Context:
The Reserve Bank of India (RBI) has released revised draft guidelines for investments by regulated entities (REs) in Alternative Investment Funds (AIFs). The new rules aim to enhance oversight and prevent potential misuse of AIFs.
The draft guidelines are open for public and stakeholder feedback, after which the RBI is expected to finalize and implement the new rules.
Key Proposals under the Revised Guidelines:
1. Cap on Single RE Contribution: A single regulated entity can now invest no more than 10% of the total corpus of any AIF scheme.
2. Limit on Collective RE Investments: The combined investment by all REs in a single AIF scheme has been capped at 15% of the scheme’s corpus.
3. Unrestricted Investments up to 5%: Investments by an RE that are up to 5% of the scheme's total size will not be subject to additional restrictions.
4. Provisioning Requirement for Connected Exposures
If an RE’s investment exceeds the 5% threshold, and the AIF has downstream debt exposure to a borrower linked to that RE (excluding equity shares and certain convertible instruments), the RE is required to make a 100% provision for its proportionate exposure.
Regulated entities (REs) in finance are financial institutions and organizations that operate under the supervision of regulatory authorities, such as the RBI.
Objective of the Revision:
The revised framework aims to:
- Promote prudent investment practices
- Prevent evergreening of loans through indirect exposure
- Improve transparency and accountability in institutional AIF investments
- Mitigate conflict-of-interest risks and exposure to connected borrowers
Expected Impact:
These changes are expected to:
- Curb misuse of AIF structures for routing funds to stressed or related borrowers
- Encourage diversification by limiting the concentration of RE investments
- Provide greater clarity and consistency for financial institutions investing in AIFs
- Foster a healthier investment environment that balances innovation with risk control
About Alternative Investment Funds (AIFs):
Alternative Investment Funds (AIFs) are privately pooled investment vehicles that collect funds from investors, whether Indian or foreign, for investing in various asset classes like private equity, venture capital, real estate, hedge funds ect.
· According to SEBI, AIFs are classified into three categories: Category I, Category II, and Category III. These categories differ in their investment strategies, risk levels, and regulatory benefits.
· AIFs in India are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012.
Conclusion:
The move is also seen as part of a broader strategy to align RBI regulations with SEBI’s existing AIF guidelines, thereby ensuring a more uniform regulatory regime across financial market participants.
