Introduction

Alternative Investment Funds (AIFs), which provide investors with a variety of options outside of conventional investment instruments, have seen a notable increase in the Indian investing scene in recent years. Regulators have been watching this growing industry, though, especially with regard to investments made later on in bankrupt enterprises. The purpose of this circular was to control the way that banks, non-banking financial firms (NBFCs), and other financial institutions, who are considered regulated entities (REs), invest in AIFs by the Reserve Bank of India (RBI) on December 19, 2023 to calm these concerns and provide clarification on regulatory compliance.

The Key points on comparison of both circulars: –

1. 1. Evergreening Prevention: Whereas December 2023 circular prohibits Regulated Entities from investing in AIFs that have downstream investments in their debtor companies, the March 2024 circular excluded investment in equity shares of such debtor company
2. Provisioning requirements: Whereas December, 2023 circular mandated Regulated Entities to make 100% provision for their investments in AIF who have invested in their debtor company, the March 2024 restricted the amount of provisioning only to the extent of Regulated Entity’s investment in AIF scheme being invested by the AIF in such debtor company.
3. Applicability of deductions: The March 2024 circular makes it clear that investments made in subordinated units of an AIF scheme with a “priority distribution model” will qualify for a deduction from capital funds that will be applied equally to Tier-1 and Tier-2 capital.
4. Investments through intermediaries: According to the March 2024 circular, investments by REs in AIFs made through intermediaries such as fund of funds or mutual funds are not included in the scope of the December 2023 circular.

Conclusion-

The March 2024 circular provided further clarification and refinement, particularly in distinguishing downstream investments, specifying provisioning requirements, and explaining the applicability of deductions. It also provided an overview of the extent of investments made through intermediaries, which helped to develop a more Practical knowledge of regulatory compliance. When taken as a whole, these circulars show the RBI’s deliberate attempt to strike a balance between encouraging AIF investments and sensible risk management, which would eventually lead to a more stable and open investment environment.

Click Here for Notification:

RBI/2023-24/90 (DOR.STR.REC.58/21.04.048/2023-24) 

RBI/2023-24/140 (DOR.STR.REC.85/21.04.048/2023-24)

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Akib Khan