The central bank said no regulated entity should individually contribute more than 10% of the corpus of an AIF scheme and that the collective contribution of all such entities in any AIF should not cross 20% of the fund’s corpus. The collective contribution limit is higher than the 15% figure proposed in May’s draft circular.
The RBI said these norms will apply to commercial banks, cooperative banks, all Indian financial institutions, NBFCs and housing finance companies from 1 January 2026 or earlier.
Proportional provisions
According to Tuesday’s circular, if a bank or a non-banking financial company (NBFC) contributes more than 5% of a scheme that also has downstream investments — excluding equity — in a borrower of the lender, the lender will have to make provisions for it. These provisions, said RBI, will be proportional to the lender’s investment in the borrower through the AIF. Borrower or debtor in this case means a company to which the lender the lender has had loan or investment exposure during the preceding 12 months.
As an example, consider a bank that has invested ₹100 crore in a ₹1,000 crore AIF, which in turn has invested ₹100 crore in a company that has borrowed from the same bank. In the December 2023 circular, the RBI had asked banks to provide for the entire ₹100 crore investment. On Tuesday, the RBI said lenders would have to make provisions proportionate to the investments made by the AIF in the common borrower, or ₹10 crore in this example.
However, if a lender’s contribution is in the form of subordinated units, it will have to deduct the entire investment from its capital funds – proportionately from both tier-1 and tier-2 capital, RBI said. Subordinated units are those that are lower in priority for distribution of earnings and assets.
Curbing misuse of AIFs
“The guidelines directly seek to address concerns relating to the misuse of the AIF route for evergreening of loans and advancing by using AIF to finance the existing stressed loans portfolio,” said Sudhir Chandi, director at Resurgent India, a category-1 merchant bank. “By restricting the individual contribution to 10% of the corpus of an AIF, concentration risk will be mitigated.”
According to Chandi, the goal is to deter the diversion of funds from AIFs for wrongful purposes. “The final guidelines are relaxed as they allow regulated entities (REs) to invest upto 20% of the corpus of AIF as against 15% allowed in draft guidelines,” said Anil Gupta, senior vice-president at rating agency ICRA.
“Further, in case of any common exposure between AIF and RE, the provisioning required on such investments is proportionate to the share of RE’s investment in AIF corpus and not 100% as required earlier.”
On 19 December 2023, RBI asked lenders not to invest in AIFs that had direct or indirect downstream investments in companies that were borrowers in the previous 12 months. Such existing investments were required to be liquidated or fully provided for in 30 days. This prompted several large private banks to make significant provisions against these investments in their financials for the last two quarters of FY24.
Siddarth Pai, co-founder and managing partner, 3one4 Capital said in May after the release of the draft norms that the domestic AIF industry had around ₹13.5 trillion in capital commitments as of 31 March. “The aim is to reach at least ₹30 trillion by 2030. For this, the simplification of regulation and the removal of artificial regulatory barriers to investing in alternatives is key,” he said.
