RBI eases investment regulations for banks and NBFCs in AIF schemes

Business Standard

6 days ago

The Reserve Bank of India (RBI) on Tuesday eased norms on investments by regulated entities (REs) in Alternative Investment Funds (AIFs), by capping the cumulative exposure of banks and non-banking financial companies (NBFCs) in AIFs at 20 per cent, with the contribution of a single RE capped at 10 per cent of the scheme's corpus.
Additionally, the RBI has excluded equity instruments as part of downstream investment made by REs in AIFs from the purview of provisions.
Previously in May, the RBI, in a draft circular, had proposed an overall cap on investment by REs in any AIF scheme at 15 per cent, with the contribution of a single RE capped at 10 per cent of the scheme's corpus.
The new directions come into effect from January 1, 2026, or from any earlier date as decided by an RE as per its internal policy.
Additionally, in the directions issued on Tuesday, the RBI stated that if an RE contributes more than 5 per cent to the corpus of an AIF scheme that has downstream investments — excluding equity instruments — in a debtor company of the RE, then the RE must make a 100 per cent provision for its proportionate investment in the debtor company through the AIF, subject to a cap equal to its direct loan and/or investment exposure to that company.
Further, the central bank stated that if an RE's contribution to an AIF is in the form of subordinated units, the entire investment must be deducted from its capital funds — proportionately from both Tier-1 and Tier-2 capital.
Back in December 2023, the RBI had barred REs from investing in AIFs that have investment in existing and recent borrowers, after markets regulator Securities and Exchange Board of India (Sebi) found instances of evergreening of loans and circumvention of other market regulations through different AIF structures.
Following this, several AIFs had approached the regulators with concerns that REs were struggling to honour capital calls, following the restrictions. Later in March 2024, the RBI eased provisioning norms.
'The major changes that the industry asked for and the RBI has graciously provided are: carving out of equity investments from the guidelines, and exclusion of companies in which banks/NBFCs have made equity investments in from the definition of 'debtor company',' said Siddarth Pai, cochair, IVCA Regulatory Affairs Council.
'Now, investors in AIFs will gain much comfort, with the banking regulator once again permitting its regulated entities to invest in equity AIFs. The safeguards for private credit leave an opportunity for change if the RBI gets comfort on this matter,' he said.
As of March 2025, the total commitments made to AIFs stood at ~13.49 trillion while the total investments made stood at ~5.38 trillion. Investments made in equity and equity-linked securities stood at ~3.5 trillion.
Of the total ~5.63 trillion fundraise, domestic investors account for ~4.08 trillion. Real estate tops the sectors in terms of investments at ~69,896 crore, followed by information technology (IT), financial services, and NBFCs.
"The directions from the RBI have some positives such as clarifying that equity instruments will include CCPS (compulsorily convertible preference shares) and CCDs (compulsorily convertible debentures), which was an industry ask. The overall RE exposure has also been kept at a reasonable 20 per cent. The fact that this only gets effective from January 2026 is a welcome move as it gives fund managers sufficient time to plan their ongoing fundraise efforts," said Pallabi Ghosal, partner, Trilegal.
'The guidelines are now brought into alignment with Sebi guidelines on due diligence and investment to ensure uniformity and clarity. The guidelines directly seek to address the concern relating to the misuse of the AIF route for evergreening of loans and advancing by using AIF to finance the existing stress loans portfolio,' said Sudhir Chandi, director at Resurgent India.