MUMBAI: The Reserve Bank of India Wednesday cushioned the blow on banks and NBFCs that invest in Alternative Investment Funds (AIFs). The investments will exclude equity investments, but debt and hybrid instruments will continue to face additional curbs the regulator had announced earlier.
It also eased the provisioning requirements, giving relief to banks at the end of the fiscal year.
The RBI has also exempted investments by regulated entities (RE) in AIFs through intermediaries such as fund of funds or mutual funds. This could result in reversal of some of the AIF provisions which weighed on the performance of banks and NBFCs in the third quarter ended December 2023. For instance, Kotak Mahindra Bank had made a provision of ₹190 crore and RBL Bank had made a contingent provision of ₹115 crore on AIF investment.
“With a view to ensuring uniformity in implementation among the REs, and to address the concerns flagged in various representations received from stakeholders, it is advised that downstream investments shall exclude investments in equity shares of the debtor company of the RE, but shall include all other investments, including investment in hybrid instruments,” RBI said in the circular issued Wednesday.
The RBI has said that provisioning will be required only to the extent of the RE’s investment in the AIF scheme that is further invested in the debtor company, rather than on the entire investment in the AIF scheme.
“The RBI has addressed the issue regarding equity investments by AIFs in debtor companies of regulated entities, clarifying that these will no longer be a provisioning or investment concern for regulated entities who are already investors or looking to invest in such AIFs,” said Tejesh Chitlangi, Joint Managing Partner, IC Universal Legal.
“However, the issue persists majorly for AIFs that invest in debt or hybrid securities of portfolio companies which are debtor companies of REs.” said Chitlangi.
Banks and NBFCs can now still be sponsors of AIFs, but not lend to downstream companies or if they do they will have to make provisions. Earlier, RBI did not allow banks to become sponsors because banks or NBFCs had to provide for the whole fund. Now, that is not required.
“The revised guidelines specify that provisions are required only to the extent of investments made in downstream entities,” said Abizer Diwanji head financial services EY India. “This means that the entire amount does not need to be provisioned for, but only when a downstream investment into a company has been made.”
This addresses the issue of evergreening, where fresh money is not lent to stressed companies with the intention of taking units and returning them. The focus is on managing investments in downstream entities without creating additional stress on the financial system.