Context:
The RBI observed improved financial discipline among Regulated Entities (REs) regarding AIF investments after prior regulatory interventions. The Securities and Exchange Board of India (SEBI) had also introduced due diligence norms for AIF investors and investments. New draft guidelines aim to tighten exposure norms, enhance risk containment, and align with SEBI frameworks.
Key Provisions of the Draft Directions
New Proposal on AIF Investments
- RBI proposes a cap on investments by Regulated Entities (REs) in Alternative Investment Funds (AIFs):
- Individual RE cap: 10% of the AIF scheme’s corpus.
- Collective RE cap: 15% of the total corpus of any AIF scheme.
Background and Context
- In December 2023, RBI banned REs from investing in AIFs that have exposures to existing or recent borrowers, following SEBI’s observations about:
- Loan evergreening
- Regulatory circumvention via AIF structures
- The restrictions led to capital call issues for AIFs.
Regulatory Response and Relaxation
- In March 2024, RBI eased provisioning norms for such investments.
- As per RBI’s May 2025 note, these measures improved financial discipline among REs.
- SEBI also mandated stricter due diligence to prevent regulatory arbitrage through AIFs.
Provisioning Requirement for Conflict Exposure
- If RE’s investment exceeds 5% of an AIF’s corpus and the AIF has downstream debt exposure to a debtor company of the RE:
- The RE must make a 100% provision for the proportionate exposure.
Implications
- Risk Mitigation: Protects REs from indirect credit exposure to related parties.
- Enhanced Transparency: Promotes responsible allocation and discourages regulatory arbitrage via AIFs.
- Stronger Due Diligence: Encourages deeper risk assessment before investing in AIFs with related-party debt.
- Capital Adequacy Impact: 100% provisioning may affect capital planning for banks/NBFCs with significant AIF exposure.
