The Reserve Bank of India (RBI) has announced modifications to its circular regarding regulated entities’ (RE) investments in alternative investment funds (AIFs), easing some of the requirements following feedback from stakeholders. The central bank stated that these revisions aim to ensure “uniformity in implementation among the REs, and to address the concerns flagged in various representations received from stakeholders”.
In December 2023, RBI had introduced a circular governing investments by banks, non-bank lenders, and other REs in the AIF sector amid concerns regarding the utilization of this route for loan restructuring. Initial concerns suggested that REs were using investments in AIFs to repay loans, potentially masking non-performing assets. Clarifying its stance, the RBI specified that provisioning requirements would only apply to the extent of the RE’s investment in the AIF scheme, which is subsequently invested in the debtor company, rather than the entire investment in the AIF scheme.
Under the revised circular, REs are no longer required to provision 100% against their entire AIF investment, providing relief to entities that faced profit impacts due to this requirement. Additionally, the modified circular excludes investments in equity shares of the debtor company of the RE from the category of “downstream investments,” while including all other investments, including those in hybrid instruments.
Addressed to commercial banks, cooperative lenders, NBFCs (Non-Banking Financial Companies), including housing finance companies, and other financial institutions, the circular stipulates that deduction from capital will occur equally from both Tier-1 and Tier-2 capital of an RE. Furthermore, it clarified that investments in subordinated units of the AIF scheme encompass all forms of subordinated exposures, including sponsor units.
The revised circular also clarified that investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are not subject to its scope.
Gopal Srinivasan, Chairman of TVS Capital Fund, welcomed the clarifications issued by the RBI, particularly highlighting the significance of the clarification on investments in AIFs and fund of funds.
This modification is expected to streamline AIF investments by regulated entities, ensuring adherence to regulatory norms while fostering growth and investment in the sector.
