RBI clarifies on lenders' investments in AIFs linked to debtor companies

RBI has clarified on the December AIF rules

The Reserve Bank of India (RBI) on March 27 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.

As per the clarification, 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.

Further, provisioning by lenders that have investments in AIFs will be required 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, RBI said.

Also,  investments by lenders in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the earlier RBI circular, RBI 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, the RBI said.

RBI's December 19 rule

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 have come to its notice and released guidelines for investments in AIFs by the lenders regulated by it.

“These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs,” the RBI said. The guidelines, RBI said, have been introduced to address concerns about potential evergreening through this route.

Regulated entities (REs) shall not make investments in any scheme of AIF that has downstream investments either directly or indirectly in a debtor company of the RE.

The RBI said lenders need to liquidate their investment in the scheme within 30 days if the AIF scheme, in which lenders are already investors, makes a downstream investment in any such debtor company, the RBI said.

Further, if lenders have already invested in schemes having downstream investment in their debtor companies as on date, the 30-day period for liquidation shall be counted from date of issuance of this circular, the RBI added.

If lenders fail to liquidate their investments within 30 days, they need to make 100 percent provision on such investments, RBI said.

The central bank also said that investment by REs in the subordinated units of any AIF scheme with a "priority distribution model" shall be subject to full deduction from RE’s capital funds.

In January, Moneycontrol reported that 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 RBI diktat. 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.