RBI Tightens Norms for AIF Investments

Syllabus:  GS-III, Economy;

Subject: Economy;

Topic: Indian Economy, Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment;

Issue: RBI guidelines on AIF;

Context: The Reserve Bank of India has tightened norms for lenders relating to making investments in units of Alternative Investment Funds (AIFs) to address concerns relating to possible ever-greening of stressed loans.

Rationale Behind the Move:

  • Investment Practices: Regulated Entities (REs) often invest in units of AIFs as part of their regular investment operations.
  • Substitution of direct loan exposure: The RBI noted certain transactions involving AIFs that substituted direct loan exposure with indirect exposure, raising regulatory concerns.
  • Curb ever-greening of loans: has introduced tighter norms for Regulated Entities (REs) to curb the practice of ever-greening loans through investments in Alternative Investment Funds (AIFs).

RBI’s New Guidelines:

  • Restriction on Investments: REs are prohibited from investing in any AIF scheme that indirectly or directly has downstream investments in a debtor company of the RE.
  • Liquidation provisions: If an AIF scheme, where an RE is already an investor, makes a downstream investment in a debtor company, the RE must liquidate its investment in the scheme within 30 days from the date of such investment by the AIF.
  • Provision for Existing Investments: For existing investments in such schemes, REs have 30 days from the issuance of the circular to liquidate.
    • Failure to do so requires them to make a 100% provision on these investments.
  • Capital Fund Deductions: Investments by REs in subordinated units of any AIF scheme with a ‘priority distribution model’ are subject to full deduction from the RE’s capital funds.


About Alternative Investment Funds (AIFs):

  • Definition: AIFs are privately pooled investment vehicles established in India, collecting funds from sophisticated investors for investing.
  • Regulation: Governed by the SEBI (Alternative Investment Funds) Regulations, 2012.
  • Formation: Can be formed as a company, Limited Liability Partnership (LLP), trust, etc.
  • Investor Profile: Aimed at high rollers, including domestic and foreign investors in India. Generally favoured by institutions and high net worth individuals due to high investment amounts.
  • Categories of AIFs:
    • Category I: Invests in start-ups, early-stage ventures, SMEs, etc. Includes venture capital funds, angel funds, etc.
    • Category II: Includes funds not in Category I/III, like real estate funds, debt funds, etc. No leverage or borrowing except for operational requirements.
    • Category III: Employs complex trading strategies, may use leverage. Includes hedge funds, PIPE Funds, etc.
  • Fund Structure: Category I and II AIFs must be close-ended and have a minimum tenure of three years.
  • Category III AIFs can be open-ended or close-ended.
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