What changed
The RBI issued clarifications on its December 2023 circular on AIF investments. Downstream investments now exclude equity of the debtor company but include hybrid instruments. Provisioning is required only on the portion of the RE's investment that flows to the debtor, not the entire AIF investment. Deduction from capital for subordinated units applies equally to Tier-1 and Tier-2 capital.
What it means for you
Banks and NBFCs get relief as provisioning is now limited to the actual exposure to the debtor, reducing capital charge. The exclusion of equity investments from downstream definition narrows the scope of the circular. However, subordinated units still attract capital deduction, and fund-of-funds or mutual fund investments remain outside the circular's ambit.
What you must do
- Review AIF portfolios to identify downstream investments in debtor companies and calculate provisioning only on the portion invested in the debtor.
- Ensure capital deduction for subordinated units is applied equally from Tier-1 and Tier-2 capital.
- Exclude equity investments in debtor companies from downstream investment calculations.
- Verify that investments through fund-of-funds or mutual funds are not subject to the circular's requirements.
Who it affects
All Commercial Banks including Small Finance Banks, Local Area Banks, RRBs, Primary (Urban) Co-operative Banks, State Co-operative Banks, Central Co-operative Banks, All-India Financial Institutions, Non-Banking Financial Companies including Housing Finance Companies
What is excluded from downstream investments under the new clarification?
Downstream investments exclude investments in equity shares of the debtor company of the regulated entity, but include all other investments, including hybrid instruments.
How is provisioning calculated for AIF investments that go to a debtor company?
Provisioning is required only to the extent of the RE's investment in the AIF scheme that is further invested by the AIF in the debtor company, not on the entire investment in the AIF scheme.
Are investments through fund-of-funds or mutual funds covered by this circular?
No, investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the circular.