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The Reserve Bank of India (RBI) has proposed easing certain norms governing investments by banks, NBFCs, and other regulated entities (REs) in Alternative Investment Funds (AIFs). This comes after regulatory actions taken in December 2023, aimed at curbing potential evergreening through AIFs, were found to have instilled financial discipline. The revised draft directions suggest allowing REs to invest up to 5% of a scheme's corpus freely, capping individual contributions at 10% and collective exposure at 15%. Provisions will be mandatory in specific cases of downstream debt investments. SEBI has also issued complementary due diligence requirements.
In a move aimed at refining the regulatory framework around investments in Alternative Investment Funds (AIFs), the Reserve Bank of India (RBI) earlier this week proposed a more relaxed set of norms for banks, NBFCs, and other regulated entities (REs). Advertisement
Back in December 2023, the central bank had issued a set of guidelines intended to address concerns about potential evergreening via AIFs. Following a subsequent review, the RBI stated that these measures had successfully encouraged financial discipline among REs in their AIF-related investments.
Adding to this, the Securities and Exchange Board of India (SEBI) had issued its own directives, which mandated specific due diligence standards concerning both investors and the investment activities of AIFs. These measures were designed to avoid any circumvention of existing regulatory structures.
Given these developments, the RBI issued a revised draft of directions for RE investments in AIFs, seeking feedback from stakeholders and the general public.
Under the proposed norms, an individual RE would be permitted to contribute up to 10% of the total corpus of an AIF scheme. Additionally, a collective cap of 15% has been suggested for the aggregate investment from all REs in a single scheme.
Notably, investments of up to 5% of a scheme's corpus by a regulated entity would be allowed without any restriction. However, the RBI indicated that if an RE's investment exceeds 5% and the AIF has a downstream debt exposure to the RE's debtor company - excluding equity shares, compulsorily convertible preference shares, and compulsorily convertible debentures - then the RE would be mandated to make 100% provisions corresponding to its share of exposure.
The draft also includes a provision allowing the RBI to exempt certain strategically significant AIFs from the proposed conditions, in consultation with the government.
Stakeholders and members of the public have been invited to submit their comments on these draft directions until early June 2025.
By retaining stringent provisioning norms where conflicts of interest might arise, and aligning with SEBI's due diligence directives, the RBI appears to be balancing regulatory oversight with the need for strategic capital deployment. As the financial ecosystem matures and safeguards evolve, these revised guidelines may pave the way for deeper institutional participation in India's growing AIF landscape.
Source - PTI
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