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In December 2023, the Reserve Bank of India (RBI) had issued a circular prohibiting the regulated entities (REs) such as NBFCs from making investment in units of Alternative Investment Funds (AIFs) having downstream investments either directly or indirectly in a ‘debtor company’ of the REs. Further, the circular required the REs, which have already invested in such AIFs, to liquidate their investment within 30 days from the date of downstream investment by the AIF/date of circular (in case of existing investments) or make 100% provision.
While RBI is concerned with evergreening of loans, the December circular caused discomfort to genuine REs as well as pose certain practical difficulties. Clarifications were sought from RBI to address concerns of the REs and the AIF industry.
In light of the above and with the intention of addressing the concerns of the industry, RBI has inter alia made the following relaxations:
- Where a RE has invested in an AIF, such AIF’s investments shall exclude investments in equity shares of the debtor company of the RE, but shall include all other investments, including investment in hybrid instruments;
- The 100% provisioning which was required to be made by the RE shall be required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme.
This relaxation will certainly help the AIF as well as financial services industry, as maximum investment would be in the nature of equity investments by AIFs. The situation of hybrid instruments are not exempted. This would include investment in CCPS by the AIFs; this may not be intended as CCPS are quasi equity and not a debt instrument. There is adequate case for exempting CCPS investments as well.
