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RBI new rules for AIF, Know what is AIF and how will it benefit Banks


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Recently, the Reserve Bank of India has made changes to Alternative Investment Funds (AIFs). These new changes are expected to be beneficial for financial institutions such as Banks and NBFCs. In this article, we will tell you about these changes. But first let’s understand what is AIF.

What is AIF?

Alternative Investment Funds (AIFs) are privately pooled investment funds that are not registered with regulatory agencies like the Securities and Exchange Board of India (SEBI) or the Reserve Bank of India (RBI). In India, alternative investment funds (AIFs) are defined in Regulation 2(1) (b) of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012. It refers to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP). Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.

Categories of Alternative Investment Funds (AIFs)

As per Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 Alternative Investment Funds shall seek registration in one of the three categories

  • Category I: Mainly invests in start- ups, SME’s or any other sector which Govt. considers economically and socially viable.
  • Category II: These include Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator
  • Category III : Alternative Investment Funds such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other Regulator.

New Guidelines

The initial restrictions imposed by the RBI prohibited banks and financial institutions from investing in AIFs if there was an existing exposure to the same firm they had lent to. This measure aimed to tackle the issue of evergreening on loans. Additionally, the RBI required banks and NBFCs to make 100% provisions for the entire investment in such AIF schemes.

However, in a circular issued on Wednesday, the RBI revised its guidelines. Now, regulated entities (REs) will only need to make provisioning for the amount invested by the AIF scheme in the debtor company, rather than the entire investment. This change is expected to alleviate the burden on NBFCs, which had previously made full provisions within the 30-day period mandated by the RBI to liquidate these assets. As a result, some entities may experience a write-back of provisions during the current quarter.

The new circular addresses the issue by requiring provisioning only when the AIF has a debt exposure to a portfolio company where the REs have a direct debt exposure. The provisioning will be proportionate to the downstream investment in the debtor company by the AIF. For example, if an RE has a total investment of Rs 100 crore in an AIF scheme, but only Rs 10 crore was invested in the debtor firm by the AIF, the new norms require provisioning for only Rs 10 crore as opposed to the previous requirement of Rs 100 crore.

Furthermore, the RBI has excluded investments made through intermediaries, such as fund of funds and mutual funds. This clarification means that government funds, including SRI, SIDBI, NABARD, and others, will also benefit from this exclusion. In addition, investments in equity shares of the debtor company are now excluded from the definition of “downstream investments.” This means that banks and NBFCs can invest in AIFs even if the scheme includes equity investments in companies to which they have already lent.

One Comment

  1. Since AIF introduced in the year 2012, why since then it was not popular in financial markets in India

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