The Reserve Bank of India (RBI) came up with a circular on December 19, 2023 (2023 Circular) putting restrictions on the Regulated entities (REs) making investments in units of Alternative Investment Funds (AIFs) to address concerns relating to possible evergreening through this route. Consequently, cautionary representations with regard to concerns arising out of the 2023 Circular were made before the Regulator by various stakeholders.

Subsequently on March 27, 2024, RBI released another circular Investments in AIFs (2024 Circular) to address the concerns flagged in various representations received from stakeholders by the RBI.

Exemptions / clarifications brought in by the 2024 Circular are briefly explained below:

1) The 2024 Circular provides that downstream investment in equity shares of the debtor company will now be excluded/exempted. However, other investments, including hybrid instruments, are still covered under the 2023 Circular.

Earlier, REs were not to make investments in any scheme of AIFs which has downstream investments, either directly or indirectly, in a debtor company of the RE. The debtor company of the RE, for this purpose, would be any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months.

2) The 2023 Circular provided that if an AIF scheme, in which RE is already an investor, makes a downstream investment in any such debtor company, then the RE is required to liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF. If REs have already invested into such schemes having downstream investment in their debtor companies as on date, the 30-day period for liquidation would be counted from date of issuance of this circular. REs will forthwith arrange to advise the AIFs suitably in the matter. Moreover, in case REs are not able to liquidate their investments within the prescribed time limit, they would have to make 100 percent provision on such investments.

The 2024 Circular clarifies that the provision is to be made only of the portion of RE’s investment which is further invested by AIF in the debtor company and not entire investment of the RE in the AIF.

3) The 2024 Circular outlines that the deduction from capital will take place equally from both Tier-1 and Tier-2 capital. It is pertinent to mention that investment in subordinated units of AIF Scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units. Earlier, as per the 2023 Circular, investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ were subject to full deduction from RE’s capital funds.

4) Furthermore, the 2024 Circular clarifies that investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are not included.

To access the circular, click here.