Unraveling the strategy: RBI's fresh plan for investments by Regulated Bodies in Alternative Investment Funds
News Article: Clarifying the Regulatory Landscape for Institutional Investments in Alternative Investment Funds
Published on Bar & Bench, the latest article from IC RegFin Legal discusses the Reserve Bank of India's (RBI) Directions issued regarding investments in Alternative Investment Funds (AIFs). The Directions, issued on July 29, 2025, aim to curb risks associated with investments by regulated entities (REs) in AIFs.
The Directions apply to Commercial Banks, Primary Co-operative Banks, State Co-operative Banks, Central Co-operative Banks, All-India Financial Institutions, Non-Banking Financial Companies (NBFCs), and Housing Finance Companies. A key difference between the RBI Directions and the Old Circulars lies in stricter exposure limits, revised applicability, and adjusted provisioning rules for REs investing in AIFs.
The Old Circulars restricted REs from investing in AIFs that, directly or indirectly, invested in their own debtor companies. In contrast, the RBI Directions establish a three-tier framework for determining which regulatory regime applies, expanding the coverage to all REs and removing the absolute ban on investments linked to their own debtor companies. Instead, clear quantitative exposure limits have been introduced, allowing some controlled participation.
The RBI Directions impose a collective investment cap of 20% for REs in AIFs, potentially leading to competition among REs for high-quality AIFs. Moreover, the Directions mandate stricter governance, mandatory provisioning norms, and enhanced risk controls to prevent evergreening of loans and credit risk masking.
The Directions provide a phased implementation approach beginning January 1, 2026, allowing REs time to align their investment strategies with the new requirements. AIFs may become more selective in onboarding REs due to the investment cap.
The key differences between the RBI (Investment in AIF) Directions, 2025, and the Old Circulars are summarised in the table below:
| Aspect | Old Circulars | RBI Directions, 2025 | |-----------------------------------|---------------------------------------------------|-------------------------------------------------------| | Applicability | Restricted primarily REs investing in AIFs that invest in their own debtor companies | Expanded to all REs including Commercial Banks, Co-operative Banks, and All-India Financial Institutions, with broader coverage and stricter norms[2][4]. | | Investment Caps | Absolute bar on REs investing in AIFs that directly or indirectly invested in their debtor companies | Absolute bar removed; individual RE investment capped at 10% of AIF scheme corpus, collective investment by all REs capped at 20% of scheme corpus[2][5]. | | Provisioning Requirements | STRICT provisioning on investments linked to debtor companies was implied, with limited flexibility | Relaxed for certain cases but mandates 100% provisioning if two key conditions are met, focusing on investment-linked risk[1][5]. | | Risk Focus | Emphasized risks mainly from direct investments in debtor companies of REs | Sharper focus on investment-linked risks, systemic vulnerabilities, and curbing misuse of AIF structures, indicating a more cautious regulatory stance[1][3]. | | Effective Date and Transition | Earlier circulars applied immediately or as specified | Directions take effect from January 1, 2026, but REs may adopt earlier at their discretion according to internal policies[3][5]. | | SEBI Coordination | SEBI actions were separate with restrictions on priority distribution models and classes of units | Directions explicitly consider SEBI’s evolving regulatory architecture around AIFs (e.g., post-2022 and 2024 SEBI circulars), aligning RBI oversight with SEBI norms[2][4]. |
In brief, the 2025 Directions represent a more calibrated and risk-sensitive framework replacing the older, more prohibitive regime, aiming to safeguard financial stability while allowing prudent institutional investments in AIFs [1][2][3][4][5].
The article was written by Leelavathi Naidu, Harsh Dilip Kothari, and Siddhanth Sharma from IC RegFin Legal. It is for informational purposes only and should not be considered as legal advice. The opinions expressed in the article are those of the authors and may not reflect the views of Bar & Bench.
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