**Summary:**
This circular, RBI/2023-24/140 DOR.STR.REC.8521/04.048/2023-24 dated March 27, 2024, issued by the Reserve Bank of India (RBI), provides clarifications and modifications to the instructions outlined in circular DOR.STR.REC.5821/04.048/2023-24 dated December 19, 2023, concerning investments in Alternative Investment Funds (AIFs) by Regulated Entities (REs). The circular addresses concerns raised by stakeholders and aims to ensure uniform implementation of the regulations.
Key clarifications include:
* Downstream investments subject to the regulations exclude investments in equity shares of the debtor company of the RE but include all other investments, including hybrid instruments.
* Provisioning is required only on the portion of the RE's investment in the AIF that is further invested by the AIF in the debtor company, not on the entire investment in the AIF scheme.
* Paragraph 3 of the original circular applies only when the AIF has no downstream investment in a debtor company of the RE. If the RE invests in subordinated units of an AIF scheme with downstream exposure to a debtor company, paragraph 2 of the circular applies.
* Deductions from capital, as proposed in paragraph 3, will be equally distributed between Tier 1 and Tier 2 capital. Subordinated exposures, including sponsor units, are included in the reference to subordinated units of an AIF scheme.
* Investments in AIFs through intermediaries like fund of funds or mutual funds are excluded from the scope of this circular.
These instructions are issued under the authority granted by Sections 21 and 35A of the Banking Regulation Act, 1949; Chapter IIIB of the Reserve Bank of India Act, 1934; and Sections 30A, 32, and 33 of the National Housing Bank Act, 1987.
This circular applies to all Commercial Banks (including Small Finance Banks, Local Area Banks, and Regional Rural Banks), all Primary Urban Cooperative Banks, State Cooperative Banks, Central Cooperative Banks, all All-India Financial Institutions, and all Non-Banking Financial Companies (including Housing Finance Companies).
For further information, contact Vaibhav Chaturvedi, Chief General Manager.
Key Entities Referenced
Commercial Banks: Banks that accept deposits and make loans to businesses and individuals.
Reserve Bank of India: The central bank of India, responsible for regulating the banking system and monetary policy.
Small Finance Banks: Banks in India created to further financial inclusion by providing banking services to unserved and underserved populations.
Local Area Banks: Banks operating in a limited geographical area in India.
Regional Rural Banks: Government-sponsored regional banks in India aimed at rural development.
Primary Urban Cooperative Banks: Cooperative banks that operate in urban areas in India.
State Cooperative Banks: Cooperative banks at the state level in India.
Alternative Investment Funds: Privately pooled investment funds in India which collect funds from sophisticated investors.
RBI/2023-24/140
DOR.STR.REC.85/21.04.048/2023-24 March 27, 2024
All Commercial Banks (including Small Finance Banks, Local Area Banks and
Regional Rural Banks)
All Primary (Urban) Co-operative Banks/State Co-operative Banks/ Central Co-
operative Banks
All All-India Financial Institutions
All Non-Banking Financial Companies (including Housing Finance Companies)
Investments in Alternative Investment Funds (AIFs)
Please refer to the circular DOR.STR.REC.58/21.04.048/2023-24 dated December
19, 2023 (‘Circular’) on the captioned subject, in terms of which instructions were
issued to address certain regulatory concerns relating to investment by regulated
entities (REs) in the AIFs.
2. With a view to ensuring uniformity in implementation among the REs, and to address
the concerns flagged in various representations received from stakeholders, it is
advised as under:
(i) Downstream investments referred to in paragraph 2 (i) of the Circular shall
exclude investments in equity shares of the debtor company of the RE, but
shall include all other investments, including investment in hybrid
instruments.
(ii) Provisioning in terms of paragraph 2(iii) of the Circular shall be required only
to the extent of investment by the RE in the AIF scheme which is further
invested by the AIF in the debtor company, and not on the entire investment
of the RE in the AIF scheme.
(iii) Paragraph 3 of the Circular shall only be applicable in cases where the AIF
does not have any downstream investment in a debtor company of the RE.
If the RE has investment in subordinated units of an AIF scheme, which also
has downstream exposure to the debtor company, then the RE shall be
required to comply with paragraph 2 of the Circular.
1(iv) Further with regard to paragraph 3 of the Circular:
• proposed deduction from capital shall take place equally from both Tier-
1 and Tier-2 capital.
• reference to investment in subordinated units of AIF Scheme includes all
forms of subordinated exposures, including investment in the nature of
sponsor units.
(v) Investments by REs in AIFs through intermediaries such as fund of funds or
mutual funds are not included in the scope of the Circular.
3. The above instructions have been issued in exercise of the powers conferred by
Sections 21 and 35A of the Banking Regulation Act, 1949 read with Section 56 of the
Act ibid; Chapter IIIB of the Reserve Bank of India Act, 1934 and Sections 30A, 32 and
33 of the National Housing Bank Act, 1987.
Yours faithfully,
(Vaibhav Chaturvedi)
Chief General Manager
2