On December 19, 2023, the Reserve Bank of India issued a notification (the “December 2023 Notification”) which 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. A few months after issuing the December 2023 Notification, as a result of industry representations, the RBI issued a notification dated March 27, 2024 (the “March 2024 Notification”) to reverse some of the terms of the December 2023 Notification.
The March 2024 Notification inter alia carried out the following changes:
took equity investments by AIFs outside the purview of the December 2023 Notification; and
if a Regulated Entity has invested in an AIF’s scheme and also lent to a portfolio company of the AIF, provisioning shall be required only to the extent of investment by the Regulated Entity in the AIF’s scheme and not for the entire investment of the Regulated Entity in the AIF’s scheme.
The RBI has now issued the draft of a notification dated May 19, 2025 (the “May 2025 Draft Directions”), proposing the following changes to the regulations:
A single Regulated Entity’s contribution to any AIF scheme shall be capped at 10% of its corpus. Collectively, a ceiling of 15% shall apply for investment by all Regulated Entities in an AIF scheme.
Investments by a Regulated Entity upto 5% of the corpus of a AIF scheme shall be allowed without any restriction.
If the investment by any Regulated Entity exceeds 5% of the corpus of the scheme, and if the scheme has a downstream debt investment in a debtor company of the Regulated Entity (excluding equity shares, compulsorily convertible preference shares and compulsorily convertible debentures), then the Regulated Entity shall be required to make 100% provisions to the extent of its proportionate exposure.
RBI may exempt certain AIFs, in consultation with the Government, that have been set up for strategic purposes.
ELP Comments
The May 2025 Draft Directions proposes to cap a single Regulated Entity’s contribution to any AIF scheme at 10% of its corpus. Further, every AIF scheme shall face a ceiling of 15% in aggregate for investments by Regulated Entities. The March 2024 Notification had taken equity investments by AIFs outside the purview of the December 2023 Notification. It had also provided that 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). On a plain reading of the May 2025 Draft Directions, on account of the words “any AIF scheme”, it appears that the individual cap of 10% and aggregate cap of 15% would apply even if the AIF scheme’s underlying investments are in equity instruments or even if the AIF is a fund of fund or even if the Regulated Entity’s investment in an AIF scheme is routed through a mutual fund.
Investments by Banks, NBFCs and other Regulated Entities in AIF schemes will not face any restriction even if the Regulated Entity has lent to a portfolio company of the AIF as long as the Regulated Entity’s investment in the AIF scheme does not exceed 5% of the total corpus of such scheme. This seems to suggest that even if a Regulated Entity invests in an AIF which has subscribed to the debt instrument issued by a portfolio company which has borrowed by the Regulated Entity, there would be no restriction or requirement to make any provisions.
Regulated Entities may invest more than 5% of the corpus of an AIF scheme which has a downstream debt investment in a debtor company of the Regulated Entity, only if the Regulated Entity has made 100% provisions to the extent of its proportionate exposure.
On account of the individual cap of 10% and aggregate cap of 15% referred to in paragraph 1 above, even if a Regulated Entity is willing to make 100% provisions, it cannot invest in any AIF in excess of these absolute caps. Even if an AIF scheme has invested only in the equity instruments of portfolio companies, it cannot receive any investment from a Regulated Entity in excess of the limits mentioned above in paragraph 1.
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.
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