What changed
RBI has prohibited regulated entities from making fresh investments in any AIF scheme that directly or indirectly invests in a company to which the entity has a loan or investment exposure within the last 12 months. If an existing AIF investment leads to such downstream investment, the entity must liquidate within 30 days or make 100% provision. Additionally, investments in subordinated units of AIFs with a priority distribution model must be fully deducted from capital funds.
What it means for you
This circular targets potential evergreening of loans through AIF structures. Banks and NBFCs must now closely monitor their AIF portfolios and ensure no indirect exposure to their own debtors. The 30-day liquidation requirement and 100% provisioning penalty create strong disincentives for non-compliance. Capital deduction for priority distribution model units will impact capital adequacy calculations.
What you must do
- Review all existing AIF investments to identify any downstream investments in debtor companies within the last 12 months.
- Liquidate any non-compliant AIF investments within 30 days from December 19, 2023, or make 100% provision.
- Update internal investment policies to prohibit new AIF investments that could indirectly fund existing debtors.
- Assess capital impact of any subordinated unit investments in AIFs with priority distribution models and deduct from capital funds.
- Communicate with AIF managers to ensure compliance and obtain necessary downstream investment data.
Who it affects
All Commercial Banks including Small Finance Banks, Local Area Banks, and Regional Rural Banks, All Primary (Urban) Co-operative Banks, State Co-operative Banks, and Central Co-operative Banks, All All-India Financial Institutions, All Non-Banking Financial Companies including Housing Finance Companies
What is the definition of a 'debtor company' under this circular?
A debtor company is any company to which the regulated entity currently has or previously had a loan or investment exposure anytime during the preceding 12 months.
What happens if we cannot liquidate our AIF investment within 30 days?
If you are unable to liquidate within 30 days from the date of downstream investment by the AIF (or from December 19, 2023 for existing investments), you must make 100% provision on such investments.
Does this circular apply to investments in subordinated units of AIFs?
Yes, investments in subordinated units of any AIF scheme with a 'priority distribution model' must be fully deducted from the regulated entity's capital funds, as defined in SEBI circular SEBI/HO/AFD-1/PoD/P/CIR/2022/157 dated November 23, 2022.