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RBI revises draft on REs’ AIF investments

Regulatory Background

  • Issuing Authority: Reserve Bank of India (RBI).
  • Subject: Investment by Regulated Entities (REs) in Alternative Investment Funds (AIFs).
  • Reason: To tighten financial discipline and prevent conflict of interest in debt investments.

Relevance : GS 3(Indian Economy , Banking)

Revised Draft Directions Highlights

  • Cap on single RE’s contribution to any AIF scheme: 10% of the AIF corpus.
  • Cap on total REs’ contribution collectively to a scheme15% of the corpus.
  • No restrictions on RE investments up to 5% of the corpus.

Provisioning Norms for Risk Containment

  • If RE’s investment exceeds 5% of AIF corpus and
    • The AIF scheme invests downstream in a debtor company of the RE,
  • Then the RE must make 100% provisioning for the proportionate exposure.

Regulatory Coordination

  • RBI’s move aligns with SEBI guidelines:
    • SEBI mandated specific due diligence on AIF investors and their investments.
    • Aimed at improving transparency and preventing regulatory arbitrage.

Broader Implications

  • Encourages prudent exposure of banks and financial institutions to AIFs.
  • Aims to avoid indirect lending to stressed entities through AIF route.
  • Supports financial sector stability by curbing risky investments and circular lending practices.

June 2025
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