RBI Tightens Norms For Banks And NBFCs Investing In AIFs To Address Concerns Relating To Evergreening

AP
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Argus Partners is a leading Indian law firm with offices in Mumbai, Delhi, Bengaluru and Kolkata. Innovative thought leadership and ability to build lasting relationships with all stakeholders are the key drivers of the Firm. The Firm has advised on some of the largest transactions in India across various industry sectors. The Firm also, regularly advises the boards of some of the biggest Indian corporations on governance matters. The lawyers of the Firm have been consistently regarded as the trusted advisors to its clients with a deep understanding of the relevant business domain, their business needs and regulatory nuances which enables them to clearly identify the risks involved and advise mitigation measures to protect their interests.
The Reserve Bank of India on December 19, 2023, has issued a notification tightening norms for regulated entities (banks, non-banking financial companies, housing finance companies etc.) ("Regulated Entities") investing in alternative investment funds ("AIF").
India Finance and Banking
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The Reserve Bank of India on December 19, 2023, has issued a notification tightening norms for regulated entities (banks, non-banking financial companies, housing finance companies etc.) ("Regulated Entities") investing in alternative investment funds ("AIF"). The norms have been introduced to address concerns of evergreening by Regulated Entities as there have been certain transactions which entailed substitution of direct loan exposure of Regulated Entities to borrowers, with indirect exposure through investments in units of AIFs.

The notification stipulates the following :

  1. A Regulated Entity cannot make an investment in any scheme of AIF which has downstream investments either directly or indirectly in a debtor company of the Regulated Entity. The debtor company of the Regulated Entity, for this purpose, shall mean any company to which the Regulated Entity currently has or previously had a loan or investment exposure anytime during the preceding 12 (twelve) months.
  2. If an AIF scheme, in which a Regulated Entity is already an investor, makes a downstream investment in any such debtor company, then the Regulated Entity has to liquidate its investment in the scheme within 30 (thirty) days from the date of such downstream investment by the AIF. If Regulated Entities have already invested into such schemes having downstream investment in their debtor companies as on date, the 30 (thirty) day period for liquidation shall be counted from date of issuance of the notification. Regulated Entities are required to forthwith arrange to advise the AIFs suitably in the matter.
  3. In case Regulated Entities are not able to liquidate their investments within the above-prescribed time limit, they are required to make 100% (one hundred percent) provision on such investments.
  4. Investment by Regulated Entities in the subordinated units of any AIF scheme with a 'priority distribution model' shall be subject to full deduction from Regulated Entities' capital funds. 'Priority distribution model' is where the distribution waterfall is structured in such a way that one class of investors (other than sponsor/manager) share loss more than pro rata to their holding in the AIF vis-à-vis other classes of investors/unit holders, since the later has priority in distribution over former.

Please find a copy of the notification, here

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RBI Tightens Norms For Banks And NBFCs Investing In AIFs To Address Concerns Relating To Evergreening

India Finance and Banking

Contributor

Argus Partners is a leading Indian law firm with offices in Mumbai, Delhi, Bengaluru and Kolkata. Innovative thought leadership and ability to build lasting relationships with all stakeholders are the key drivers of the Firm. The Firm has advised on some of the largest transactions in India across various industry sectors. The Firm also, regularly advises the boards of some of the biggest Indian corporations on governance matters. The lawyers of the Firm have been consistently regarded as the trusted advisors to its clients with a deep understanding of the relevant business domain, their business needs and regulatory nuances which enables them to clearly identify the risks involved and advise mitigation measures to protect their interests.
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