The Reserve Bank of India (“RBI”) vide Press Release No. 2025-2026/366,[1] issued a draft proposal for revised directions on the investment by Regulated Entities (“REs”) in Alternative Investment Funds (“AIFs”) (“Draft Directions”). The Draft Directions aim to enhance financial discipline and mitigate potential risks arising from certain investment structures, particularly addressing concerns related to evergreening (the practice of extending additional credit to keep a failing loan from defaulting).
In December 2023, RBI introduced guidelines governing investments by REs in AIFs. These measures were primarily focused on curbing potential evergreening practices. In March 2024, clarifications were issued by RBI, further refining these guidelines. The current review, however, reflects the evolving regulatory landscape and incorporates feedback from other financial regulators like SEBI, which has its own set of due diligence requirements for AIF investments.
Key Proposals in the Draft Directions
- Single RE’s Investment Cap: The individual investment of any RE in an AIF scheme shall be capped at 10% (Ten Percent) of the AIF’s corpus. Collectively, investments by all REs in any given AIF scheme shall have a 15% (Fifteen Percent) ceiling.
- Unrestricted Investments: Investments by an RE up to 5% (Five Percent) of the corpus of any AIF scheme shall be allowed without any restrictions.
- Provisions for High-Exposure Investments: If an RE invests more than 5% (Five Percent) of an AIF’s corpus, and the AIF scheme has a downstream debt investment in a company in which the RE has exposure, the RE shall be required to make 100% (Hundred Percent) provisions for its proportionate exposure. This excludes equity shares, compulsorily convertible preference shares, and compulsorily convertible debentures.
- Strategic Exemption: The RBI may grant exemptions for AIFs set up for strategic purposes, in consultation with the Government of India.
- Transition for Existing Investments: The revised Draft Directions shall apply prospectively, meaning that existing investments or commitments shall continue to be governed by the current regulatory framework.
Call for Public Comments
The RBI has opened the Draft Directions for public comments and invites feedback from stakeholders until June 08, 2025. Comments can be submitted via the ‘Connect 2 Regulate’ section on the RBI’s official website or directly tothe Chief General Manager.
[1] https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=60481