RBI moots 15% cap on banks, NBFCs' investments in AIFs

Time of India

19-05-2025

Mumbai: India's banking regulator on Monday proposed capping the exposure of regulated entities (RE), such as banks and non-bank lenders, into schemes of
Alternative Investment Funds
(AIF) at 15% of the total combined investment by all lenders. Also, the proposals allow REs to invest up to 5% of the corpus of an AIF without any curbs, while 10% of the scheme's corpus will act as an upper limit.
Despite the proposed caps on investments, industry experts said the draft norms published by the Reserve Bank of India are less restrictive than when it disallowed such exposures 18 months ago on evergeering risks.
"Proposing unrestricted 5% investment by a RE in Cat 1 and 2 AIFs, without impacting such an AIF's choice of underlying investment instrument or kind of portfolio entity and without any requirement of potential provisioning for such Res, is a step in the right direction," said Tejesh Chitlangi, Joint MD IC Universal Legal.
The norms also said if an RE's investment exceeds 5% and the AIF holds downstream debt in a company that also owes money to the same RE, then the bank or NBFC concerned must make a 100% provision for its share of the exposure.
Against this, in December 2023, RBI had prohibited REs from investing in AIF schemes that had direct or indirect downstream investments in companies that owed them money. If such exposure existed, REs were required to exit within 30 days or make a 100% provision. This reduced investments by banks and NBFCs into AIFs.
This was done to address concerns of possible evergreening through this route.
On Monday, RBI proposed that downstream exposures, which earlier only excluded equity shares, will now also exclude compulsorily convertible preference shares (CCPS), or compulsorily convertible debentures (CCDs).
Also, proposing to allow REs to invest beyond 5% and up to 10% in AIFs with equity-linked instruments like CCPS and CCDs without triggering provisioning norms is seen as a positive move, industry experts say, although some argued against the 15% overall cap.
"However, the new proposed introduction of an overall ceiling of 15% of all RE investments taken together in an AIF needs to be liberalised as it will be too restrictive if implemented," Chitlangi said.