RBI tightens norms for lenders investing in AIF

The Reserve Bank of India illustrated while regulated entities [REs] make investments in units of AIFs as a part of their regular investment operations, it has come to the regulator's notice that certain transactions were not in line with regulatory norms. According to the central bank authority, the REs shall not make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the respective RE. 

The norms apply to all commercial banks, including small finance banks, cooperative banks, NBFCs and financial institutions. Separately, the RBI said if an AIF scheme already has RE as an investor, and still makes a downstream investment in any debtor company of the RE, then the regulated entities shall have to liquidate their position in the scheme within 30 days from the date of such downstream investment by the AIF.

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On the other hand, in case REs are not able to liquidate their investments within the prescribed time limit, they shall make 100 percent provision on such investment. RBI added that investment by REs in the subordinated units of any AIF scheme with a 'priority distribution model' shall be subject to full deduction from REs capital funds.

Further, the directive is also aimed at plugging the loophole of wrong usage of additional borrowed funds under the AIF route to circumvent the norms relating to the restructuring of advances and declaration of NPA. REs will now need to make 100 percent provision on such outstanding debt, which will likely act as a big deterrent to irregularities.

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WHO ARE REGULATED ENTITIES [REs]:

Regulated entities refer to financial institutions and organizations that operate within the framework of specific regulations set by regulatory authorities. It plays a critical role in maintaining the integrity and stability of the financial sector. Regulated entities act as gatekeepers, ensuring compliance with regulations, conducting due diligence, and implementing measures to prevent financial crimes, such as money laundering and fraud.

Regulated entities form the foundation of a well-functioning and compliant financial sector. These entities, ranging from commercial banks to insurance companies and investment firms, plays a pivotal role in maintaining stability, protecting consumers, and adhering to regulatory frameworks.

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