RBI modifies norms for lenders having exposure into AIFs

The Reserve Bank of India (RBI) has modified norms for regulated entities (REs) concerning their investments in Alternative Investment Funds (AIF). 

The Reserve Bank of India (RBI) has modified norms for regulated entities (REs) concerning their investments in Alternative Investment Funds (AIFs).

As per the fresh directive, REs need to only set aside provisions to the extent of their investment in the AIF scheme which is further invested by the AIFs in a debtor’s company and not the entire investment in the AIF scheme.

“With a view to ensuring uniformity in implementation among the REs, and to address the concerns flagged in various representations received from stakeholders, it is advised that downstream investments shall exclude investments in equity shares of the debtor company of the RE, but shall include all other investments, including investment in hybrid instruments,” the RBI said in a circular issued on Wednesday.

“Provisioning shall be required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme,” the regulator said.

Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the circular.

The RBI had in December 2023 prevented REs from making investments in the units of AIFs having downstream investments either directly or indirectly in any debtor’s company of REs. This was to stop the practice of evergreening of loans.