In a significant development for the alternative investment industry, the Reserve Bank of India has relaxed some key rules for investments made by banks and other lending institutions in Alternative Investment Funds (AIFs).
The changes come as a relief to lenders who had faced restrictions in their ability to invest in certain AIF schemes due to the downstream investments made by such funds. Last year, RBI had directed banks and NBFCs to avoid investing in any AIF scheme that had exposures to debtor companies of the investing institution through indirect stakes. They were also asked to liquidate existing investments in such schemes within a month or make 100% provisions.
However, in a notification issued yesterday, the central bank has now eased these norms stating that provisions will only be required to the extent of AIF investments in debtor companies and not on the entire exposure. Further, direct equity investments by AIFs have been excluded from the purview of “downstream investments”.
The revised norms aim to bring more clarity and harmonization in the implementation of the prudential guidelines. Commenting on the development, experts highlighted that it will boost participation of regulated entities in the AIF industry and allow genuine flow of long-term capital for valuable investment opportunities.
The modifications are also expected to aid growth of specialized funds investing in distressed assets/stressed companies as banks can now consider investing where the underlying investments are not in their own entities facing debt issues. Overall, the progressive changes demonstrate RBI's commitment towards developing a robust alternative investments ecosystem.
