AIFs want to know extent of exclusion for equity play now

The industry is also seeking an explanatory glossary on whether provisioning is prorated or based on literal amounts.

On Wednesday, the Reserve Bank of India () allowed and to exclude AIF investments in equity shares of their debtor companies, but included all other investments, including those in hybrid instruments.

As per the revised circular, if a bank and NBFC has a ₹100 crore investment in an AIF with a total corpus of ₹1,000 crore, and the AIF invests ₹50 crore in a debtor company, the linked bank's 10% investment in the AIF implies a provisioning requirement of 10% of ₹50 crore, which amounts to ₹5 crore. The provisioning requirement earlier would be ₹50 crore, as per the December circular.

"AIFs are seeking clarification from the RBI regarding the exclusion of equity shares from the definition of downstream investments. The industry wants to know whether the exclusion applies only to investments in equity shares or also includes private equity and venture capital investments in the form of compulsory convertible instruments like CCPS and CCDs as treated under FEMA guidelines," said Tejesh Chitlangi, joint managing partner, IC Universal Legal.

In the revised circular, RBI said 100% provisioning which was required to be made by banks, NBFCs is now required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme.

"The situation of hybrid instruments is not exempted," said Punit Shah, partner, Dhruva Advisors. "This would include investment in CCPS by the AIFs; this may not be intended as CCPS are quasi equity and not a debt instrument. There is an adequate case for exempting CCPS investments as well."

In December 2023, concerned with evergreening of loans, RBI had put the wide-ranging curbs the banking regulator imposed earlier this week on AIFs, potentially choking institutional fund flows to a high-risk and hitherto lightly regulated investment vehicle experts believe could be misused to evergreen doubtful corporate loans.

The RBI had prohibited banks and NBFCs from making investment in units of AIFs having downstream investments either directly or indirectly in their debtor companies. RBI had asked banks, NBFCS, which had already invested in such AIFs, to liquidate their investment within 30 days from the date of downstream investment by the AIF/date of circular in case of existing investments or make 100% provision.