RBI Circular RBI/2023-24/90: Guidelines for AIF Investments by Regulated Entities

Key Takeaways:

1. REs are advised not to invest in AIF schemes with downstream investments in debtor companies of the RE.

2. If an AIF scheme, in which an RE is already an investor, makes a downstream investment in any such debtor company, the RE shall liquidate its investment within 30 days from the date of such downstream investment.

3. If REs are unable to liquidate their investments within the prescribed time limit, they shall make a 100 percent provision on such investments.

4. Investment in subordinated units of AIF schemes with a ‘priority distribution model’ will lead to a full deduction from RE’s capital funds.

5. The guidelines are effective immediately.

Synopsis:

The Reserve Bank of India (RBI) issued circular no. RBI/2023-24/90 on December 19, 2023, to address concerns related to investments in Alternative Investment Funds (AIFs) by regulated entities (REs). AIFs are privately pooled investment vehicles that collect funds from investors to invest in accordance with a defined investment policy for the benefit of its investors. However, the RBI aims to halt transactions that involve the substitution of direct loan exposure of lenders to borrowers with indirect exposure through investments in units of AIFs.

The circular outlines the following guidelines for regulated entities:

1. Prohibition of Investments: REs are advised not to invest in AIF schemes that have made downstream investments, either directly or indirectly, in a debtor company. Here, a debtor company refers to a company where the RE has currently or previously had a loan or investment in the preceding 12 months.

2. Liquidation of Investments: If an AIF scheme, in which an RE is already an investor, makes a downstream investment in such a debtor company, the RE shall liquidate its investment within 30 days from the date of such downstream investment. If the AIF has already made a downstream investment in such a debtor company, the RE shall liquidate its investment within 30 days from the date of the issuance of the circular. Failure to liquidate within the specified timeline requires the RE to make a 100% provision on such investments.

3. Deduction from Capital Funds: The central bank prescribes a full deduction from lenders’ capital funds if they have investments in the subordinated units of any AIF scheme with a ‘priority distribution model’.

The circular is effective immediately and signifies a proactive approach by the RBI in addressing potential risks associated with AIF investments by regulated entities. The guidelines aim to prevent evergreening practices and ensure transparency in financial operations.

The tightening of norms for lenders investing in AIFs is illustrated by a scenario where a debtor company, unable to repay a loan or installment, provides a list of mutual funds/fund houses that have invested in their equity or debts through AIFs to the lender. The lender then invests in the AIF with the understanding that the money will be invested partly or fully in its debtor company. The debtor company uses the funds received from the AIF, mostly as debt, to repay the lender on the due date and subsequently receives additional finance or fresh funds from the lender after clearing old dues.

It is important to note that this article provides general information and does not substitute the need to refer to the original pronouncement. Professional advice should be sought based on specific facts and circumstances.

FAQ

Q1: What is the purpose of the RBI circular RBI/2023-24/90?

A1: The circular aims to address concerns related to investments in Alternative Investment Funds (AIFs) by regulated entities (REs) and prevent evergreening practices.

Q2: What are the key guidelines outlined in the circular?

A2: The circular advises REs not to invest in AIF schemes with downstream investments in debtor companies, and if such investments exist, they should be liquidated within 30 days. Additionally, it mandates a 100 percent provision on investments if liquidation is not feasible, and prescribes a full deduction from RE’s capital funds for investments in subordinated units of AIF schemes with a ‘priority distribution model’.

Q3: When do the guidelines become effective?

A3: The guidelines are effective immediately, emphasizing prompt adherence by regulated entities.