New Delhi: The RBI issued an advisory for banks investing in alternative investment funds (AIFs). The central bank’s announcement said banks should only set aside funds for their share of the investment in the AIF, which is then used by the AIF for the debtor company, not for the entire investment in the AIF scheme.
The release said, “With a view to ensuring uniformity in implementation among the Recognised Entities (REs), 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.” Downstream investments are investments made by an organisation using funds it has received from another source, usually a higher-level entity.
This advisory comes after the RBI issued a circular in December 2023, meant to control how banks, non-bank lenders, and other recognised entities invest in the AIF sector. It was issued because there were concerns that AIF investments might be used to get around loan classification rules.
Initially, there were concerns that REs were using investments in AIFs to pay off loans that would otherwise be marked as non-performing, helping out borrowers. The updated circular repeated that “downstream investments” should not count equity shares of the debtor company, but should include all other investments, like hybrid instruments.
The updated circular applies to commercial banks, cooperative lenders, NBFCs (Non-Banking Financial Companies), including housing finance companies, and other financial institutions. It states that reductions in capital should be evenly split between Tier-1 and Tier-2 capital of an RE.
