The Reserve Bank of India (RBI) has tightened norms for Regulated Entities (RE) like all banks, all India Financial Institutions and Non-Banking Financial Companies (together with Housing Finance Companies) to prevent evergreening of loans via investments in Alternative Investment Funds (AIFs).
The regulator mentioned although REs do make investments in models of AIFs as half of their common funding operations, sure transactions of REs involving AIFs had raised regulatory considerations.
“These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs,” the RBI mentioned in a round.
“In order to address concerns relating to possible evergreening through this route, it is advised that REs shall not make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the RE,” the regulator mentioned.
“If an AIF scheme, in which RE 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,” it added.
As per the round if REs have already invested into such schemes having downstream funding in their debtor corporations as on date, the 30-day interval for liquidation could be counted from date of issuance of this round.
In case REs should not ready to liquidate their investments inside the above-prescribed time restrict, they’ve to make 100% provision on such investments, the central financial institution mentioned in the round.
“In addition, investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ shall be subject to full deduction from RE’s capital funds,” it mentioned.
The directions have change into efficient instantly, the RBI mentioned.
