Banks versus AIFs: Govt enters the picture

livemint.com:

MUMBAI : Top officials of the government and the central bank will meet on Monday to figure out a way forward on the vexed issue of bank exposure to alternative investment funds (AIFs), two people aware of the matter said. Officials from the department of economic affairs, department for promotion of industry and internal trade (DPIIT), MSME ministry, the Reserve Bank of India (RBI) and banks will attend the meeting, the people said on the condition of anonymity. The government stepped in because apart from AIFs from private firms, several AIFs have been floated by central government ministries and state governments to pool funds from state-owned banks.

The central bank’s 19 December circular asked lenders to sell their investments in AIFs linked to their debtor companies, in a bid to prevent evergreening, rattling the entire sector. For AIFs, the matter gains urgency as funds need to submit annual audits on their private placement memorandums to markets regulator Sebi at the end of each financial year. This requires AIFs to submit details of their private placements each year, including potential defaults.

The implications of being labelled a defaulter in an AIF are immense as it could jeopardize an investor’s (in this case, a bank’s) existing investments, the two people said on the condition of anonymity. Further, most banks also require one or two weeks to respond to capital calls and may find it hard to meet capital-call timelines by the end of March, they added. A finance ministry spokesperson did not respond to queries.