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The Reserve Bank of India has introduced a fresh framework limiting how much banks, NBFCs, and All-India Financial Institutions can invest in Alternative Investment Funds. As per the new rules, no regulated entity can invest more than 10 % in any AIF scheme, and total investment from all such entities cannot exceed 20 % of the AIF's corpus. If more than 5 % is invested in a scheme that indirectly funds a borrower of the investor, a 100 % provision will be required. These directions will come into force in early 2025, with previous investments covered under older norms.
The Reserve Bank of India has revised its norms governing investments by regulated entities in Alternative Investment Funds (AIFs), issuing tighter limits on how much exposure banks, NBFCs, and financial institutions can take in such funds. Advertisement
Under the updated rules, a single regulated entity can now invest up to 10 % of the corpus of an AIF scheme. In addition, the cumulative investment by all regulated entities in any AIF scheme must not exceed 20 % of the scheme's total corpus.
The RBI has also retained the provisioning requirement introduced earlier for situations where there is indirect exposure to the regulated entity's own borrowers. If more than 5 % of an AIF scheme's investments are in companies that have received loans or investments from the regulated entity in the last 12 months (excluding equity investments), the investor must make a 100 % provision on the portion of its investment that corresponds to its exposure to that borrower.
Further, any investment made through subordinated units will have to be fully deducted from Tier 1 and Tier 2 capital, meaning these cannot be counted as part of the bank or NBFC's regulatory capital.
These rules override the RBI's December 2023 circular, which had barred banks and NBFCs from investing in AIFs that indirectly fund their own borrowers and required them to exit such exposures. That circular was later partially revised in March 2024, allowing proportionate provisioning instead of a complete sell-off.
In May, the RBI had issued a draft version of these guidelines, seeking feedback from stakeholders. The draft proposed a 10 % cap per entity and an aggregate cap of 15 %. After receiving inputs, the RBI marginally relaxed the overall limit to 20 %.
The latest framework will be applicable from the beginning of the next calendar year. However, institutions may choose to adopt it earlier if they wish. Any investments made before the issuance of this framework will continue to be governed by the norms that were in force at the time of the investment.
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