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Alternative Investment Fund

Context:

The Reserve Bank of India (RBI) has issued a directive to Regulated Entities (REs), including banks, non-banking financial companies (NBFCs), and other lenders, prohibiting them from investing in alternative investment funds (AIFs) schemes that have downstream investments in debtor companies. This move is aimed at addressing concerns related to the evergreening of stressed loans.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. Recent RBI Directives on AIF Investments by REs
  2. What is an Alternative Investment Fund (AIF)?

Recent RBI Directives on AIF Investments by REs:

Concerns Addressed:

  • RBI has highlighted concerns about the substitution of direct loans with AIF unit investments by Regulated Entities (REs).
  • This practice indirectly connects REs to the borrowers and has raised apprehensions about loan evergreening.

Definition of Evergreening:

  • Evergreening is a process in which lenders attempt to revive loans on the brink of default by providing additional loans to the same borrower.

Explicit Prohibition:

  • The RBI directive explicitly forbids REs from investing in AIF schemes that have downstream investments in debtor companies associated with the RE.

Timeline for Liquidation:

  • If an AIF, in which an RE is an existing investor, makes downstream investments in debtor companies, the RE must liquidate its investment within 30 days.

Provisions for Non-Compliance:

  • Failure to liquidate within the stipulated time requires REs to make a 100% provision on such investments.

Definition of Provision:

  • A provision is an amount set aside or reserved by a company or financial institution to cover anticipated future expenses or losses.

What is an Alternative Investment Fund (AIF)?

  • Definition:
    • An AIF refers to a privately pooled investment mechanism established or formed in India.
    • Its purpose is to gather funds from sophisticated investors, whether domestic or international, and invest according to a specific policy, ultimately benefiting investors.
  • Regulation:
    • AIFs adhere to the SEBI (Alternative Investment Funds) Regulations, 2012.
  • Registration Statistics:
    • As of December 2023, 1,220 AIFs were registered with the Securities and Exchange Board of India (SEBI).
Categories of AIFs:
  • Category I:
    • Invests in startups, early-stage ventures, social initiatives, SMEs, infrastructure, or sectors deemed socially and economically beneficial.
    • Includes venture capital, social venture funds, infrastructure funds, and specified Alternative Investment Funds.
  • Category II:
    • Does not fall into Category I or III.
    • Does not undertake leverage or borrowing except for day-to-day operational requirements.
    • Includes real estate funds, private equity funds (PE funds), distressed asset funds, etc.
  • Category III:
    • Employs diverse or complex trading strategies.
    • May use leverage, including through investment in listed or unlisted derivatives.
    • Includes hedge funds, PIPE (private investment in public equity) Funds, etc.
Legal Forms:
  • An AIF can be established in the form of a trust, company, limited liability partnership, or a body corporate.
  • Most SEBI-registered AIFs are in trust form.

-Source: Indian Express


February 2024
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