In a significant move, the Reserve Bank of India (RBI) on Tuesday introduced regulations to prevent banks and non-banking financial companies (NBFCs) from utilising the alternative investment fund (AIF) route to ‘evergreen’ their loans.
Taking the cognizance of certain transactions of REs involving AIFs, the central bank highlighted Regulated Entities (REs) make investments in units of AIFs as part of their regular investment operations. These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs.
REs shall not make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the RE, RBI said in a statement.
The debtor company of the RE, for this purpose, shall mean any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months, it clarified.
The central bank in its circular has further gave clarification for the REs which are already investor in AIF scheme.
“If an AIF scheme, in which RE is already an investor, makes a downstream investment in any such debtor company, then the RE shall liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF,” it said.
“….if REs have already invested into such schemes having downstream investment in their debtor companies as on date, the 30-day period for liquidation shall be counted from date of issuance of this circular. REs shall forthwith arrange to advise the AIFs suitably in the matter,” it added.
