RBI strengthens regulations for financial institutions participating in Alternative Investment Funds (AIFs).

-

RBI strengthens regulations for financial institutions participating in Alternative Investment Funds (AIFs).

In a move to prevent the practice of extending additional funds to stressed loans, known as evergreening, the Reserve Bank of India (RBI) issued a directive on Tuesday, instructing banks, non-banking financial companies (NBFCs), and other lenders to refrain from investing in any alternative investment funds (AIFs) schemes with downstream investments in debtor companies.

An AIF is a privately pooled investment vehicle established in India that collects funds from sophisticated investors, whether Indian or foreign, for investment based on a defined policy. While regulated entities regularly invest in AIF units, the RBI expressed concerns about specific transactions that involve the substitution of direct loan exposure with indirect exposure through AIF investments.

The RBI stated that these transactions raise regulatory concerns, as they involve the substitution of direct loan exposure with indirect exposure through investments in AIF units. Evergreening of loans is a temporary fix for a lender trying to revive a loan on the verge of default by extending additional loans to the same borrower.

As of December 19, there were 1,220 registered AIFs in India, with a total investment commitment of Rs 8.44 lakh crore as of June 30, 2023, according to SEBI data. In an effort to address concerns related to potential evergreening, the RBI directed regulated entities not to invest in any AIF scheme with downstream investments in a debtor company of the regulated entity.

Downstream investments refer to actual investments by the AIF in a company using funds raised from AIF investors. The RBI clarified that the debtor company of the regulated entity includes any company to which the regulated entity currently has or had a loan or investment exposure in the preceding 12 months.

The RBI emphasized that if an AIF scheme, in which a regulated entity is already an investor, makes a downstream investment in any such debtor company, the regulated entity should liquidate its investment in the scheme within 30 days. Failure to do so will require the regulated entity to make a 100 percent provision on such investments.




The directive aims to prevent the misuse of additional borrowed funds under the AIF route to circumvent guidelines related to loan restructuring and the declaration of non-performing assets (NPAs). Resurgent India's Managing Director, Jyoti Prakash Gadia, noted that the need to make a 100 percent provision on outstanding debt serves as a significant deterrent to irregularities in such transactions.

Disclaimer: This article is pure understanding of Gyaanleikh Team, and we don't allow you rely on the same.



RBI directive on evergreening
Alternative Investment Funds (AIFs) regulations
Stressed loans and evergreening practices
Downstream investments in debtor companies
Reserve Bank of India (RBI) and financial institutions
Evergreening of loans and regulatory concerns
AIF schemes and indirect exposure
Loan exposure substitution in AIF transactions
AIF investment commitment and SEBI data
Registered AIFs in India
Loan restructuring guidelines
Non-performing assets (NPAs) declaration
Regulated entities and AIF investments
Financial regulations for banks and NBFCs
RBI's measures to prevent evergreening
Restructuring of advances in banking
Borrowed funds misuse in AIF route
Liquidation of AIF investments
Investment vehicle regulations in India
Prudential concerns and RBI directives.








Comments

Post a Comment

Best Blogs

IB Interview Questions: M&A : Level 1 M&A Questions

-
Image
1. Why do companies merge? While are many reasons that companies merge the underlying driver of most M&A deals to expedite growth and/or generate cost savings to create value for the owners of the business. When people say that M&A is an ‘art’ and a ‘science’, what does that mean? The science refers to the mechanical valuation methods (Comps, DCF, etc.), but the art is in making a judgment call on valuation based on the outputs of the various valuation methodologies. 2. Who can pay more when buying a company: a Financial buyer or Strategic buyer? Why? Strategic (i.e. corporate) buyers can typically pay more than Financial (i.e. Private Equity) buyers because strategic buyers typically have overlapping operations that can be removed post-merger to generate cost savings (i.e. Synergies). 3. When are sponsors and corporate buyers on equal footing? When a Financial buyer already owns a competing asset, they can generate synergies (which justifies a higher price) and thus are on mor...
Read more

Getting into Investment Banking: A Comprehensive Guide

-
Image
Introduction Breaking into investment banking (IB) is no small feat, whether you're pre-MBA or post-MBA, from a target or non-target school. While high GPAs and test scores are standard, they are often not enough to stand out. Here’s a strategic approach to help you embark on a successful investment banking career. 1. Network Extensively When your application lands at an investment bank, it’s usually reviewed by a small team of bankers responsible for recruiting from specific schools. Given the competitive nature of this field, networking is crucial. Why Networking Matters: Decision-making bankers are more likely to advocate for you if they know you. Especially vital for non-target school students. Engage with alumni and other connections at your target firms. How to Network: Start reaching out to analysts and associates a few months before core recruiting starts. Look for non-target alumni if you're from a non-target school; they often help each other out. Demonstrate Interest...
Read more