The Reserve Bank of India recently issued a revised framework for investments by lenders into alternate investment funds (AIFs), sparking a mix of clarity and confusion among industry players. The central bank’s circular clarified that downstream investments by AIFs will not apply to equity shares of debtor companies of the lender, excluding these firms from the regulatory scope.
While the move aims to provide operational and regulatory clarity, questions linger regarding the treatment of hybrid instruments and investments from private equity and venture capital funds. Industry experts highlight concerns over potential requirements to convert hybrid instruments to equity, impacting credit funds more prone to evergreening practices.
Stakeholders are seeking further clarity on the applicability of the revised norms on private equity and venture capital funds, emphasizing the importance of convertible instruments to mitigate risk in case of business wind-downs. Additionally, uncertainties loom over honoring capital commitments to AIFs not meeting the new criteria, especially for regulated entities.
As banks and non-bank lenders navigate these changes, they face provisions directed by the RBI to account for their AIF investments. The ball is now in lenders’ court to adapt to the revised framework, strategically managing their capital allocations to comply with the regulatory guidelines while navigating the evolving landscape of alternative investments in India’s financial ecosystem.
