The Reserve Bank of India (RBI) has relaxed its regulations concerning lenders’ investments in alternative investment funds (AIFs) following feedback from stakeholders. This decision comes after the central bank tightened norms in December 2023 to address concerns regarding the potential misuse of funds.
According to the latest circular issued by the RBI, lenders are now permitted to invest in AIF schemes that have downstream equity investments in debtor companies. However, investments in schemes with hybrid instruments in debtor companies are not allowed.
AIFs are privately pooled investment vehicles that collect funds from investors to invest according to a defined policy for the benefit of investors.
Additionally, the RBI has adjusted provisioning norms. Lenders are now required to provision only for the amount invested in AIF schemes, which is further invested in debtor companies. Previously, provisioning was required for the entire investment in the AIF scheme.
The RBI clarified that if a lender holds investment in subordinated units of an AIF scheme with downstream exposure to debtor companies, revised provisioning norms must be followed.
Investments made by lenders in AIFs through intermediaries like fund of funds or mutual funds are not covered by the latest circular.
Mixed bag
The RBI’s decision has received mixed reactions from industry experts. While some view it as a step towards clarity and relief for AIFs and banks/non-banking financial companies (NBFCs), others raise concerns about certain ambiguities and new questions arising from the circular.
| While the circular is expected to provide relief to AIFs and banks/non-banking financial companies (NBFCs), as it offers clarity on regulatory matters. |
However, some questions remain regarding the treatment of certain investments, particularly in relation to compulsory convertible instruments such as CCPS and CCDs. The industry is debating whether such investments need to be converted to equity to comply with the new regulations.
Additionally, there is ambiguity regarding whether existing entities can fulfill capital calls to AIFs that do not meet the specific criteria outlined in the circular.
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