RBI on Tuesday said that Regulated entities (REs) like Banks/FIs make investments in units of AIFs as part of their regular investment operations. However, it added that certain transactions of REs involving AIFs that raise regulatory concerns have come to their notice.
The full form of AIF is the Alternate Investment Fund. AIF means any Indian investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing by a defined investment policy.
“These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs”, it said.
Hence, to address possible ever-greening through this route, the central bank advised the regulated entities as under.
(i) REs shall not make investments in any scheme of AIFs that has downstream investments either directly or indirectly in a debtor company of the RE.
Explanation provided by RBI: The debtor company of the RE, for this purpose, shall mean any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months.
(ii) If an AIF scheme, in which RE is already an investor, makes a downstream investment in any such debtor company, then the RE shall liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF. If REs have already invested into such schemes having downstream investment in their debtor companies as of date, the 30 days for liquidation shall be counted from the date of issuance of the above circular dated December 19, 2023, those entities (Banks/FIs) shall forthwith arrange to advise the AIFs suitably in the matter.
(iii) In case REs are not able to liquidate their investments within the above-prescribed time limit, they shall make 100 percent provision on such investments.
Further, investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ shall be subject to full deduction from RE’s capital funds.
Explanation given by RBI: ‘Priority distribution model’ shall have the same meaning as specified in the SEBI circular SEBI/HO/AFD-1/PoD/P/CIR/2022/157 dated November 23, 2022.
The above instructions of RBI shall become effective immediately.
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