RBI tightens norms for AIF investments
- The Reserve Bank of India (RBI) directed banks, non-banking financial companies (NBFCs) and other lenders not to invest in any scheme of alternative investment funds (AIFs)
- It is limited to the AIFs which have downstream investments in a debtor company.
Directives of RBI
- Objective : Aimed at curbing evergreening of stressed loans,
- An AIF means any fund established or incorporated in India which is a privately pooled investment vehicle
- It collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.
- Regulated entities (REs) make investments in units of AIFs as part of their regular investment operations.
- RBI, however, said that certain transactions of REs involving AIFs raise regulatory concerns.
- These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs,” the RBI said in a notification.
Evergreening of loans
- It is a process whereby a lender tries to revive a loan that is on the verge of default or in default by extending more loans to the same borrower.
- As of December 19, there were 1,220 AIFs registered with the Securities and Exchange Board of India (SEBI).
Downstream investments
- It means the actual investment by the AIF in a company using the funds they have raised from AIF investors.
- The need to make 100 per cent provision on such outstanding debt is likely to be a big deterrent to such irregularities in transactions
Prelims Takeaway
- Non-banking financial companies (NBFCs)
- Alternative investment funds (AIFs)