The Reserve Bank of India (RBI) on Tuesday introduced regulations to prevent banks and non-banking financial companies (NBFCs) from utilising the alternative investment fund (AIF) route to ‘evergreen’ their loans.
The Central bank highlighted Regulated Entities (REs) make investments in units of AIFs as part of their regular investment operations. These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs.
REs shall not make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the RE, RBI said in a statement.
The debtor company of the RE, for this purpose, shall mean any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months, it clarified.
The Central bank, in its circular, further gave clarification for the REs which are already investors in the AIF scheme. “If an AIF scheme, in which RE is already an investor, makes a downstream investment in any such debtor company, then the RE shall liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF,” it said.
“….if REs have already invested into such schemes having downstream investment in their debtor companies as on date, the 30-day period for liquidation shall be counted from the date of issuance of this circular. REs shall forthwith arrange to advise the AIFs suitably in the matter,” it added.
In case the REs are not able to liquidate their investments within the above-prescribed time limit, they shall make 100 percent provision on such investments, the circular read.
The bank highlighted that investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ shall be subject to full deduction from RE’s capital funds.