REs Can Not Make Investment In AIF Where Debtor Company Is Involved: RBI

The Reserve Bank of India(RBI) in its recent circular has said that Regulates Entities(REs) like banks and non-banking financial companies(NBFCs) can not make investment in Alternative Investment Funds (AIFs) which has downstream investments either directly or indirectly in a debtor company of the REs.

“REs shall not make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the RE,” RBI said in a press release.

RBI has brought these amendments to address concerns relating to possible evergreening through this route.

Also RBI has said that if in an AIF scheme where RE is already an investor, makes a downstream investment in any such debtor company, then the REs shall liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF.

“If REs have already invested into such schemes having downstream investment in their debtor companies as on date, the 30 day period for liquidation shall be counted from date of issuance of this circular,” RBI emphasised.

RBI has further added that if REs are not able to liquidate these investments within the stipulated time then they shall make 100 per cent provision on such investments.

The debtor company of the REs shall mean any company to which the REs currently has or previously had a loan or investment exposure anytime during the last 12 months.

“RBI directive aims at plugging the loophole of wrong usage of additional borrowed funds under the AIF route to circumvent the guidelines relating to the restructuring of advances and declaration of NPA.

The need to make 100 per cent provision on such outstanding debt is likely to as a big deterrent to such irregularities in transactions,” Jyoti Prakash Gadia, Managing Director, Resurgent India.