Insights by: Shammi Khanna & Sumit Kochar
The Reserve Bank of India (RBI) vide notification number DOR.STR.REC.58/21.04.048/2023-24 dated 19th December 2023, has issued guidelines aimed at regulating investments by regulated entities (REs), comprising banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs), in schemes of Alternative Investment Funds (AIFs). These guidelines are effective immediately and have been introduced to address concerns regarding transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs, which is called evergreening of loans.
Key Guidelines:
- Restriction on Investments in Debtor Companies: REs are prohibited from making investments in any AIF scheme that has downstream investments, either directly or indirectly, in a debtor company of the RE. For clarification, a debtor company is defined as any entity to which the RE currently holds or previously held a loan or investment exposure within the preceding 12 months.
- Liquidation of Investments in Case of Downstream Investment: If an AIF scheme, in which an RE is already an investor, makes a downstream investment in a debtor company of the RE, the RE must liquidate its investment in the scheme within 30 days from the date of the downstream investment by the AIF. For existing investments in such schemes as of the date of this circular, the 30-day period for liquidation shall be calculated from the circular’s issuance date. REs are required to promptly inform the concerned AIFs about the necessary actions.
- Provision Requirement for Unliquidated Investments: In instances where REs are unable to liquidate their investments within the prescribed time limit, they must make a 100 percent provision on such investments.
Furthermore, Investment by REs in the subordinated units of any AIF scheme following a ‘priority distribution model’ is subject to a full deduction from the RE’s capital funds. The term ‘priority distribution model’ is defined in alignment with the SEBI circular SEBI/HO/AFD-1/PoD/P/CIR/2022/157 dated 23rd November 2022. The notification can be accessed from here.
