Context:
On July 30, 2025, the Reserve Bank of India (RBI) revised its regulatory framework on investments by regulated entities (REs) — including banks and NBFCs — in Alternative Investment Funds (AIFs), easing certain norms while reinforcing safeguards against indirect loan evergreening.
Key Highlights of RBI’s Revised AIF Norms:
- Overall Cap on Collective Investment:
- Total investment by all REs in a single AIF scheme capped at 20% of the scheme’s total corpus.
- Individual Cap:
- Single RE’s contribution capped at 10% of an AIF scheme’s corpus
- Exclusion of Equity Instruments:
- Equity investments made by AIFs are now excluded from provisioning requirements, easing the burden on REs
- Instruments such as compulsorily convertible debentures (CCDs) and compulsorily convertible preference shares (CCPS) are classified as equity instruments
- Provisioning Mandates:
- If an RE contributes more than 5% to an AIF with downstream non-equity exposure in its debtor company, the RE must make 100% provision for its proportionate exposure
- The provisioning cap is equal to the RE’s direct loan or investment exposure to the same company
- Capital Deduction for Subordinated Units:
- Entire investment in subordinated AIF units must be deducted from capital funds, proportionately from both Tier-1 and Tier-2 capital
- Effective Date:
- Norms will come into force from January 1, 2026, or earlier if adopted per an RE’s internal policy
Objective of the Move
- To prevent regulatory arbitrage via indirect lending through AIFs.
- To mitigate credit and concentration risks from circular or layered exposure to debtor firms.
- To align provisioning norms with risk exposure in indirect investments.
Background
- In December 2023, RBI had barred REs from investing in AIFs with exposure to their own borrowers, following SEBI’s findings on loan evergreening via AIFs
- REs faced difficulties in meeting capital calls, leading to partial easing of norms in May 2024
- The latest norms address industry concerns by:
- Excluding equity-linked exposures from restrictions
- Clarifying definitions around equity instruments and debtor companies
