Banks, non-bank lenders and financial institutions may invest up to 10% in alternative investment funds (AIF) programs to mitigate industries facing central banks’ troubled in December 2023.
There will be no restrictions on the proposed Reserve Bank of India (RBI) on Monday’s proposed investment of up to 5% of regulated entities (RES) such as banks in the AIF program’s corpus. However, if the AIF plans to invest in a company borrowed from a bank, the RE must be fully regulated within its pro-proportional exposure. Likewise, the total investment of all RES in any AIF program will be limited to 15% of the program.
“Nevertheless, if the contribution of RE is in the form of a subsidiary of the Priority Distribution Model (PDM), then the full investment should be deducted from its capital fund, as well as from Tier-1 and Tier-2 Capital (whether applicable).”
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The new instructions apply only to future investments. Investments and commitments that have been made will continue to be governed by the current norms. In addition, the Reserve Bank of India can exempt certain AIFs established for strategic purposes in consultation with the government. The central bank seeks comments and feedback on the new draft by June 8.
“The latest guidance for the Reserve Bank of India’s bank investment in AIFS reflects a mature policy shift. They balance prudent risk management with broader development goals for banks,” said Gopal Srinivasan, chairman and managing director of TVS Capital Fund, which will help restore regulatory clarity to such investments.
Specifications that need to be revised
The Reserve Bank of India said the draft was released in accordance with guidelines issued by the Securities and Exchange Commission of India on October 8, 2024, requiring specific due diligence for investors and AIF investments. The Reserve Bank of India said the new norms will help “prevent circumvention that promotes regulatory frameworks” by ensuring uniform guidelines across regulators.
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While the SEBI circular highlights concerns about using AIFS to regulate lenders underscoring the use of AIFS, it has put forward stricter due diligence requirements for AIFS, their managers and key managers. The purpose is to prevent regulations, tighten supervision of such funds, and prevent unqualified investors from obtaining benefits suitable for qualified institutional buyers (QIB) (QIB) and qualified buyers (QB). If 25% or more of the plan’s plans are contributed by investors regulated by RBI, or they have a significant impact on investment decisions, the AIF must also conduct due diligence.
“Given the stronger, more comprehensive structure provided in the SEBI guide, there is a scope that needs to bring some relaxation,” said Jyoti Prakash Gadia, managing director of Resurgent India, a Class 1 merchant bank.
He added: “Since regulated entities following the previous guidelines have shown a disciplinary approach, partial relaxation is expected to make alternative investment funds better utilized.”
background
On December 19, 2023, the Reserve Bank of India asked lenders not to invest in AIFS directly or indirectly invested by borrowers in the past 12 months. In addition, such investments need to be cleared or fully provided within 30 days. This prompted several large private banks to make significant provisions on their financial investments in the last two quarters of FY24.
In March 2024, regulators clarified that these investments would exclude stocks, compulsory convertible preferred stocks and compulsory convertible bonds. It then also stated that in the AIF program, the AIF’s investment scope in the AIF program further invested in the debtor’s company is only in the debtor’s company and is not allowed to invest in the entire investment in the AIF program.
These guidelines are prescribed to prevent common instances by leveraging AIF avenues to repay existing potentially troubled loans. The Reserve Bank of India said in a notice on Monday that the regulatory measures put “financial discipline in Res about its investment in AIFS”.
Siddarth Pai, co-founder and executive partner of 3one4 Capital, said the new guidelines are crucial for Rs rupee capital formation, as banks and NBFC are important institutional investors in AIFS but are restricted due to certain regulatory findings.
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“India AIF industry is nearby ₹As of March 31, 2025, 13.5 trillion yuan of capital commitments. At least the purpose must be achieved ₹By 2030, $30 trillion. To this end, simplification of regulations for investing in alternatives and removing barriers to manual regulatory oversight is key. ” he said.
(with input from Sneha Shah)
