Why is it in the news?
- The Reserve Bank of India (RBI) has introduced modifications to norms for regulated entities (REs) regarding their investments in Alternative Investment Funds (AIFs).
About AIFs
- AIFs refer to privately pooled investment funds, whether sourced from Indian or foreign origins, established as trusts, companies, bodies corporate, or Limited Liability Partnerships (LLPs).
- These funds operate as private entities not under the jurisdiction of any regulatory agency in India.
Need for Regulations:
- Concerns arose regarding lenders misusing the AIF route for “evergreening loans,” a practice where new loans are extended to pay off old ones.
- This practice led to increased provisions by banks and Non-Banking Financial Companies (NBFCs), tightening capital flows for AIFs.
Regulations:
- REs are now required to set aside provisions only to the extent of their investment in the AIF scheme, which is subsequently invested by the AIFs in a debtor’s company, rather than the entire investment in the AIF scheme.
- To ensure consistency in implementation among REs, downstream investments should exclude investments in equity shares of the debtor company of the RE. However, all other investments, including those in hybrid instruments, should be included in downstream investments.
