Angel Investments vs. Venture Capital Legal Frameworks in India.

Angel Investments vs. Venture Capital: Legal Frameworks in India

India’s startup eco-system received a massive growth in recent years and gained cumulatively more than 29,200 crores from the stock market, becomes the 3rd largest startup ecosystem in the world. As startups aim to build large scale industry with rapid development, they need funding, for that, Angel investor and Venture Capitalists are two primary pillars of this funding ecosystem. While both angel investments and venture capital play an important role in driving the growth of the startups, their objective and legal framework differs significantly. This article explores in depth legal, comparative, and contemporary analysis of Angel Investment and venture capital in India, while juxtaposing them with global practices.

Understanding Angel Investments and Venture Capital.

Angel Investment is an early-stage investment where high net worth individuals (HNIs) invest their personal capitals in startups. This investment is generally made during the initial stage when startups are struggling to get fund from traditional resources, that’s why it is called ‘seed investing’. They often work as a mentor to the startups. Angel Investors often invest smaller amounts than other fund-raising capitalist and receive equity shares of the company. The due-diligence process is moderate. This type of investments are deals with high risks as they invest in the unproven business models. In India, Angel Investments are usually structured as equity or equity linked instruments issued to investors via the private placement regime under the Companies Act,2013. In India, Angel Investment usually range from INR 25 lakhs to INR 2 crores.

Venture Capital (VC) is a form of private equity, which provides funding to startups with high-growth potential in exchange for equity stakes. It’s finances generally comes from professional investors, banks or other financial institution. Harvard Business School Professor Georges Doriot is generally considered the “Father of Venture Capital”. There are many types of venture capital such as Seed funding (less common), Series A, B, Start-up capital, Expansion Funding, Late-stage funding and Bridge funding. The investments comparably larger than angel investment. VC’s due-diligence process is more rigorous than angel investment. VC funding is a long-term investment, where profit can be realised within a 5–10-year timeframe, here the investment ranges from INR 5 crores to over INR 100 crores, depending on the funding round.

Regulatory Regime in India.

Both Angel Investment and Venture Capital generally occurs by Private placements of equity or convertible securities under the Companies Act, 2013. Section 42 of the Companies Act permits a company shares or convertible instruments to a “select group of persons” by means of private placement offer-cum-application. The Act limits a maximum of 200 identified investors to private placement per financial year. In practice, the shares allotted to the VCs and angels through a board resolution and filings. Valuation and pricing must be certified by a registered valuer. The company must maintain records of all the identified investors.

Understanding of AIF.

SEBI (Security and Exchange Board of India) Alternative Investment Funds Regulations (AIF) came into force from 21st May 2012. As per this, AIF is a privately pooled investment vehicle that collects funds from investors for investments in private equity, pooling of funds through any entity other than AIF is prohibited. There are different types of categories under AIF, Both Angel investments and Venture capital comes under the Category-1 AIF, which also includes infrastructure funds, SME funds, and social impact funds.

Registration Under SEBI: In India, Both Angel Investments and Venture Capitals are governed by SEBI to ensure investor’s protection, maintain transparency and compliance with the legal frameworks. In case of Angel Investments individual angel investors are not required for the registration. However, when ‘angel funds’ pooled investments collectively from multiple investors, registration is necessary through AIF as mentioned before. Venture Capital funds must register under AIF of SEBI as it deals with higher amount in high potential startups.

Other Regulations.

Both Angel Investment and Venture Capital intersect with other laws. For example, RBI regulates foreign investment into Indian Startups, FEMA (Foreign Exchange Management Act) must be adhered while receiving funds from foreign capital. PMLA (Prevention of Money Laundering Act) obligates the startups to conduct KYC and AML checks on significant investments in any form. STAMP DUTY becomes mandatory under Indian Stamp Act when equity shares issued to foreign Angels or VCs. Section 62 of the Companies Act says that transfer of shares on private placement must be completed on non-judicial stamp paper as per the State Stamp Act. Angel Investments and Venture Capital equally liable to these compliance steps, though sometimes it burdens the smaller angel rounds.

Indian Startup Case Studies.

Flipkart (e-commerce): Founded in 2007 by Sachin Bansal and Binny Bansal, began as online bookstore on 2009, Flipkart’s founders incorporated as a private company under the Companies Act and Ashish Gupta (Founder of Helion Ventures) invested 10 lakhs as first angel and benefitted later from long term capital gains. All the investment subscribed through SSA and board-approved allotments. Gupta reportedly earned 20 million from the Walmart (parent company) acquisition in 2018. After this, VC seemed to invest followed by larger rounds like Tiger Global, SoftBank, Naspers, etc. Flipkart’s journey shows that initially angels were taken risks and later VCs provided the scale capital. In 2025, they transitioned their legal domicile from Singapore to India to cope up with national regulatory frameworks.

Ola Cabs (ride-hailing): Founded in 2010 by Bhavish Agarwal and Ankit Bhati. Initially backed by Anupam Mittal, Rehan Yar and Zeeshan Hayath, the classic angel investors. The angel funding rounds were governed by SSA (Share Subscription Agreements) and SHAs (Shareholder’s Agreements). Ola gained over 3 billion from 2011 onwards with VCs like Tiger Global, Sequoia Capital, Soft Bank and Matrix Partners. These investments are governed by SEBI AIF Regulations and FEMA-compliant FDI channels.

Zomato (food tech): In 2010, Deepika Gugnani invested 10 lakhs acquiring a share with a very low valuation. After that Info Edge, Sequoia, Tiger Global, Ant Financial other VCs lead made it a successive step and her stake’s value multiplied by hundreds of times. This case illustrates impact of long-term capital gains in startup investing.

Paytm (fin-tech): It’s been one of the largest fin-tech unicorns which initially started with founder’s capital and government grants, then eventually raised angels (including Sachin Bansal via Bacancy technology), though in 2011 they didn’t face angel tax as it was introduced in 2012. Later massive VC funding like SAIF Partners, Alibaba, SoftBank etc. highlights evolution of regulatory response. Later VC funds registered as AIFs and compiled with RBI. SEBI IPO rules governed their exits when Paytm launched one of the India’s largest IPOs went in 2021.

Recent Developments.

Abolition of Angel Tax: As mentioned earlier, Budget 2024 removes Angel Tax introducing a landmark change which will maintain the transparency further in startup.

SEBI’s Angel Fund Consultation: “In November 2024, SEBI proposed amendments to the regulatory framework for angel funds. The proposed changes include setting investment ranges between 10 lakh (1 million) and 25 crores (250 million), expanding the scope for angel fund investors. These proposals aim to enhance flexibility and attract more participants in the startup funding eco-system.” These proposals are not yet law, but can reflect that India’s regulator is adapting feedback from the startup community.

Start-up India Reforms: DPIIT (The Department for promotion of industry and internal trade) provides DPPIT-recognised startups some privileges like tax exemptions, relaxed compliance and easier patent and trademark registration. Such business friendly policies will help both angel and VC by improving the prospectus of startup.

Taxation and Incentives.

A major issue historically distinguishing angel vs. VC funding in India was the so called ‘Angel tax’.

Angel tax refers to the income tax payable on the funds raised by unlisted companies from angel investors (under section 56(2) (viib) of the Income Tax act,1961). Many unlisted companies have strong profitability and promising business prospects, making them attractive to angel investors who are willing to purchase stakes at a higher valuation. “When these companies raise funds at a valuation above their fair market value, the excess amount is considered ‘Income from Other Sources’ and is subject to angel tax.”After extensive industry lobbying, this tax has been effectively abolished with effect from FY 2025-26 as declared by our finance minister in the Union Budget 2024. “The abolition of the ‘angel tax’ is a significant development aimed at fostering a more conducive environment for startup investments. This change is expected to encourage more angel investments by removing the tax burden on funds raised above fair market value.” These changes puts angel investors on almost equal footing with other investors, which eliminates the prior 30% tax penalty on their early-stage funding.

VC funds- Pass-through status and capital gains.

Venture Capitals registered under SEBI enjoyed ‘pass-through’ taxation means u/s 10(23FB) and 115UB of the Income Tax act, income is taxed in the hands of the investors, not the fund. Capital gain taxes are exempted under Section 54GB subject to Securities Transactions Tax at a lower rate. In other words, a VC fund itself plays no income tax. The fund investors individually pay taxes on their shares or gains. This framework encourages to maintain the institutional capital flow into startups.

Exit Mechanisms.

In case of Angel Investments exit strategies are not properly structured and no such mandatory provisions are mentioned.

Exists are well defined through IPOs (Initial Public Offerings), mergers or acquisitions and all the clauses are mentioned in the agreement.

International Perspectives.

U.S. framework is more tolerant in case of capital but more restrictive in case of investor’s eligibility. Their startup system generally raises from ‘accredited investors’, with no statutory limit on share price or investment size. These accredited investors must meet certain criteria to be accredited like their financial or professional criteria. U.S. law doesn’t impose a counterpart to India’s angel tax, but it does restrict fundraising without SEC (U.S. Security and Exchange Commission) registration. In US, Section 1202 of Internal Revenue Code allows for the exclusion of up to 100% of capital gains on QSBS (Qualified Small Business Stock) held for at least five years, which is similar to India’s 54GB, offers similar tax benefits. However, India is strict via AIF in case of registration and adherence to any specific regulations where, US puts more priority on management of significant asset than registration.

Singapore government ran an Angel Investment Tax Deduction (AITD) scheme, “Under the scheme, approved angel investors who make equity investments of at least $100,000 in eligible start-ups in a given year will qualify for a 50% tax deduction of the investment on their incomes. To benefit from the scheme, the angel investor must demonstrate the ability to nurture investee companies, through his entrepreneurial or business experience. He should also be prepared to contribute as a board member or an advisor to the start-up.” This system encourages experienced entrepreneurs to mentor startups. Singapore provides a eco-system to grow startups by allowing co-investment by government agencies and maintaining funds system, which is somewhat similar to India’s AIF approach.

Isarael enacted ‘Angels Law’ on 25th July 2023 aiming to boost tech startup investment. “The law will remain in effect until 31 December 2026, when it may be extended. The regulation provides a number of benefits to both high‑tech firms at various stages of their development, and their investors. It allows an investor to credit up to 33% of their investment in shares of a high‑tech firm against Israeli tax liabilities incurred by that firm. Moreover, investors have the option to carry forward any unused tax credits and claim them in subsequent years. The Angels Law also provides an exemption from capital gains tax for an investor who sells shares in a preferred enterprise that has a technology plant and subsequently invests the amount in shares of another hi‑tech company soon after the sale. High‑tech companies also get a tax exemption for any loan interest paid to foreign financial institutions.” The policy is part of Israel’s aggressive startup incentives which eventually complements R&D grants and incubators.

Regulatory Challenges.

Compliance Burdens for Angels: Individual Angel Investors and small seed investment face distinct compliance issues. Multiple regulators (MCA, RBI, SEBI, GST authorities) and their separate regulatory requirements, though designed for more significant deals, can be onerous on the same time. Simplifying processes, lighter regime for solo angels would help.

Exit Mechanisms: Angel Exits are often opportunistic. Angels may remain invested for many years until the founders get a significant liquidity event (M&A, IPO). As angel invest at very high risks, the exit channels are uncertain. By contrast, VC’s exits are usually planned. The common exit routes are IPOs, M&A, or buybacks, also use contractual method to force exits. Indian VC backed startups like Zomato and Paytm executed IPOs, which enables the early investors to realize gains. Overall, VC investors have clearer path to liquidity than angels.

Uniform Definition of Angel Investors: Indian lacked in framing the category of angel investors, where US already has the statutory “accredited investors” category. Introducing the clarification of who can invest in private placements outside AIF rules would draw a clear picture.

Investor’s Protection: Venture Capitalists negotiate extensive investor protection through both contractual rights and legal backstops. Section 241-242 (Operational Mismanagement) of Companies Act, can also apply to VCs if their shareholding is below thresholds. While angel investors often rely on informal trust and future buyout clauses, which should be restructured to promote investor’s protection.

International Alignment: Easier Regulatory compliance under FEMA and tax treaties would encourage foreign angel and VC participation, which will help India global capital. The regulatory frameworks must adhere the global investment trends and prioritize cross border investment.

Conclusion.

Angel Investors and Venture Capitalists are crucial pillars of the startup ecosystem to boost their growth via funding and providing valuable guidance to prosper in the business world. While Angel Investors focus on early-stage startups with smaller investments, Venture Capitalist pooled institutionalised funds to high growth potential business with long term investment. The legal frameworks governing them overlap but diverge in regulatory detail and tax treatment. However, navigating the legal landscapes, both Angel investment and Venture capitalist need more reformation and acquire feasibility by adopting tax incentives, simplified registration process, new sectors and encourage global recognition and cross border transactions.

Lastly, to answer the question, which is better between both of them in terms of investment? There is no uniform answer as each serves a distinct purpose in the startup life cycle. It varies on what kind of business it is and in which stage it belongs. Angel investments are best of early-stage startups needing smaller funds and mentorship, which is also risk-tolerant. VC is ideal for scaling the business, provides larger investment with high equity shares. Both are the key for fostering entrepreneurship and build the startup eco system.

References.

1. ‘Investment Opportunities in India’s Startup Ecosystem: Angel Investing and Venture Capital’ (cwmindia, 2023):- Click Here (25th December 2024)

2. Adam Hayes, ‘What is Venture Capital? Definitions, Pros, Cons and how it works’, (investopedia, 18th October 2024) Click Here (24TH December 2024)

3. Companies Act,2013, s42

4. Roopal Bajaj & Keshav Singhania, ‘A legal guides to India’s AIFs, Angel Funds & more’ (inc42, 24th July 2022) Click Here (accessed 25th December 2024)

5. Private equity poised for growth in India as IPOs wane, industry executives say’ (Reuters, February 11) Click Here (accessed 5th March 2025)

6. Income Tax Act 1961, 56(2) (viib)

7. What is Angel Tax’ (Groww, 22nd August 2024) Click Here (accessed 25th December 2024)

8. Understanding the legal aspects of Angel Investing in India in 2025’ (BestVantage Technology, February 7) Click Here (accessed 5th March 2025)

9. Income Tax Act 1961, 10(23FB)

10. Income Tax Act 1961, 115UB

11. Income Tax Act 1961, s 54GB

12. ‘Accredited Investors’(sec.gov, 30th Jan,2025) Click Here (accessed 27th May,2025)

13. Internal Revenue Code, s1202

14. Spring media release: tax deduction scheme to encourage angel investment in start-ups”( nas.gov, 28th June, 2010) Click Here (accessed 29th May,2025)

15. “Grants tax benefits to high-tech angel investors”(investmentpolicy , 25th July, 2023) Click Here (accessed 29th May, 2025)