RBI cautions banks, NBFCs on exposure to alternative investment funds
22 Dec 2023
Reserve Bank of India (RBI) has directed all regulated entities (REs), including commercial banks, co-operative banks and all-India financial institutions, to limit investments in alternative investment funds (AIFs) that have exposure to debtor companies of the respective REs.
Regulated entities, including banks, non-banking financial institutions and cooperative banks make investments in units of AIFs, as part of their regular investment operations. Such transactions raise regulatory concerns if the AIF has made downstream investments in debtor entities of the RE concerned.
Such indirect exposure through investments in units of AIFs would entail substitution of direct loan exposure to borrowers, This, according to RBI, could lead to possible evergreening through this route.
RBI has advised REs not to make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the RE.
The debtor company of the RE, for this purpose, could by any company to which the RE has or had a loan or investment exposure in the preceding 12 months, RBI pointed out.
If an AIF scheme, in which RE is already an investor, makes a downstream investment in any such debtor company, then the RE shall liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF.
RBI has asked REs that have already invested into such schemes having downstream investment in their debtor companies to liquidate such investments within 30 days from the date of issuance of its circular.
In case REs are not able to liquidate their investments within the above-prescribed time limit, they should make 100 per cent provision on such investments, RBI said.
In addition, investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ would be subject to full deduction from their capital funds, it added.
