What changed
RBI observed NBFCs excluding group investments made through sponsored Venture Capital Funds (VCFs) from NOF calculation, claiming the VCF made the investment. The circular clarifies that if an NBFC contributes 50% or more of the AIF/VCF corpus, or is the beneficial owner of a trust holding the investment, the investment must be treated as direct for NOF purposes.
What it means for you
NBFCs can no longer use AIF/VCF structures to circumvent NOF deduction rules for group company investments. This tightens regulatory capital calculation and may reduce reported NOF for NBFCs with significant group investments through such funds. Lenders must review their AIF exposures and ensure compliance with the substance-over-form principle.
What you must do
- Review all AIF/VCF investments where your NBFC contributed 50% or more of the fund corpus.
- Identify trust structures where your NBFC is the beneficial owner and holds 50%+ of trust funds.
- Recalculate NOF by including such indirect group investments as direct investments for deduction.
- Update internal NOF calculation policies to reflect substance-over-form for all investment structures.
- Prepare for potential NOF reduction and assess impact on regulatory compliance and lending limits.
Who it affects
All NBFCs, NBFCs with group company investments through AIFs/VCFs, NBFCs sponsoring Venture Capital Funds, NBFCs with trust structures for investments
Does this circular apply to all AIFs or only VCFs?
It applies to any Alternative Investment Fund (AIF) as defined under SEBI AIF Regulations, 2012, including Venture Capital Funds (VCFs). The key trigger is the NBFC contributing 50% or more of the fund's capital.
What if my NBFC contributes less than 50% to an AIF?
If the NBFC's contribution is below 50% and it is not the beneficial owner of a trust holding the investment, the indirect investment may not need to be deducted for NOF calculation. However, the substance-over-form principle still applies, so review the overall control and benefit structure.
How does 'beneficial ownership' in a trust affect NOF?
If the NBFC is the beneficial owner of a trust (i.e., has power to make/influence decisions and receives benefits), and 50% or more of the trust's funds come from the NBFC, then investments made by that trust in group entities must be treated as direct investments for NOF deduction.