The Reserve Bank of India called upon various entities falling under its regulation (RE) like commercial banks, all primary (urban) co-operative banks, all All-India financial institutions and non-banking financial companies (including housing finance companies to desist from investments in alternative investment funds (AIFs) which have investments in existing and recent borrowers.
If an AIF scheme, in which an RE is already an investor, makes a downstream investment in any such debtor company, then the RE shall liquidate its investment in the AIF within 30 days from the date of such downstream investment by the AIF, the RBI said on Tuesday. .
The instruction also applies to small finance banks, local area banks and regional rural banks), /state co-operative banks and central co-operative banks. While regulated entities make investments in units of AIFs as part of their regular investment operations, the Central Bank’s directive comes in the wake of it taking note of regulatory concerns raised over certain transactions of REs involving AIFs.
These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs.\
The step has been taken in order to address concerns relating to possible evergreening through this route.
The RBI has advised that in case REs are not able to liquidate their investments within the above-prescribed time limit, they shall make 100 per cent provision on such investments.
