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SEBI, Seed Capital and Start-ups- Accreditation Compliances Curbing Angel Investments?



Written by Drishti Verma, the author is law student currently pursuing BA.LLB from Symbiosis Law School, Pune.

Introduction

With nearly 200,000 start-ups officially recognised in India as of October 2025, along with 100+ unicorns having emerged till date, India has secured its position as the third largest start-up hub in the world. This trajectory in turn highlights the effectiveness of the Indian policies and administrative framework that support business development and increasing market assurance for start-ups, essentially championed under the “Ease of Doing Business” agenda. However, recent changes in regulatory practices may suggest a contemplative shift in the Indian start-up economy, creating apprehension with respect to seed capital and the funds fuelling the entire system.


Start-ups in India often rely on angel investors for critical seed capital, fuelling innovation and entrepreneurship at the earliest stages of a business. However, contemporary regulatory shifts with the introduction and eventual revocation of the angel tax, and more importantly, the accreditation compliance introduced by the Securities Exchange Board of India (SEBI), creates a foreseeable apprehension that the government could be attempting to curb start-up growth by employing enhanced compliance requirements in their funding. 


This, however, does not fit the larger perspective of government’s propagated intention of promoting its ‘Ease of Doing Business’ policy. This contradiction in policy administration therefore creates palpable questions with respect to the foreseeable growth of the start-up economy in India. Therefore, the present circumstances create the imperative requirement of analysing and understanding the need for SEBI regulations and compliances and its calculated application in an economy powered by the idea of encouraging business growth and development. 


Angel Investing landscape in India

The Indian start-up economy has experienced exponential growth over the last decade, characterised with thousands of new ventures emerging across key sectors, including technology and healthcare.  Angel investors play a vital role at the centre of this transformation.  These early-stage investors assist firms in navigating the challenging terrain of development and innovation by offering not only funding but also the required mentorship and advice.


Angel investors are individuals who make early-stage financial investments in start-ups, frequently in exchange for loan or equity and are typically the first external funding sources for any new start-up, as opposed to venture capitalists, who typically invest later in a company's life cycle.  Start-up survival depends on this kind of early funding since it may assist businesses in overcoming some of the most important early obstacles, like product development, market entry, and operating expenses. Angel Investors thus not only help with seed capital, but also help in strengthening the entrepreneurial culture of the nation by fostering a risk- taking spirit and creating an ecosystem that is open to failure and a learning curve, hence manufacturing a risk- forward start- up ecosystem.


Angel Investors are huge stakeholders to the Indian economy. By offering financial support to growing businesses, they become the functional force for the economy to develop and upgrade itself with time. Additionally, by offering required mentorship and promoting businesses to overcome the risk factor, such investors allow start-ups to survive tough competition in a healthy market like India. Thus, it is substantially true that Angel Investors are the driving force behind many businesses in their early stages of functioning.

Therefore, a cumulative effect of Angel investments for start-ups, especially in terms of job creation, economic expansion and innovation, becomes a substantial factor legitimating the Ease of Doing Business dream of the Indian Government. However, the recent regulatory compliances suggest a conflicting policy direction. 


Angel Tax and its Abolishment

Introduced by then Finance Minister Pranab Mukherjee under the Union Budget through the Finance Act 2012 as Section 56 (2) (viib) of the Income Tax Act 1961, Angel Tax is a classification of income tax that operates on unlisted companies raising capital from investors other than venture capital undertakings via issue of shares. It was seen that prominent start-ups would pitch their strong brand value and foreseeable future growth to issue shares costing higher than any other comparable stock. The government therefore prepared the provision for ‘angel tax’ which claimed that Indian start-ups receiving such angel investment shall be liable to pay tax on such funds received if the amount received is higher than company’s fair market value of FMV. This tax hence acquired its colloquial name “angel” tax and established to be covered under ‘income from other sources’ for the purposes of Income Tax Act 1961. Such a levy, it was believed, would allow the government to oversee transactions in relation to formation of any new companies not acquiring public debts but attracting private funds to initiate operations, hence curbing transactions possibly involved in money laundering.


However, as seen with any other overly intrusive government policy, the introduction of “angel” tax was also seen to be a major cause of hindered growth of the entire start-up industry due to restrained cash flows and limited scope for expansion. Additionally, some start-ups also claimed that paying such hefty amount in tax and late fee charges was resulting in India being at a competitive disadvantage in the global market where the foreign counterparts were not expected to participate in such regimes. 

As a result, the tax was initially partially exempted conditionally in 2019, and eventually in the budget of 2024, completely abolished. The decision of such abolishment was seen to be reflecting the government’s commitment to bolstering the start-up ecosystem. 


SEBI Regulation - Accreditation Requirements

With the Angel tax now abolished, the Angel investment market of India soared to a billion dollars, showing how the government’s act to abolish it in fact worked in strengthening the start-up ecosystem, in effect to carry forward the Ease of Doing Business Agenda. 

However, in the 210th of the SEBI Board on June 18, 2025, Mumbai, the Board collectively decided to execute the following “New Rules” relating to Angel Investment Management-

The framework for accreditation of investors was first proposed by the board back in 2012 by the SEBI (Alternative Investment Funds) Regulations or the AIF Regulations to facilitate participation of Accredited investors in the securities market, where ‘accredited investors’ were seen to be individuals who understood various financial products and the risks- returns associated with the securities market, enabling them to make informed decisions for their investments. As a result of such proposal, a consultation paper was issued on February 24, 2021 for public views and comments. 


The following benefits are expected with the accreditation on investors-

  1. With well qualified individuals only being allowed to accredited, it is aspired that a clean class of sophisticated investors with the capacity and the willingness to invest in securities will be able to invest in the high on returns, albeit riskier products. Leading to improvement in quality of investments.

  2. Reducing the pool of investors to counted and registered investors will allow the regulatory board to keep a standard check on all transactions taking place under the name of investments, hence countering the menace of money laundering, a goal which was also aimed to be achieve by the Angel Tax in 2012.

  3. With the terms of the agreement in subject, accreditation is also expected to allow investors to diversify their portfolios by availing the benefit of lower ticket size.

The board also provided the public with the eligibility criteria for an accredited investor, providing an exhaustive list consisting of “Individuals, HUF, Family Trusts and sole proprietorships, all having

  1. more than 2 crores in annual income, OR

  2. Net-worth greater than or equal to 7.5 crores, of which, at least INR 3.75 Crores is in form of financial assets, OR

  3. Annual Income more than or equal to 1 crore, and net worth greater than or equal to 5 crores, of which, at least 2.5 crores is in the form of Financial Assets.”


Additionally, Partnership Firms set up under the Indian Partnership Act, 1932 in which each partner independently meets the Accredited Investor criteria, or Trusts (other than family trust) Assets under Management greater than or equal to 50 crores, or Body corporates with net worth greater than or equal to INR 50 crores, to be considered Accredited Investors.


While the above prepared list of requirements guarantees that only individuals who are capable of investing invest in start-ups, the accreditation system has its own share of negative critique.


In another paper titled- Why the Accredited Investor Standard Fails the average Investor by Lee So-Yeon, the author has deliberated on the possible consequences of introducing an accreditation framework and has concluded that at the bottom of all the short advantages envisaged by the government, lies the biggest drawback- the widening gap between the rich and poor. The author claims that by allowing only the rich to invest and earn back returns, the government is not only providing an additional source of income to the rich, but also declining an average investor to earn through such means. India is a country that suffers from a wide rich and poor gap, and such a policy could possibly result in the consequences estimated by the author.

However, another paper titled Revisiting the Investor Standard by Syed Haq, the author has vehemently argued the benefits of accreditation. Listing out all the advantages cited above by SEBI, the author has reinforced the idea that accreditation does ensure quality investments in the market and better development of the start-up economy.


The author of this paper believes that while both views to accreditation frameworks offer equal insights into its economic effects, this paper, from the point of view of start-ups receiving angel investments, supports the accreditation policy introduced by SEBI.


Conclusion & Recommendations

Therefore, in light of the above analysis, this paper concludes that the Accreditation framework can successfully guarantee the quality of investments and knowledge being afforded to the start-up industry. That is, the framework does NOT curb the angel investments being offered to start-ups, but rather ensure that a strict degree of quality is maintained, thus supporting the broader idea of the ‘Ease of Doing Business’ agenda.

Secondly, as far as the rich and poor divide is concerned, from the context of providing seed capital to start ups, which usually amount to big figures, it is not in the capacity of an ordinary investor to be involved. That is the accreditation, although not working on decreasing the gap, is also not increasing the gap any further. That is, even before the implementation of the new rules, only the “rich” can afford to become an angel investor in the first place, so it can be assumed that the gap will not be disturbed any further if the accreditation system is introduced, although it does not guarantee any prevention of money laundering, as apprehended by the Angel Tax system. 


On the basis of the above the author would like to put forward the following recommendations:


  1. Introduction of tier-based accreditation framework- Since the widening rich and poor gap can still be a point of concern for many, the accreditation framework can be designed with tiered monetary limits. As in a person within the limits of x amount for wealth or net value, can invest upto z amount. This shall ensure that there is no complete barring for ordinary investors to create new means of income from returns. This shall also ensure that industrial knowledge, which has also been highlighted as a key concern, is not side-lined by rigid monetary limits.


  2. Creation of alternate investment models- Since the crux of the issue lies in the economic capacity of the ‘angel individual’, alternative option of ‘angel crowdfunding’ could be explored, reducing the risk per individual, but encouraging ordinary common man to also support start- up economy, hence ensuring collective effort towards Vikasit Bharat under the broader ease of doing business agenda.


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