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RBI Issues Instructions on Investments in AIFs to Prevent Evergreening of Loans December 19, 2023
Published in: Investment Funds
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Reserve Bank of India (“RBI”), vide its notification dated December 19, 2023, has issued a circular with instructions on the procedure to be followed by the Regulated Entities (“REs”) in order to make investments in units of Alternative Investment Funds (“AIFs”), and to address concerns relating to possible evergreening through this route. REs make investments in units of AIFs as part of their regular investment operations. However, as per RBI, certain transactions of REs involving AIFs entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs.
In order to tackle these issues, RBI has issued the following instructions:
(a) REs will not be allowed to invest in any scheme of AIFs which have downstream investments, either directly or indirectly, in a debtor company of the RE. The debtor company has been defined as any company to which the RE currently has or previously had given a loan or investment exposure in the preceding 12 months.
(b) If an AIF scheme, in which an RE is already an investor, makes a downstream investment in a debtor company, then the RE is required to liquidate its investment in the AIF scheme within 30 days from the date of making such downstream investment. Further, in the event REs have already made investments in such AIF schemes, the 30-day period for liquidation shall initiate from the date of issuance of this circular.
(c) REs will be entrusted with the responsibility of arranging to advise the AIFs suitably on this matter.
(d) In the event, the REs are unable to liquidate their investments within the prescribed time limit, they will be required to make a 100% provision on such investments.
(e) Any investment by REs in subordinated units of any AIF scheme with a ‘priority distribution model’ will be subject to a full deduction from REs’ capital funds. The term ‘priority distribution model’ refers to a distribution waterfall structure of AIFs where one class of investors share loss more than pro rata to their holding in the AIFs with respect to the other classes of investors/ unit holders.
To read the circular click here
For any clarification, please write to:
Mr. Yatin Narang
Partner
[email protected]
