RBI clarifies on its earlier advisory notification to address the circumvention of regulations by using the Alternative Investment Fund (AIF) Regulations.
Introduction
RBI & SEBI had recently taken cognizance of circumvention of Regulatory rules by banks, NBFCs and such other financial institutions by using the AIF route. You can read our article on the same. RBI had issued its advisory via a notification on December 19, 2023. Thereafter, the issue was also addressed in the consultation paper by SEBI on January 19, 2024. There were some questions which came out of the RBI advisory and hence the regulator has now issued a notification to clarify the earlier advisory.
Advisory of December, 2023
In it's advisory of December, RBI had mandated the following measures to curb the evergreening of loans by financially regulated entities (REs) through investments in AIFs:
Not make investments in AIFs which has downstream investments, directly/ indirectly, in a debtor company of the RE.
Liquidate its investment in the scheme within 30 days from the date of downstream investment by the AIF in a debtor company of the RE.
Liquidate its investment in the scheme within 30 days from the notification date incase the AIF has already made such downstream investment in a debtor company of the RE.
In case REs are not able to liquidate their investments within the above-prescribed time limit, they shall make 100 percent provision on such investments.
Investment in the subordinated units of an AIF with a ‘priority distribution model’ shall be subject to full deduction from RE’s capital funds.
Further clarification issued on March 27, 2024
To address the various representations received by RBI, they have issued a further advisory as follows:
'Downstream investments' referred in the Notification shall exclude investments in equity shares of the debtor company, but shall include all other investments, including hybrid instruments.
Provisioning in terms of the Circular shall be required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme.
If the RE has investment in subordinated units of an AIF scheme, which also has downstream exposure to the debtor company, then the RE shall be required to liquidate/provide for the investment made. Then reduction from REs capital fund is not required.
The proposed deduction from capital shall take place equally from both Tier-1 and Tier-2 capital.
Reference to investment in subordinated units of AIF Scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units.
Investments by REs in AIFs through intermediaries such as Fund of Funds or Mutual Funds are not included in the scope of the Circular.
Conclusion:
This proactive measure to respond to the questions of stakeholders is quite welcoming to allay the doubts of the REs and such institutional investors. The AIF market is growing quite significantly and the institutional investors are a major stakeholder in the growth of the industry. Allaying these doubts of the institutional investors will go a long way in boosting the confidence of the institutional investors in the AIF market.
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