fund (at cost) as on the date of filing application with SEBI for overseas investment.

• • • The earlier investment thresholds specified for angel funds have been revised with the minimum investment in any investee company lowered from INR 25,00,000 to INR 10,00,000 and the maximum investment increased from INR 10,00,00,000 to INR 25,00,00,000.

4. Methodology of allocation of investment: 

• • • Angel funds must disclose a defined methodology for allocation of investments among investors who provide approval for investments and managers cannot exercise discretion for allocation of investments on a case-by-case basis. Allocation of investments made post October 15, 2025, shall be in accordance with the methodology disclosed in the PPM.

• • • Investors retain pro-rata rights in investments and distributions of proceeds except for carried interest or additional return.

5. Other obligations: 

• • • The investment manager or sponsor shall now be required to maintain a continuing interest of at least 0.5% of the amount invested or INR 50,000, whichever is higher, in each investment of the angel fund, and this cannot be fulfilled by waiving management fees.

• • • 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.

• • • Previously, angel funds were not subject to annual PPM compliance audits, nor were they required to report to benchmarking agencies. With effect from financial year 2025–26, any angel fund with aggregate investments (at cost) exceeding INR 100,00,00,000 must undergo an annual PPM compliance audit. Additionally, all angel funds will be required to comply with SEBI’s performance benchmarking framework, including submitting investment-level valuation and cash flow details to benchmarking agencies and providing benchmark comparison reports whenever they disclose past performance.

Conclusion:

SEBI’s amendments and supporting frameworks mark a new era for private markets in India, positioning the AIF sector as a dynamic platform for early-stage, alternative, and co-investment capital.