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Evergreening of Loans: RBI Tweaks Circular on AIF Investments

The Reserve Bank of India (RBI) has modified its earlier instructions on investments by regulated entities in AIF (Alternative Investment Fund) schemes, which were aimed at preventing evergreening of loans.

As per RBI’s previous circular dated December 19, 2023, regulated entities are prohibited from investing in AIF schemes having downstream investments in debtor companies of such regulated entities. It also states that if a regulated entity has already invested in such a scheme, it has to liquidate the investment within 30 days from the date of downstream investment by the AIF scheme. This move essentially prevented regulated entities from resorting to the practice of evergreening of loans to avoid making higher provisions.

After stakeholders raised concerns about the instructions, RBI considered it necessary to modify the previous circular. The revised instructions make it clear that downstream investments exclude investment in equity shares of the regulated entity’s debtor company. However, all other investments including hybrid investments will be covered.

Regulated entities, under the December 2023 circular, are also required to make 100% provision on investments if they are not able to liquidate them on time. It is now clarified that such provisioning will be necessary only to the extent of investment by the regulated entity in the AIF scheme which is further invested by the AIF in the debtor company. I.e., it won’t apply to the entire investment of regulated entity in the AIF scheme.

Moreover, it is stated that investments by regulated entities in AIFs “through intermediaries such as fund of funds or mutual funds” are not covered within the circular’s ambit.

 

Date: March 28, 2024