The crackdown on AIF abuse comes with some collateral damage

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₹30,000 crore worth of investments related to such evergreening of loans. “However, the uncertain language of the RBI circular has prompted banks to deny capital calls across the industry, even to legitimate AIFs," said the second person cited above, an investor whose fund was impacted.

According to industry estimates, Indian banks have invested around ₹12,000 crore in Indian PE/VC funds over the last 20-25 years. “The RBI guidelines have caused some stress on Indian AIFs, given that banks have started to reconsider deployment in funds which have common portfolios and this, in turn, has resulted in the funds having to delay committed rounds.

It is imperative that the guidelines issued be revised to provide a breather for the regulated entities which would help getting life back to normal for the funds," said Ritesh Kumar, partner at consulting firm BDO. The circular penalizes banks for making investments into AIFs even when they are legitimate or genuine investments, Kumar added.

“What this instruction also ignores is the essential fact that no one LP is in a position to decide or control the management of the AIF and that the fund managers (along with an investment committee, in some cases) take the investment decisions. The instruction appears to disregard the independence of the investment manager and presumes a malafide intent by default," Kumar said.

The Indian Venture and Alternate Capital Association (IVCA) has been lobbying the banking and markets regulators to relax the new rule. “The changes by RBI to place greater restrictions Banks and NBFCs (REs or regulated entities) investing in funds and their portfolio companies has disrupted the capital call process for various AIFs in India," Siddarth Pai, an executive