RBI Modifies AIF Regulations For Lenders

The Reserve Bank of India has directed banks and non-bank lenders to provide for the extent of investment in the alternative investment fund, which is further invested in the debtor company.

The provisions should not be made on the entire investment of the lender in the AIF scheme, the central bank clarified in a circular released on Wednesday.

This comes after the RBI, in December, restricted banks and NBFCs from investing in AIFs, which have downstream investments in debtor companies. The move was aimed at controlling evergreening of loans through the AIF investment route.

If banks or NBFCs had such investments in AIFs, they were given 30 days to liquidate their holdings or make 100% provisions against them, the RBI circular from December stated.

The central bank also said that downstream investments by AIFs "shall exclude investments in equity shares of the debtor company of the lender." However, the directions apply to all other investments, including investments in hybrid instruments.

Debtor companies include borrowers who have availed loans or investments from banks or NBFCs in the last 12 months.

After the circular was issued in December, Piramal Enterprises Ltd. and IIFL Finance Ltd. informed exchanges of their exposure to AIFs and said that they had initiated the process of making provisions.

IIFL Finance disclosed a total investment of Rs 21.37 crore in the IIFL Fintech Fund, along with an outstanding debt exposure of Rs 3.28 crore related to the fund's downstream investments. The total value of other AIF investments stood at Rs 909.81 crore, excluding any downstream exposure in the preceding 12 months.

IIFL Home Finance had an investment of Rs 161.07 crore through the "priority distribution model,"  the company said in an exchange filing. If the housing finance arm of IIFL Finance fails to liquidate this investment, the company would have to provide fully for this exposure.

Piramal Enterprises had a total exposure of Rs 1,737 crore to AIFs. The company emphasised its intention to provide for its entire AIF exposure, beyond what is stated in the RBI's regulations.

The central bank clarified that provisions for downstream exposure to debtor companies, where AIF is invested, have to come from tier-1 and tier-2 capital equally.

Notably, AIF investments by lenders through intermediaries such as fund of funds or mutual funds are excluded from the aforementioned restrictions, the RBI said.

While industry participants have lauded the clarification, there are some sticking points as well.

"The recent RBI circular does provide some operational and regulatory clarity but also raises new questions," said Siddarth Pai, co-chair of Regulatory Affairs Committee at Indian Venture and Alternate Capital Association.

Excluding investments through fund of funds and mutual funds will increase capital participation in AIFs, Pai said. However, the exclusion of equity shares from the definition of downstream investments works only for investments in listed companies, he said.

The RBI's clarification does not say anything about investments in private equity and venture capital, which are in the form of compulsory convertible instruments, Pai said.

Industry participants are unsure whether the companies would need to convert their hybrid instruments into equity products, so that lenders can stay invested in their funds.

Some players were expecting banks and development finance institutions to be exempted of the circular.

"...the much-awaited requirement from the market, that DFIs and banks should be exempted overall from the applicability of the circular is not covered, which we think is a big miss and not what people would’ve expected," Dipen Ruparelia, head of products at Vivriti Asset Management, said.

It is also unclear that lenders who have capital commitments can still "honour capital calls to AIFs who do not meet the specific criteria in the new circular", Pai said.