Tighter norms for investment by banks in AIFs
investment norms for banks and non-banking finance companies that invest in Alternative Investment Funds (AIF), potentially disrupting the flow of institutional money into these high-risk, aggressively managed corpuses and helping prevent likely evergreening of doubtful credit.
RBI has asked banks and NBFCs not to invest in AIFs that invest in companies they had a loan or investment exposure to in the past 12 months.
Under scrutiny
These AIFs were under regulatory scrutiny for being allegedly used to extend the life of loans, often unpaid or restructured. RBI, along with Sebi, had been investigating several cases where AIFs are misused to circumvent financial regulations.
«Against the backdrop of 'evergreening', the existing structures in the market operated in a regulatory vacuum of not being prohibited and in more instances than not, failed to pass the smell test on account of the spirit of the existing RBI regulations,» said Veena Sivaramakrishnan, a partner at law firm Shardul Amarchand Mangaldas & Co.
Also, the RBI has said that if a bank or financial institution has a lending relationship with a company that an AIF invests in, they must sell their investment in that AIF within the next 30 days.
If they can't do that, the banks or NBFCs concerned need to set aside 100% of the money they put into that AIF.
The RBI directive will help prevent the misuse of AIFs, which have seen significant growth in the past 5 years. Sebi data showed investments in AIFs have more than doubled over the past three years to ₹3.11 lakh crore, from ₹1.53 lakh crore.
HFCs could see some pressure to either divest or fully provide for some assets as some of them have investments in AIFs, and those funds have invested in real estate
