1. May 2014
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Venture Capital Fund & Angel Fund
Under
SEBI (Alternate Investment Fund) Regulations 2012
Explained
As per SEBI (Alternative Investment Funds) Regulations, 2012, 3 broad categories of funds have been classified to
be registered under said regulations namely Category I, II, & III. Under Category I, there are further classification
namely:
(a) Venture Capital Fund
(b) SME Fund
(c) Social Venture Fund
(d) Angel Fund
Amongst the above categories, Angel Funds is recently introduced by SEBI.
Though the purpose of AF and VCF both are to promote Venture Capital Undertakings, though there are several
difference between the both with respect to category of Investors, Investee Company, Limits of Investments etc.
which are discussed in detail hereunder.

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Basic Structure & Definitions
So far as basic structure of Angel Funds in comparison to that of Venture Capital Funds are concerned, the prime
difference lies in the Investor and Investee criteria or standards defining them.
Investors
Firstly w.r.t. to Investors, in case of VCF, any person/investor can pool in fund with minimum investment amount of
Rs. 1 Cr. Alternatively in case of Angel Funds, only Angel investors can pool in fund. The Regulations have further
provided that which entities can be termed as Angel Investors which broadly to include individuals having net
tangible asset value of Rs. 2 Cr. or a body corporate with net worth of Rs. 10 Cr.
Investee Companies
Further w.r.t. to Investee Company, though both VCF or Angel Fund are required to invest in Venture Capital
Undertakings (VCU) (as described hereunder), though herein too in case of Angel Fund, the VCU must be such which
are not more than 3 years old and must have maximum turnover of Rs. 25 Cr. etc. though a VCF can invest in any
VCU irrespective to years or networth.
The same is detailed herein below:
Alternative Investment Fund
Category III
Category II
Category I
Venture Capital Fund Angel Fund
Start ups  Unlisted securities
Venture Capital
Undertaking
 All Emerging or
early stage
Venture
Capital
Undertaking
 Incorporated min. 3 yrs
 Turnover less than Rs. 25 Cr.
 Not related to industrial group-
turnover exceeds Rs. 300 Cr.
 Not companies having family
connection with any Angel
Investors of fund
Venture Capital Undertaking:
 Domestic Company
 Not listed at time of investment,
 Not NBFC, Gold Financing,
 Business not permitted under
Industrial policy of GOI or such as
notified by SEBI
Invests In:
AIF that raises funds
from Angel Investors
Individual
 Net tangible assets min. Rs. 2
Cr. (excluding 1 residence)
 Experience
 early stage investment; or
 serial entrepreneur; or
 10 yrs. senior mgt
professional
OR : Body Corporate
 Net worth min. Rs. 10 Cr.
OR : Registered AIF or VCF

3. May 2014
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Creation of Fund
Fund Corpus of either VCF or AF constitute of two components, one the contribution of the Sponsor (creator of
fund) or Fund Manager and another that is collected from Investors at large.
For each category and nature of funds, SEBI has prescribed a minimum corpus as well as contribution by the
Sponsor or the Manager in the corpus. The corpus is to be maintained for each scheme to be launched by the
Fund. The major differences w.r.t. VCF and AF are discussed herein below:
Fund Corpus (for each scheme)
Investor
Total
Rs. 10 Cr.
Any Investor
Min. Contribution:
Rs. 1 Crore
(Rs. 25 Lakhs employee/
director of the AIF or its
Manager)(Max 1000)
Only Angel Investor
Min. Contribution:
Rs. 25 Lakhs
(for maximum period of
3 years) (max 49
investors)
Venture Capital Fund Angel Fund
Sponsor / Manager
Total
Rs. 20 Cr.
Not less than
2.5 % of the corpus
OR
Rs. 5 Crores
Whichever is lower
At all times
Not less than
2.5 % of the corpus
OR
Rs. 50 Lakhs
Whichever is lower
At all times
Venture Capital Fund Angel Fund
Investor may
be Indian,
Foreign or
NRI
Each schemeEach scheme

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Investments Criteria and Limits
Though VCF and AF both belong to the same category I of AIF, the requirement of investment by these funds
differ. Mainly in case of AF the entire investment is to be made in VCU whereas in case of VCF the requirement is
that of minimum 66%. Also the nature of VCU wherein an AF is required to make investment also differs from VCU
for VCF (as explained at Pg.1).
The differences as well as common points are listed in brief herein below:
 Min 66% of corpus  Unlisted Equity or equity linked instrument of VCU
 Companies listed or proposed to be listed on SME Exchange or SME segment
 Max 33% of Corpus  Subscription to IPO of VCU
 Debt instrument of VCU where already it has invested by way of Equity
 Preferential allotment of equity or linked instruments of listed Co. with 1 yr lock-in
 Listed equity or linked instruments of financially weak or Sick Company
 SPV to promote investment in accordance to these Regulations
 May invest in units of other registered VCF.
 Not more than 25% of the Investible Fund in one Investee Company
 Not invest in associate Companies except with approval of 75% of investor by value
 May invest in securities of Companies outside India subject to RBI norms (in applicability of above provisions).
Venture Capital Fund
 Un-invested portion may be invested in liquid mutual fund; bank deposits, treasury bills, commercial
papers and such other liquid assets.
 Shall not borrow funds or engage in leverage except for meeting temporary funding requirements subject
to: For Max 30 Days; Max 4 times a Year; Max 10% of Investible funds.
Both VCF & AF
Angel Fund
 100% investment to be in VCU (as specified for AF)
 Not more than 25% of the total investments under all schemes in one Investee Company
 Not invest in associate Companies
 Investment in VCU to be locked in for period of 3 years
 Min. Investment in a VCU to be of Rs. 50 Lacs
 Max investment in a VCU to be Rs. 50 Cr.
 May not invest in securities of companies outside India

5. May 2014
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Fund Manager
Structure of Fund
Provisions for Funding through Foreign Nationals
As per Regulation 15 of SEBI Regulations, 2012 the companies incorporated outside India can make
investment in securities but subject to the conditions or guidelines that may be stipulated or issued by
the Reserve Bank of India and the Board from time to time.
 Every AIF including a VCF & AF shall be managed by a Fund Manager.
 The key investment team of Fund Manager to be appointed should have relevant professional
qualification and adequate experience in the following field, and also one key personnel should have
atleast 5 years experience in:
 Advising or managing pool of Capital or Funds or assets or wealth
 Portfolio management
 Business of buying, selling or dealing in securities or Financial assistance
 The Manager to have necessary infrastructure and manpower to effectively discharge its activities.
 The Manager must be a Fit & Proper person in terms of schedule II of SEBI (Intermediaries)
Regulations, 2008 including but not limited to, the principal officer and the key management persons
by whatever name called –
 integrity, reputation and character;
 absence of convictions and restraint orders;
 Competence including financial solvency and networth.
 The fund may be in any of the following structure:
 Body Corporate
 LLP
 Trust
 The Trust form of structure is most prevalent
 In case of Body Corporate, how units to be issued to investors remain unclear since the same will
attract the provisions of Deposits under Companies Act.

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Tax Provisions
STATUS FOR FUND
The SEBI Regulations, 2012 specifically provide that Category I AIFs formed as trusts or companies
shall be construed as “Venture Capital Company” or “Venture Capital Fund”. Such venture capital
groups are exempted from tax in accordance with Section 10 (23FB) of the Income Tax Act, 1961 (“IT
Act”).
Furthermore, Category I AIFs that do not fall under the sub category of VCFs shall not eligible for a tax
pass through. Hence, it can be argued that only those Category I AIFs that invest primarily in unlisted
securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new
products, new services, technology or intellectual property right based activities or a new business
model i.e. are VCFs are eligible for a tax pass through. It is pertinent to mention here that a whole
gamut of Category I AIFs which are setup as SME funds, social venture funds, infrastructure funds does
not enjoy exemption u/s 10(23FB) of the Income Tax Act, even though these funds would in all
likelihood have “positive spillover effects on the economy”.
TAX PASS THROUGH
In addition to what is stated above the Income from funds other than VCFs & AF under Category I, and
for other categories of funds too, which are not exempted under Section 10(23FB) of the IT Act,
taxation of the same may be structured on the basis of type of entity incorporated. It is worthy to
note that other funds to achieve a tax pass through status, the industry has resorted to the taxation
principles of trust since majority of these investment funds are started as trusts. The income of a trust
is subject to tax under Section 161 to 164 of the IT Act. As per section 164 of the IT Act, the trust shall
be considered as ‘determinate trust’ i.e. where the beneficiaries and their individual shares are
ascertainable in the trust deed, such type of trust are believed to be eligible to achieve a tax pass
through status. However on the other hand if the trust is not determinate then the income of the
trust would be chargeable to Maximum Marginal Rate (MMR) in accordance with section 164(1) IT
Act.
STATUS FOR INVESTOR INVESTING IN FUND
It is very important to mention that the above mentioned tax pass through ensures that the income is
exempted at the fund level and is only taxable in the hands of the investors.
According to Section 115U of the IT Act any amount of income distributed by a venture capital
company or venture capital fund to the investors shall be chargeable to tax and such company or fund
shall be liable to pay income-tax on such distributed income at the rate as prescribed. Hence it can be
construed from this Section ensures that the income of a VCF earned from its investment in any VCU
shall be exempted from tax in the hands of the fund and shall only be taxable in the hands of the
investors of the fund.

7. May 2014
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Liquidation
 A fund can be wound-up at any of the following instance:
 The tenure mentioned in the PPM (for all the schemes) is over; or
 The trustees intends to wound up the fund in the interests of investors; or
 75% of the investors by value of their investment pass a resolution to wound up the
fund; or
 SEBI directs in the interests of investors.
 Assets of the fund to be liquidated within 1year from date of intimation of liquidation and
proceeds accruing to the investors to be distributed after satisfying all liabilities.
 The process of winding up shall otherwise be in accordance to the structure of the fund i.e.
whether Trust, LLP, Company or body corporate and shall be required to follow the process as
prescribed under the specific statute.
For Queries, Contact:
Ms. Deepika Vijay Sawhney
Partner
Corporate Professionals,
Advisors & Advocates
Mobile: + 91 9818316936
Tel: +91.11.40622229
Email: deepika@indiacp.com
Ms. Aarti Sharma
Associate
Corporate Professionals,
Advisors & Advocates
Mobile: + 91 9650100622
Tel: +91.11.40622253
Email: aarti@indiacp.com
DISCLAIMER
This Document is on the analysis of the provisions contained in respective governing laws and our understanding and
interpretation of the same and should not be constituted as an advice. Also this is only a abridged document giving brief
about the AIF regulations and cannot be deemed to have detailed coverage regarding the points covered and other
conditions and provisions stipulated in the Regulations. For any further query, reference should be drawn to the Regulations
and circulars as issued from time to time or a detailed opinion may also be sought from us. We expressly disclaim any
financial or other responsibility arising due to any action taken by any person on the basis of this opinion.