RBI proposes new norms for RE investments in AIFs, seeks public feedback

Business Standard

19-05-2025

The Reserve Bank of India (RBI) on Monday released revised draft guidelines for investments by regulated entities (REs) in Alternative Investment Funds (AIFs), aimed at tightening oversight and preventing potential misuse of the investment route.
'On a review, it is observed that the regulatory measures undertaken by the Reserve Bank have brought financial discipline among the REs regarding their investment in AIFs,' the RBI said in a press release.
The central bank also acknowledged that the Securities and Exchange Board of India (Sebi) has issued its own guidelines: 'Sebi has also issued guidelines requiring inter alia specific due diligence with respect to investors and investments of the AIFs, to prevent facilitation of circumvention of regulatory frameworks,' the RBI stated.
As part of the revised framework, the RBI has proposed a cap of 10 per cent on the contribution of a single RE to any AIF scheme, while all REs collectively cannot invest more than 15 per cent in a single scheme.
Investments by an RE up to five per cent of a scheme's corpus will not face any additional restrictions. However, if an RE's investment exceeds five per cent and the AIF has downstream debt exposure to a borrower linked to the RE—excluding equity shares, compulsorily convertible preference shares, and compulsorily convertible debentures—the RE will have to make a 100 per cent provision for its proportionate exposure.
The RBI may exempt certain AIFs from these rules, in consultation with the government, if they are set up for strategic purposes. The revised guidelines will apply prospectively, while existing investments and commitments will continue under current regulations.
The RBI has invited public and stakeholder feedback on the draft Directions until 8 June 2025. Comments can be submitted through the 'Connect 2 Regulate' section on the RBI's website.
In a circular issued in December 2023, the RBI had barred REs from investing in any AIF scheme that had downstream investments—directly or indirectly—in companies to which the RE had a loan or investment exposure in the preceding 12 months. If an AIF later made such an investment, the RE was required to exit the fund within 30 days, failing which it had to make 100 per cent provisioning for its exposure. The circular also mandated full capital deduction for investments in subordinated units of AIFs with a priority distribution model.
In another circular in March 2024, the RBI refined these provisions further, stating that downstream investments would exclude equity shares but include all other instruments, such as hybrids. It also clarified that provisioning would apply only to the portion of the RE's investment linked to the debtor company exposure and that capital deductions for subordinated units would apply even to sponsor units. Investments made via intermediaries such as mutual funds or fund-of-funds were excluded from the scope of the restrictions.