RBI relaxes norms; restricts banks, NBFCs’ investments in AIF

RBI relaxes norms; restricts banks, NBFCs’ investments in AIF

The new guidelines will be effective from January 2026

The Reserve Bank of India (RBI) has relaxed restrictions on investments by regulated entities (REs) in Alternative Investment Funds (AIFs). It has capped the cumulative exposure of banks and non-banking financial companies (NBFCs) in AIFs at 20 percent.

While the contribution of a single RE has been restricted to 10 percent of the scheme’s corpus, equity instruments have been excluded from the provisions.

In a draft circular in May, the banking regulator proposed an overall cap on investment by REs at 15 percent. The contribution of a single RE was fixed at 10 percent.

However, the RBI has now stated that if an RE contributes over 5 percent to the corpus of an AIF scheme having downstream investments (excluding equity) in the RE’s debtor company, then the RE must make a 100 percent provision for its proportionate investment in the debtor company through the AIF. This will be subject to a cap equal to its direct loan and/or investment exposure.

The bank added that if an RE’s contribution to an AIF was in subordinated units, the investment must be proportionately deducted from its capital funds from Tier-1 and Tier-2 capital.

In December 2023, the regulator had barred REs from investing in AIFs having investment in existing and recent borrowers. This was after the Securities and Exchange Board of India (SEBI) found evergreening of loans and circumvention of other market regulations through AIF structures.

Subsequently, several AIFs approached the watchdogs with concerns that REs struggled to honor capital calls. Thus, in March 2024, the norms were eased by the RBI.

Commenting on the matter, Siddarth Pai, Cochair of the IVCA Regulatory Affairs Council said, “The major changes that the industry asked for and the RBI has provided are: carving out of equity investments from the guidelines, and exclusion of companies in which banks/NBFCs have made equity investments in from the definition of ‘debtor company.”

He added, “Now, investors in AIFs will gain comfort, with the banking regulator again permitting its regulated entities to invest in equity AIFs. The safeguards for private credit provide an opportunity for change if the RBI gets comfort on the matter.”

As of March 2025, the total commitments to AIFs stood at Rs.13.49 trillion, while the total investments were Rs.5.38 trillion. Investments in equity and equity-linked securities were Rs.3.5 trillion.

Of the Rs.5.63 trillion fundraise, domestic investors accounted for Rs.4.08 trillion. Real estate topped at Rs.69,896 crore, followed by information technology (IT), financial services and NBFCs.

Pallabi Ghosal, Partner, Trilegal remarked, "The directions from the RBI have some positives, such as clarifying that equity instruments will include compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCDs), which was an industry ask. The overall RE exposure has been kept at a reasonable 20 percent. The fact that this takes effect from January 2026 is a welcome move. It gives fund managers sufficient time to plan their ongoing fundraising efforts.”

Meanwhile, Sudhir Chandi, Director at Resurgent India, stated, “The guidelines are brought into alignment with SEBI norms on due diligence and investment to ensure uniformity and clarity. These address the concerns on misuse of the AIF route for evergreening of loans and advancing by using AIF to finance the existing stress loans portfolio.