RBI issues revised draft guidelines for bank investments in AIFs

Reserve Bank of India

The Reserve Bank of India (RBI) on May 19 released revised draft guidelines on investment by regulated entities in Alternative Investment Funds (AIF), and invited public comments by June 8.

This follows the RBI’s observation that its regulatory measures have brought financial discipline among banks regarding their investment in AIFs.

The Securities and Exchange Board of India (SEBI) has also issued guidelines requiring, inter alia, specific due diligence with respect to investors and investments of AIFs, to prevent the circumvention of regulatory frameworks, the RBI said in a release.

Under the new draft norms, the RBI has proposed that a single regulated entity (RE) contribution to any AIF scheme shall be capped at 10 percent of its corpus. Collectively, a ceiling of 15 percent shall apply for investment by all REs in an AIF scheme.

Investments by a RE up to five percent of the corpus of an AIF scheme shall be allowed without any restriction. If the investment exceeds 5 percent of the corpus of the scheme and if the scheme has a downstream debt investment in a debtor company of the RE (excluding equity shares, compulsorily convertible preference shares and compulsorily convertible debentures), then the RE shall be required to make 100 percent provision to the extent of its proportionate exposure, the RBI said.

Additionally, the RBI said that certain AIFs will be exempted from this requirement in consultation with the government, which have been set up for strategic purposes.