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Investments in Alternative Investment Funds (AIFs)

Reserve Bank of India (RBI) has issued an update on instructions for investments in Alternative Investment Funds (AIFs).

What is Alternative Investment Funds (AIFs)?

Alternative Investment Fund (AIF) means any fund established or incorporated in India in the form of a trust / company / limited liability partnership / body corporate which –

  • Is a privately pooled investment vehicle which collects funds from investors (Indian / foreign) for investing it in accordance with a defined investment policy for the benefit of its investors.
  • Is not covered under the Securities and Exchange Board of India (SEBI) (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of SEBI to regulate fund management activities.

What are the updates on instructions for investments in AIFs?

New investments in AIF having exposure to a debtor company

  • Any company to which a Regulated Entity (RE) currently has or previously had a loan / investment exposure anytime during the preceding 12 months, is termed as a debtor company of the RE.
  • If the AIF has downstream investments (directly / indirectly) in such debtor company of the RE, the REs shall not make investments in any scheme of such AIFs.
  • The downstream investments shall exclude investments in equity shares of the debtor company of the RE, but shall include all other investments, including investment in hybrid instruments. 

Existing investments in AIF having exposure to a debtor company

  • If a RE is already an investor in an AIF scheme and the AIF makes a downstream investment in any debtor company of the RE, the RE shall liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF. 
  • If REs have already invested into such schemes having downstream investment in their debtor companies as on date, the 30-day period for liquidation shall be counted from the date of the guidelines (i.e. December 19, 2023). 
  • In case REs are not able to liquidate their investments within the above-prescribed time limit, they shall make 100% provision on such investments. Provisioning shall be required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme.

Investments in AIF scheme with a ‘priority distribution model’

  • Investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ shall be subject to full deduction from RE’s capital funds. This shall be applicable only in cases where the AIF does not have any downstream investment in a debtor company of the RE.
  • Proposed deduction from capital shall take place equally from both Tier-1 and Tier-2 capital.
  • Reference to investment in subordinated units of AIF Scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units.
  • ‘Priority distribution model’ shall have the same meaning as specified in the SEBI circular SEBI/HO/AFD-1/PoD/P/CIR/2022/157 dated November 23, 2022.

Which investments are outside the scope of the updated instructions?

Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the instructions.


References

Reserve Bank of India. (2023, December 19). 'Investments in Alternative Investment Funds (AIFs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12572&Mode=0

Reserve Bank of India. (2024, March 27). 'Investments in Alternative Investment Funds (AIFs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12639&Mode=0

Securities and Exchange Board of India. (2012, May 21). 'Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 [Last amended on July 4, 2023]'. Retrieved from https://www.sebi.gov.in/legal/regulations/jul-2023/securities-and-exchange-board-of-india-alternative-investment-funds-regulations-2012-last-amended-on-july-4-2023-_74146.html


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