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 scheme: 15% 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.
