The Reserve Bank of India (RBI) on Tuesday capped investments by a single regulated entity (RE), including banks and non-banking financial companies (NBFCs), at 10% of the corpus of an alternative investment fund (AIF) scheme. The purpose is to mitigate concentration risk.

For collective contribution by all REs in any AIF scheme, the cap is at 20% of the fund’s corpus. This is higher than the 15% cap proposed in the RBI’s May draft guidelines. 

These norms will apply to commercial banks, cooperative banks, all Indian financial institutions, NBFCs and housing finance companies.

In case of any common exposure between the RE and the AIF, the provisioning requirement has been eased. As per the RBI guidelines, the provisioning requirement on such investments will be proportionate to the share of RE’s investment in AIF corpus and not 100% as mandated earlier.

"If a RE contributes more than 5% of the corpus of an AIF scheme, which also has downstream investment in a debtor company of the RE, then the RE shall be required to make 100% provision to the extent of its proportionate investment in the debtor company through the AIF Scheme, subject to a maximum of the direct loan and/ or investment exposure of the RE to the debtor company," the RBI said in its Tuesday circular.

The RBI had issued guidelines in December 2023 and later in March 2024 prescribing the regulatory guidelines in respect of investment by the REs of the Reserve Bank in AIFs.

The guidelines have been reviewed, inter alia, taking into account industry feedback as well as the regulations issued by the Securities and Exchange Board of India (Sebi) relating to specific due diligence of investors and investments of AIFs, the RBI said in a circular on Tuesday.

The guidelines aim to address concerns relating to the misuse of the AIF route for evergreening of loans. The goal is also to deter the diversion of funds from AIFs for wrongful purposes.