RBI provides breather on alternative investment fund investments
Mumbai, Mar 27, 2024
RBI said that its regulated entities (REs) will now be required to make provisioning only to the extent of the amount invested by the AIF scheme in the debtor company and not the entire investment
In a relief to banks and non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) on Wednesday relaxed the norms it announced on investments in Alternative Investment Funds (AIFs) in December last year.
The RBI had restricted banks and financial institutions from investing in AIFs where there is an exposure to a firm to which they have already lent to, in order to address evergreening on loans. The regulator had asked banks and NBFCs to make 100 per cent provisions for the entire investment in such AIF schemes.
In a circular issued on Wednesday, the RBI said that its regulated entities (REs) will now be required to make provisioning only to the extent of the amount invested by the AIF scheme in the debtor company and not the entire investment.
Industry experts said that this would lower the burden on the NBFCs which had done 100 per cent provisioning for the total investments in AIFs after the lapse of the 30-day period given by RBI to liquidate such assets. As some of the entities have already made provision, there could be write back of provision in the current quarter.
“The circular helps to address the issue that the provisioning that these entities need to make will be applicable only where the AIF has a debt exposure (since equity has been carved out) to a portfolio company where the REs have a direct exposure by the way of debt,” said Siddharth Shah, Partner, Khaitan & Co.
With the changes, the provisioning will be proportionate to the downstream investment in the debtor company by the AIF.
“For instance, if the RE has a total investment of Rs 100 crore in an AIF scheme but only Rs 10 crore of it is invested in the debtor firm by the AIF, then under the new norms, provisioning is required only for Rs 10 crore against a Rs 100 crore provisioning required earlier,” said Dipen Ruparelia, Head of Products, Vivriti Asset Management.
Further, the RBI has also excluded investments made through intermediaries like fund of funds and mutual funds.
“The circular has also clarified that the earlier circular would not apply to fund of funds. So, besides private fund of funds, government funds like SRI, SIDBI, NABARD, etc should also benefit out of this carve out,” Shah said.
The RBI has also excluded investments in equity shares of the debtor company from the definition of “downstream investments”. This means that they will be able to invest in AIFs even if the scheme has equity investments in the company to which the bank or NBFC has already lent to.
“The exclusion of equity shares from the definition of downstream investments works only for investments in listed companies. It fails to account for the Private Equity & Venture Capital investments, which are in the form of compulsory convertible instruments such as CCPS and CCDs. The industry is debating as to whether they would need to convert all their hybrid secured to equity to allow REs to stay invested in their funds,” said Siddarth Pai, Founding Partner, 3one4 Capital.
Pai, who is also co-chair of the Regulatory Affairs Committee at AIF industry body Indian Venture and Alternate Capital Association (IVCA), added that there is ambiguity as to whether existing REs can still honour capital calls to AIFs who do not meet the specific criteria in the new circular.
“I would say to a great extent it addresses a major issue for venture capital funds and private equity funds who were inadvertently caught into the ambit of the earlier circular even when they were really taking equity exposure in portfolio entities. While it is difficult to put a number to the quantum or number of AIFs who will benefit out of this circular, it can be assumed that a fairly significant number of AIFs should now be able to go out and raise money from banks and REs,” Khaitan’s Shah said.
Pai said the industry will reach out for further clarity on the matter.
Some relief
Relaxation on provisioning required only for the extent of exposure to debtor firms, and not the entire investment
Investments through fund of funds, mutual funds carved out of the circular’s scope of impact
Investment in equity shares of debtor firm excluded from the definition of downstream investments
As there’s no exclusion to hybrid instruments, AIF industry mulling if it needs to convert all its hybrid instruments to equity to allow REs to stay invested
[The Business Standard]
