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RBI modifies circular on AIF investments by regulated entities

Investments by REs in AIFs through intermediaries, like fund of funds or mutual funds, are not included in the scope of the circular.

RBI modifies circular on AIF investments by regulated entities

Wednesday March 27, 2024 , 2 min Read

The Reserve Bank of India (RBI) on Wednesday modified its circular on regulated entities' (RE) investments in alternative investment funds (AIFs), dialling down on some of the requirements after feedback.

The central bank said the revisions have been made with a view to ensure "uniformity in implementation among the REs, and to address the concerns flagged in various representations received from stakeholders".

The RBI had in December 2023 come out with the circular governing investments by banks, non-bank lenders, and other REs to the AIF sector, following concerns about the route being used for evergreening of loans.

As per the initial concerns, REs' investments in AIFs were used as a route to repay loans that would otherwise have to be classified as non-performing, wherein the AIF gives succour to a bank's borrower.

Following the central bank's clarification, provisioning will be required only to the extent of investment by the RE in the AIF scheme, which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme.

It can be noted that REs had to provide 100% against the entire stock of their AIF investments and many entities experienced a hit to profits because of this requirement.

The revised circular further said that "downstream investments" will exclude investments in equity shares of the debtor company of the RE, but shall include all other investments, including investment in hybrid instruments.

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The modified circular addressed to commercial banks, cooperative lenders, NBFCs, including housing finance companies and other financial institutions, said deduction from capital shall take place equally from both Tier-1 and Tier-2 capital of an RE.

Reference to investment in subordinated units of the AIF scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units, it said.

Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the circular, the revised circular clarified.

TVS Capital Fund's Chairman Gopal Srinivasan welcomed the clarifications issued by the RBI, especially the one on investments into AIF and fund of funds.


Edited by Suman Singh