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RBI Mandates Regularization of Partly Paid Units Issued by AIFs to Foreign Investors

The RBI, through its circular dated May 21, 2024, mandates the regularization of the issuance of partly paid-up units by Alternative Investment Funds (AIFs) to foreign investors before March 14, 2024, through compounding under the Foreign Exchange Management Act, 1999 (FEMA).

Compounding by the RBI is prescribed for contraventions of foreign exchange regulations, as per the Foreign Exchange (Compounding Proceedings) Rules, 2000. This process involves the payment of fees and in many cases, monetary penalties to the RBI.

AIFs are required to report the issuance of partly paid units on the RBI FIRMS portal and undergo compounding proceedings to rectify non-compliance.

AD Category-I banks are directed by the RBI to ensure proper reporting of partly paid unit issuances on the FIRMS portal and the issuance of conditional acknowledgments ‘subject to compounding‘ to the relevant AIFs.

FPIs face a complex predicament due to the notification. While it streamlines the issuance, apprehensions linger about potential penalties for existing issuances. However, legal analysts foresee this step easing worries about regulatory uncertainties and minimizing the risk of penalties linked to previous AIF regulations.