RBI's New Rules Set to Impact AIF Investments of Rs 20,000 Crore

New regulatory measures introduced by the Reserve Bank of India (RBI) are poised to affect Alternative Investment Fund (AIF) deals exceeding a valuation of Rs 20,000 crore. This action underscores the central bank's efforts to prevent the practice of 'evergreening', where banks indirectly fund non-performing borrowers under the guise of new investments.

Implications for Banks and NBFCs

The RBI's stringent norms stipulate that banks and Non-Banking Financial Companies (NBFCs) are prohibited from putting money into AIFs that make downstream investments in debtor companies. These companies include entities that have taken loans or investments from such regulated entities within the previous year. Banks and NBFCs currently invested in non-compliant AIFs are mandated to divest within a 30-day window or provision the entire investment amount.

Crackdown on Regulatory Violations

Insights from insiders reveal that a significant number of AIF transactions, ranging between Rs 20,000 and Rs 25,000 crore, have not adhered to the existing regulations. The RBI has been scrutinizing these investments to identify and address any major discrepancies. The identified issues ranged from evergreening tactics to various other regulatory non-compliances.

The Priority Distribution Model Problem

Under the spotlight is the priority distribution model employed by some AIFs, which divides investors into senior and junior categories—with the former receiving preferential treatment on returns, and the latter shouldering disproportionate risks. The RBI's latest guidelines call for a full deduction of such investments from the capital funds of the lending institutions. Moreover, the Securities and Exchange Board of India (SEBI) had earlier proposed the elimination of these distributive arrangements, reflecting a growing regulatory push against preferential schemes within AIFs.

RBI, AIF, Investments