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RBI proposes relaxation in norms for investment in AIFs by banks, NBFCs
The Reserve Bank of India (RBI) on Monday sought to ease norms on investments by regulated entities (REs) in Alternative Investment Funds (AIFs) by proposing revised guidelines that cap investment by REs in any AIF scheme at 15 per cent, with the contribution of a single RE capped at 10 per cent of the scheme's corpus.
In December 2023, the RBI had barred REs from investing in AIFs that have investment in existing and recent borrowers, after markets regulator Securities and Exchange Board of India (Sebi) found instances of evergreening of loans and circumvention of other market regulations through different AIF structures.
Several AIFs had approached the regulators with concerns that REs were struggling to honour capital calls, following the restrictions. Later in March 2024, the RBI eased provisioning norms.
'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, adding that Sebi has also issued guidelines requiring specific due diligence with respect to investors and investments of the AIFs, to prevent facilitation of circumvention of regulatory frameworks.
"This is a more palatable approach as compared to a blanket ban. However, the proposed limits seem overly restrictive, particularly for collective exposure of all REs being limited to 15 per cent. Separately, exemption should also be provided by the RBI on fund of funds (FoF) structures as was done in the earlier March, 2024 circular," said Nandini Pathak, partner, Bombay Law Chambers.
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According to the proposed guidelines, investment by an RE up to 5 per cent of the corpus of an AIF scheme shall be allowed without any restriction. However, if the investment exceeds 5 per cent of the corpus of the scheme, and if the scheme has a downstream debt investment in a debtor company of the RE, then the RE shall be required to make 100 per cent provisions to the extent of its proportionate exposure.
Additionally, the central bank has said that it may exempt certain AIFs, in consultation with the government, that have been set up for strategic purposes.
These revised norms will be applicable prospectively, the RBI said, adding that existing investments or commitments will follow the extant norms.
The central bank has sought comments from stakeholders by June 8 this year.
'This move by the RBI is significant to rupee capital formation through AIFs,' said Siddarth Pai, co-chair, IVCA Regulatory Affairs Council, adding that banks and non-banking financial companies (NBFCs) are important institutional investors in AIFs.
'The RBI placed restrictions on them investing in AIFs due to certain regulatory findings. Since then, Sebi issued specific due diligence in consultation with AIFs, which addresses these findings. This circular is a relaxation basis for this work by Sebi and the AIF industry,' he further said.
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