Comments
The Reserve Bank of India (RBI) has given a breather to the lenders on their investments in alternative investment funds (AIFs) following representations received from stakeholders.
The central bank had tightened the norms in December 2023 for lenders relating to making investments in units of AIFs to address concerns relating to the possible evergreening of stressed loans.
In its latest circular, the RBI said lenders cannot make investments in any scheme of AIFs which has downstream investments, such as hybrid instruments in a debtor company of the former.
However, lenders are allowed to make investments in any scheme of AIFs which has downstream equity investments in a debtor company of the former.
An AIF is a privately pooled investment vehicle, which collects funds from investors, for investing it in accordance with a defined investment policy for the benefit of its investors.
The RBI also gave relief on provisioning norms. Provisioning will be required only to the extent of investment by the lender in the AIF scheme, which is further invested by the fund in the debtor company.
The earlier interpretation was that provisioning had to be made on the entire investment of the lender in the AIF scheme.
The RBI said if a lender has investment in subordinated units of an AIF scheme, which also has downstream exposure to the debtor company, then the lender will be required to comply with the revised provisioning norms.
The RBI said investments by lenders in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of its latest circular.
Gopal Srinivasan, Chairman & Managing Director, TVS Capital Funds, said the industry had flagged issues relating to how hybrid instruments (such as convertible debentures defined as per FEMA) could be treated under RBI norms. The latest clarification relating to downstream equity investments comes as partial relief, he added.
Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA, said the earlier interpretation relating to provisioning was that if a lender invested ₹10 crore in a ₹100 crore AIF scheme, which in turn invested ₹1 crore in the debtor company of the lender, the provisioning would be on the entire ₹10 crore. But now the provisioning will be only on the ₹1 crore exposure.
Siddharth Shah, Partner at Khaitan & Co., said this circular should bring a sigh of relief both for AIFs and the banks/NBFCs.
“The carving out of equity investments from the applicability of the earlier circular should allow a large majority of VCFs and PE funds to continue with the investments by REs as well as to go out and raise capital from REs. Secondly, limiting the provisioning to pro-rata exposure to the underlying debtor company makes logical sense and should help dilute the adverse provisioning impact for REs linked to their entire exposure to an AIF,” Shah said.
Referring to the clause in the earlier circular whereby investment by lenders in the subordinated units (including sponsor units) of any AIF scheme with a ‘priority distribution model’ will be subject to full deduction from lenders capital funds, the RBI said this will be applicable only in cases where the fund does not have any downstream investment in a debtor company of the lender.
The proposed deduction from the lender’s capital will take place equally from both Tier-1 and Tier-2 capital.
Siddarth Pai, Founding Partner, 3one4 Capital, & Co-Chair, Regulatory Affairs Committee, IVCA, said while the RBI circular provides some operational and regulatory clarity but also raises new questions. “The exclusion of equity shares from the definition of downstream investments works only for investments in listed companies. It fails to account for the Private Equity and venture capital investments, which are in the form of compulsory convertible instruments such as CCPS and CCDs. The industry is debating as to whether they would need to convert all their hybrid security to equity to allow REs to stay invested in their funds. Furthermore, there is still ambiguity as to whether existing REs can still honour capital calls to AIFs who do not meet the specific criteria in the new circula,” he said.
Comments
COMMENT NOW
