Alerts & Updates 28th Mar 2024

Investments by Banks and NBFCs in AIFs – Latest RBI Circular Offers a Limited Respite


Vinod Joseph Partner | Mumbai
Paridhi Jain Associate | Mumbai

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  • A few months ago, the Reserve Bank of India issued a notification dated December 19, 2023 (“December 2023 Notification”), which sought to address concerns of evergreening by banks and NBFCs. The December 2023 Notification prohibited banks and other entities such as NBFCs that are regulated by the RBI (“Regulated Entities”) from investing in any scheme of an alternative investment fund (“AIF”) which has downstream investments either directly or indirectly in a debtor company of such Regulated Entity.

    The December 2023 Notification had resulted in an outcry and various representations were made to the RBI for a watering down of at least some of the provisions of the December 2023 Notification. In a very welcome development, the RBI has now issued a notification dated March 27, 2024 (“March 2024 Notification”) which reverses some of the terms of the December 2023 Notification:

    • Equity investments by AIFs in portfolio companies shall be outside the purview of the December 2023 Notification. Only investments by AIFs in debt securities or hybrid instruments of portfolio companies would be covered by the December 2023 Notification.
    • Even if a Regulated Entity has invested in an AIF’s scheme and also lent to a portfolio company of the AIF (with which the AIF’s scheme has made an equity investment) provisioning shall be required only to the extent of investment by the Regulated Entity in the AIF’s scheme. Provisioning is not a requirement for the entire investment of the Regulated Entity in the AIF’s scheme.
    • The December 2023 Notification had provided that investment by a Regulated Entity in the subordinated units of any AIF scheme with a ‘priority distribution model’ shall be subject to full deduction from such Regulated Entity’s capital funds.  This rule applied irrespective of whether the AIF had a downstream investment in a debtor company of the Regulated Entity. So, where there was a downstream investment (in a Regulated Entity’s debtor company) by an AIF, the Regulated Entity had to both make a 100% provision and also deduct such investment from its capital funds. The March 2024 Notification provides that this rule (of full deduction from Regulated Entity’s capital funds) will apply only if the AIF does not have any downstream investment in a debtor company of the Regulated Entity.

    The December 2023 Notification will not apply to indirect investments by Regulated Entities in AIFs (through intermediaries such as fund of funds or mutual funds).

  • ELP Comments

    There may be some confusion regarding the phrase “hybrid” instruments which the RBI has . It is clear that Non-Convertible Debentures (NCDs), along with Optionally Convertible and Redeemable Preference Shares (OCRPs) or Optionally Convertible Preference Shares (OCPS), are classified as ‘hybrid’ instruments. However, should Compulsorily Convertible Preference Shares (CCPS) and Compulsorily Convertible Debentures (CCDs) also be treated as ‘hybrid’ instruments?The Foreign Exchange Management (Non-Debt) Instruments, rules, 2019 (“Non-Debt Rules”) defines “equity instruments” to mean “equity shares, convertible debentures, preference shares and share warrants issued by an Indian company”. It is explained in this definition that “Equity shares issued by an Indian Company in accordance with the provisions of the Companies Act, 2013 or any other applicable law, shall include equity shares that have been partly paid. “Convertible debentures” means fully and mandatorily convertible debentures which are fully paid. “Preference shares” means fully and mandatorily convertible preference shares which are fully paid. “Share Warrants” are those issued by an Indian Company in accordance with the regulations made by the Securities and Exchange Board of India, the Companies Act, 2013 or any other applicable law.”

    If the definition given in the “Non-Debt Rules”, which are issued by the RBI, were to be applied to the March Notification, not only CCPS, but even CCDs would be considered equity. However, the Non-Debt Rules are issued under the Foreign Exchange Management Act, 1999 and it is unclear if the RBI would want definitions from the Non-Debt Rules to be applied to the December Notification or the March Notification.

  • Please find the March 2024 Notification here and the December 2023 Notification here.

    We hope you have found this information useful. For any queries/clarifications please write to us at  or write to our authors:

    Vinod Joseph, Partner – Email –
    Paridhi Jain, Associate, Email –

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.