RBI’s AIF rules impractical, to shift industry dynamics, say investors

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MUMBAI : The Reserve Bank of India’s new rule barring banks and non-banks from investing in alternative investment funds (AIFs) having downstream investments in debtor funds is impractical, risking a freeze on the AIF industry, said investors. According to RBI, debtor firms are those which have either borrowed or received investments from the same banks or NBFCs in the past 12 months. Investors believe ₹20,000-40,000 crore of assets under management will be affected if the banks and non-banks have to unwind their investments in 30 days or make 100% provisioning.

They argued that unwinding these investments is not feasible and would topple the entire AIF structure, as limited liability partnerships (LLPs) typically invest following commitments from sponsors that are usually regulated entities like banks and non-banks. “The unintended consequence of this regulatory measure would be that the flow of bank money into domestic AIFs would completely freeze for a time, till the matter is fully resolved. After all, domestic venture and private equity AIFs get 5-10% of the money from banks, and these monies are invested in companies who in turn, could borrow from the very same bank.

This is no longer possible," said Gopal Srinivasan, chairman and managing director of TVS Capital Funds. “AIFs were the mechanism through which banks could invest in startup equity or venture debt. It was officially a pathway for banks to take risks.

This will get closed. Also, how will banks liquidate what is an illiquid asset? They will have to make provisions and write downs," said an AIF industry executive. That said, investors agreed that RBI’s intent is to curb evergreening of loans through the AIF route.