The Reserve Bank of India (RBI) vide notification dated March 27, 2024,has eased its restrictions on banks and Non-Banking Financial Companies(NBFCs) investing in AIFs, reducing the burden of provisioning. Previously, these entities had to make 100% provisions for investments in AIFs if they had lent to the underlying debtor firm. Now, they only need to provision for the amount invested by the AIF in the debtor company, not provision for the entire investment. Additionally, investments through intermediaries like fund of funds and mutual funds are excluded from the notification dated March 27, 2024. Equity investments in debtor firms are also exempted from the definition of downstream investments. However, there's ambiguity regarding hybrid instruments like compulsorily convertible preference shares and compulsorily convertible debentures, with discussions on whether converting them to equity is necessary for Regulated Entities (REs) to remain invested in AIFs.
Originally published 08 May 2024
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