RBI tightens norms for banks, NBFCs investing in Alternative Investment Funds

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Reserve Bank of India on Tuesday barred regulated entities including banks, non-banking finance companies (NBFCs), and housing finance companies (HFCs) from investing in any scheme of alternative investment funds (AIFs) that have downstream investments either directly or indirectly in a debtor company of the regulated entities. It is important to note that venture capital funds, angel funds, infrastructure funds, private equity funds and hedge funds, among others, are AIFs.

The Reserve Bank in a circular said, “…certain transactions of REs involving AIFs that raise regulatory concerns have come to our notice." These transactions entail substituting direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs, the circular added. The apex bank said that “to address concerns relating to possible evergreening through this route", REs cannot make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the lender.

“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," the banking regulator stated. “If REs have already invested into such schemes having downstream investment in their debtor companies as of date, the 30-day period for liquidation shall be counted from the date of issuance of this circular.

REs shall forthwith arrange to advise the AIFs suitably in the matter" the RBI circular read. This includes companies in which lenders have current exposure such as an investment or a loan in the past 12 months, the RBI noted.