Rules for banks and NBFCs engaging in alternative investment funds are tightened by the RBI

 Rules for banks and NBFCs engaging in alternative investment funds are tightened by the RBI

The RBI forbids any scheme of an AIF that contains downstream investments in the entity's debtor firm from being invested in by regulated institutions, including banks, non-banking financial organizations, and HFCs.

Regulated entities will be required to make 100% provision on such investments if they are unable to sell them within the time frame specified above.

On Tuesday, the Reserve Bank of India prohibited regulated businesses from making direct or indirect investments in any Alternative Investment Funds (AIFs) scheme. This included banks, non-banking financing companies (NBFCs), and housing finance companies (HFCs). Investment happens downstream. One of the regulated entities' debtor companies.

It is important to remember that AIFs include, among others, hedge funds, private equity funds, infrastructure funds, angel funds, and venture capital funds.

The Reserve Bank said in a circular, "...certain RE transactions including AIFs which raise regulatory concerns have arrived to our notice." Instead of the direct credit exposure of the RE, these transactions feature indirect exposure to borrowers via investments in units of the AIF. Added a circular.

REs are not permitted to engage in any AIF scheme in which the lender has a direct or indirect downstream ownership in the debtor firm, according to the top bank, "to address concerns related to potential evergreening through this route."

"If an AIF scheme, in which the RE is already an investor, makes a downwards investment in any such debtor company, the RE shall exit its investment with the scheme after 30 days form the date of such downstream investment by the AIF," the Banking Regulation said. stated the regulator.

The 30-day liquidation period will begin on the day this circular was issued if RES has already invested in schemes with downstream interests in their debtor enterprises. The RBI circular said that the RES needed to make plans right now to provide the AIF the right advise in this regard.

According to the RBI, this comprises businesses to whom lenders have already made investments or loans during the last 12 months.

According to the central bank, REs will need to make a 100% provision on their investments if they are unable to sell them within the time period mentioned above.