Apr 29, 2024

Investments by REs in AIFs

RBI, by way of Circular dated March 27, 2024 (‘Circular’) has relaxed certain norms pertaining to investments by REs in AIFs which were earlier brought in by the RBI by way of Circular dated December 19, 2023 (‘December Circular’) such as:

i.    The definition of ‘downstream investment’ for the purposes of the December Circular excludes investments in equity shares of the debtor company of the RE but includes all other investments, including investment in hybrid instruments.

ii.   Provisioning is 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.

iii.  Paragraph 3 of the December Circular specified that investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ will be subject to full deduction from RE’s capital funds. In this regard, the Circular has clarified that:

a. A full deduction from RE’s capital funds will apply only in cases where the AIF does not have any downstream investment in a debtor company of the RE.

b. The proposed deduction from capital will take place equally from both tier-1 and tier-2 capital.

c. Reference to investment in subordinated units of AIF scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units.

iv.   Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are excluded from the scope of the December Circular.




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