India's startup ecosystem has been in a remarkable transformation phase for the last 10 years. The number of government-recognized startups has grown from around 20,000 in 2015 to more than 1,59,000 by early 2025 — an extraordinary surge significantly powered by early-stage angel investments. Angel investors have long acted as the backbone of first-cheque capital in India, stepping in at the most precarious phase when ideas are still raw and institutional investors are wary. Recognizing this critical role and the growing complexity of startup financing, SEBI introduced sweeping reforms to the regulatory framework for Angel Funds in September 2025.

Though presented as regulatory refinements, these reforms mark one of the most significant shifts in India’s early-stage capital landscape, infusing a hitherto flexible market with much greater structure, transparency, and oversight.

A new era for Angel Funds

SEBI's new framework, through the Alternative Investment Funds (AIF) (Second Amendment) Regulations, 2025, reshapes the landscape in which Angel Funds raise and manage capital. While Angel Funds continue to be part of the AIF structure, the revised norms elevate governance standards and bring investor eligibility in line with the best international practices.

A key shift is the mandatory accreditation of all investors, replacing the decade-old self-declaration model that required only a net-worth threshold of ₹2 crore for individuals and ₹10 crore for corporates. The new system mandates third-party verification to ensure investors have the financial strength and sophistication for high-risk startup investing. Supporting this shift, SEBI has simplified the documentation and issued a consultation paper to further streamline the accreditation.

Balancing investor protection and access

This accreditation requirement has generally been welcomed for strengthening investor protection and bringing greater discipline into early-stage investing. The general consensus is that funding a startup demands financial maturity, which accreditation helps verify.

But critics say strict eligibility norms could shut out participation from smaller or first-time investors who possess expertise but may not meet a high wealth threshold, thereby narrowing India's active angel investor base. That said, many believe the reforms will increase clarity, standardization, and confidence in the system by ensuring alignment of investor capabilities with early-stage venture risks.

What Angel Funds are and why they matter

Angel Funds are a form of Category I AIF that specifically raises capital from accredited investors for investment in early-stage companies. Such funds pool resources to directly invest in high-potential businesses, without creating different schemes, so that their structures are made simple to reduce administrative intricacies.

They operate under Section 19-A(1) of the SEBI AIF Regulations, 2012, which impose strict guidelines on compliance, investment ceilings, transparency, and investor protection. The Angel Funds provide a conduit for pooled early-stage capital that bridges the gap before venture capital firms step in, enabling young startups to access resources required for innovation, prototyping, and market entry.

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Key takeaways from SEBI’s revised Angel Fund framework

The revised SEBI regulations bring far-reaching changes in everything from raising capital to fund operations and exits by investors. The key reforms are:

1. Angel Funds can raise money only from accredited investors

Under the new regulations, Angel Funds that get freshly registered shall raise funds only from 'Accredited Investors' defined under Regulation 2(1)(ab). Existing funds are allowed to continue operating until September 8, 2026. During this transitional period, they may onboard as many as 200 non-accredited investors but cannot accept fresh contributions beyond the deadline.

2. First close timeline and minimum investor requirement

The first close for the Angel Funds has to be declared within 12 months of SEBI acknowledging its Private Placement Memorandum, and for this first close, at least five accredited investors are needed.

3. Simplified investment structure and record maintenance

Angel Funds will continue to directly invest in startups without launching separate schemes. However, though the filing of term sheets has been done away with by SEBI, funds would need to maintain detailed internal records of each investment and its participating investors.

4. Follow-on investment flexibility

Angel Funds may make follow-on investments in portfolio companies that have graduated beyond startup status if:

The post-issue shareholding remains below the pre-issue level.

The total follow-on investment does not exceed ₹25 crore.

Contributions by original investors are made on a pro-rata basis.

5. Overseas investments allowed

Angel Funds are now allowed to invest in overseas companies, in tune with instructions from SEBI and RBI. More importantly, the 25% overseas investment limit is to be calculated based on total investments at cost as opposed to corpus, which more correctly reflects the actual level of fund activity.

6. Clear allocation methodology

Starting from October 15, 2025, Angel Funds shall follow a well-disclosed, non-discretionary methodology for allocation of investment opportunities amongst consenting investors. This further enhances the elements of transparency and discipline in fund operations.

7. Benchmarking and reporting enhancements

Funds whose cumulative investments exceed ₹100 crore will have to conduct annual audits related to PPM compliance. Similarly, Angel Funds shall report investment-wise valuation and cash flow details to benchmarking agencies to ensure consistency and reliability in the performance measurement. Every disclosure of past performance shall be followed by benchmark comparison reports.

8. Structural recognition as a distinct category

Accordingly, all Angel Funds shall be treated as a separate Category I AIF, Angel Fund, and not as a sub-category under Venture Capital Funds. This gives Angel Funds clearer regulatory identity and operational autonomy.

Why the reforms were needed now

Early-stage investing is intrinsically high-risk. Over the years, as the maturation of the startup landscape has occurred, diversity among investors has increased, with entry points including high-net-worth individuals, corporate executives, family offices, and cross-border participants. This previous framework, based upon self-declaration and with very little verification, did not correctly represent the scale and complexity of the startup ecosystem within India itself.

The revised framework by SEBI aims to:

• Strengthen investor protection by incorporating robust eligibility checks
• Improve transparency through valuation and disclosure mandates
• Balance risk control with operational flexibility

A quiet revolution for early-stage capital

The reforms of SEBI in Angel Funds mark a significant movement toward better governance, clarity of processes, and accountability in the early-stage investment ecosystem. Though it may challenge smaller investors to adapt, the long-term effect will be a more transparent, professional, and resilient framework for India's fast-growing startup economy — a quiet but significant transformation.

About the Author

Rachit Chawla, a SEBI-registered investment advisor and seasoned entrepreneur, is the visionary Founder & CEO of FinwayAccelerator, asubsidiary of Finway (an RBI-registered NBFC) established in 2017. With a mission to empower India’s startup ecosystem, Finway Accelerator functions as a tech-enabled venture capitalist firm that nurtures early and growth-stage startups through funding, mentorship, and strategic guidance. An alumnus of Aston University, Birmingham (U.K.), Rachit holds a degree in Business & Management and brings over a decade of experience spanning investment advisory,wealth management, lending, and startup scaling. Prior to entrepreneurship, he worked with Intel Corporation at its EMEA Headquarters in Swindon, U.K., as a Pricing Analyst, before returning to India to pursue his entrepreneurial ambitions. His entrepreneurial journey began in 2008 with the founding of CHC Logistics Pvt. Ltd., which grew into a nationwide logistics company with 20+ branches and a turnover of INR 200 million within just a few years. Alongside logistics, Rachit has been managing his family’s investment portfolio as a high-net-worth investor since 2008.