RBI Norms for Alternative Investment Funds

Context

The Reserve Bank of India (RBI) has modified norms for regulated entities (REs) concerning their investments in Alternative Investment Funds (AIFs).

About

AIFs: It refers to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP).

Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.

Need for the Regulations:

There are concerns that some lenders were misusing the AIF route for evergreening loans, a practice where lenders extend new loans to pay off old ones.

This forced banks and NBFCs to make steep provisions, and tightened capital flows for AIFs.

Regulations: REs need to only set aside provisions to the extent of their investment in the AIF scheme which is further invested by the AIFs in a debtor’s company and not the entire investment in the AIF scheme.

With a view to ensuring uniformity in implementation among the REs, it is advised that downstream investments shall 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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