RBI's hand behind today's rally in banks, other financial stocks

RBI's December circular prohibiting regulated entities such as NBFCs from investing AIFs having downstream investments either directly or indirectly in a debtor company of the entities had stressed investors. The rules also required entities to liquidate their investment within 30 days from the date of downstream investment or make 100% provision.

Now, the RBI has tweaked the rules. Rather than a 100% provision, banks and NBFCs need to set aside funds to only cover that part of their investment in an AIF that is further invested in the debtor company.

The revised circular excludes investments in equity shares of debtor companies but includes other investments like hybrid instruments.

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"This relaxation will certainly help the AIF as well as the financial services industry, as the maximum investment would be in the nature of equity investments by AIFs. The situation of hybrid instruments is not exempted. This would include investment in compulsorily convertible preference shares (CCPS) by 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," Punit Shah of Dhruva Advisors said.

Technically, the reading of the circular is that in a Rs 1,000 crore fund, for example, if the RE investment is Rs 100 crore and if the AIF, for example, has invested in common debtor entity which is only Rs 50 crores, then now the provisioning requirement would be to the tune of the Rs 50 crores and not the entire Rs 100 crores of AIF exposure by the RE, Dipen Ruparelia, Head of Products, Vivriti Asset Management, said.

Previously, the interpretation was that even in the case of the exposure by the AIF was only Rs 10 crore, the provisioning requirement was on the entire investment of Rs 100 crore by the RE.

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