According to the RBI advisory, banks, non-banking financial companies (NBFCs), and other financial institutions like Nabard and Sidbi will not be able to make investments in any scheme of AIFs which has downstream investments directly or indirectly in a debtor company of the bank/NBFC.
It implies that if the bank or NBFC currently has exposure to or had lent to a company at any time during the preceding 12 months, then they cannot invest in an AIF scheme investing in the same company.
The RBI’s advisory comes amidst the backdrop of findings by the Securities and Exchange Board of India (Sebi), which stated that cases of circumvention amount to ‘tens and thousands of crores’.
Last month, a Sebi official stated that the market regulator had shared data with the RBI on AIFs being structured to enable evergreening of financial sector assets to avoid NPA recognition.
“We have shared this data with the RBI, and the RBI agrees with our assessment. We have seen cases where AIFs have been used to circumvent FEMA regulations—where a particular entity not allowed to invest in another does so via an AIF,” the Sebi official had said.
AIF officials said that the RBI decision could lead to heavy exits from the schemes or write-downs on certain investments.
“If an AIF scheme, in which a regulated entity (RE) [bank or NBFC] is already an investor, makes a downstream investment in any such debtor company, then the RE shall liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF,” said the RBI.
If the RBI-regulated entity is not able to liquidate their investments within the 30-day timeline, then they will have to make a 100 per cent provision on such investments, advised the RBI.
The AIF industry has raised concerns on the impact and the challenges in tracking such investments. Industry officials said they have started to work on their submissions to both the regulators.
“This is like throwing the baby out with the bathwater. Several banks have signed agreements of AIF investments. This will also restrict investments by Sidbi, government’s own initiative to provide credit. Many AIFs invest in listed entities too and there could be some credit provided by these financial institutions already. Even if a credit card or banking facility is availed by the entity where the AIF plans to invest, then the bank/NBFC cannot invest in the said AIF,” said an AIF official seeking anonymity.
Industry officials said that the decision will deter banks and NBFCs from investing in debt AIFs or the funds facilitating venture debts.
AIFs are privately pooled investment products investing in startups and SMEs, private equity funds, private credit providers, etc. AIFs fall under the regulatory ambit of Sebi. Category II AIFs are the ones majorly investing in debt and private equity.
“Many banks would also have a cash credit or overdraft facility to the startups in some way or another. In such cases, they won’t be able to invest in AIFs which also have downstream investments in such a startup,” said another industry player.
As of June 30 this year, AIFs raised investment commitments worth Rs 8.44 trillion, of which Rs 6.96 trillion is for category II AIFs. Till the first six months of the calendar year, a total of Rs 3.50 trillion was invested through the AIFs. The number of AIFs and investments by these schemes has grown multi-fold in the last five years. As of June 2018, the investment amount stood at around Rs 75,000 crore.
Legal players said that the exits by banks and NBFCs could impact the valuation and the Net Asset Value (NAV) for investors.
First Published: Dec 19 2023 | 5:57 PM IST