MC Explains | All you need to know about RBI’s clarification on AIF circular

MC Explains

On March 27, the Reserve Bank of India (RBI) issued certain clarifications on its earlier guidelines on investments by lenders in alternative investment funds (AIFs), which have further investments in borrower companies linked to the lenders.

In its clarification, the central bank has made a few exclusions. Here is an explainer on this development.

Why did RBI bar banks from investing in AIF in December?

On December 19, 2023, the RBI barred regulated entities, such as banks, non-bank lenders and home financiers, from investing in AIFs that have directly or indirectly invested in companies that have borrowed money from the lenders.

In a press release, RBI highlighted regulatory concerns regarding certain transactions involving AIFs by regulated entities that had come to its notice, and released guidelines for investments in AIFs by the lenders regulated by it.

Also read: AIFs get regulator's nod to pledge equity of investee companies in infra sector

So, what are the key changes in the RBI’s AIF norms?

The central bank said the definition of downstream investments will exclude investments in equity shares of the debtor company of the lender.

However, the rules will apply to all other investments, including investment in hybrid instruments.

Investments by regulated entities in AIFs through intermediaries such as fund of funds or mutual funds are not included.

What are the changes announced on banks’ provisioning requirements?

As per the clarification, the regulated entities (REs) have to make provisions only to the extent of investment by the lender 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.

Why did the RBI announce the rule modifications?

The central bank said these rules have been brought in with a view to ensuring uniformity in implementation among the lenders and to address the concerns flagged in various representations received from stakeholders.

Also read: PMS and AIF industries have more than doubled in last 5 years; know how to invest via 'PMS AIF WORLD summit 2024'

What are the provisions made by top banks on AIF investments so far?

After the RBI’s circular on AIF investment, at least six Indian banks have made a combined provision of over Rs 1,070 crore on their investments in alternative investment funds after the recent diktat from the Reserve Bank of India (RBI), as per a Moneycontrol analysis on January 24.

These banks are HDFC Bank, Union Bank of India, Kotak Mahindra Bank, RBL Bank, Axis Bank, and ICICI Bank. IDBI Bank and IDFC First Bank did not disclose the amount.