RBI MODIFIES CIRCULAR ON AIF INVESTMENTS TO TACKLE

EVERGREENING OF LOANS

The Reserve Bank of India (RBI) has recently made adjustments to its guidelines concerning
investments by regulated entities in Alternative Investment Fund (AIF) schemes. This move
comes in response to concerns about the potential for evergreening of loans within the
financial system.

Key Points:

1. Previous Circular Restrictions:

• The earlier circular issued on December 19, 2023, imposed restrictions on

regulated entities from investing in AIF schemes that have downstream
investments in debtor companies of said entities.

• Regulated entities were mandated to liquidate any such investments within 30

days from the date of downstream investment by the AIF scheme. This
measure was designed to curb the practice of evergreening of loans, where
entities prolong the repayment of loans to avoid recognizing them as non-
performing assets.

2. Stakeholder Concerns:

• Stakeholders raised concerns about the practicality and implications of the

previous circular. It prompted the RBI to review and modify its directives.

3. Revised Instructions:

• The revised instructions now clarify that downstream investments exclude

investments in equity shares of the regulated entity’s debtor company.
However, all other forms of investments, including hybrid investments, remain
covered under the new guidelines.

• Regulated entities are mandated to make 100% provision on investments if

they fail to liquidate them within the stipulated time. However, this
provisioning will only apply to the extent of the investment made by the
regulated entity in the AIF scheme, which is further invested by the AIF in the
debtor company. It will not be applicable to the entire investment of the
regulated entity in the AIF scheme.
 4. Exclusion of Certain Investments:

• Investments made by regulated entities in AIFs through intermediaries such as

fund of funds or mutual funds are not covered within the ambit of the circular.
This exclusion aims to provide clarity and delineate specific investment
channels from the regulatory framework.

The modifications introduced by the RBI seek to strike a balance between preventing
financial malpractices like evergreening of loans while ensuring a conducive environment for
investment and financial stability. These adjustments reflect a responsive approach by the
RBI towards addressing evolving challenges in the financial sector.

By providing clearer guidelines and addressing stakeholder concerns, the RBI aims to foster
transparency and accountability in investment practices, thereby contributing to the overall
health and resilience of the financial system.

Stay tuned for further updates on regulatory developments and their impact on the financial
landscape.