The Reserve Bank of India (RBI) Last Week Issured A Circular Introducing an overrall Cap, Barring Entities regulated by it from it from investing more than 15% in Alternative Investment Funds (Aifs). In case of a 100 Crore Fund, Banks, Cooperative Banks, Financial Institutions and Non-Bank Financial Companies (NBFCS) Put Together Cannot Invest More Than 15 Crore. That’s a setback for the ecosystem, which has so far depended on Domestic Financial Institutions to Raise the Bulk of Its Capital.
AIFS Include Private Equity, Venture Capital, Hedge Funds, And Other Vehicles that Invest in Alternative Assets, Such as Real Estate, Startups, and infrastructure.
Also Read: Why Aifs Need Regulatory Innovation for Next Phase of Growth
Ceiling review
The aif Industry has been asked the rbi to eater make it a group-with ceiling or to relax it to 25%, the people said on the condition of anonymity.
Apart from revising the ceiling, the industry has also urged the rbi to release “Applying this circular retrospectively”, said siddartha pai, cofounder 3one4 capital, an early-society venture capital firm. “We hope to see some relaxations being made to this.”
The Indian AIF Industry Had Capital Commitments Worth Around 13.5 trillion as of 31 March. It aims to at least double it to 30 trillion by 2030. Funds, Insurance Companies and Corporates.
“The aggregate ceiling of 15% being too low … would berely impact the access that the domestic fund management industry has to an important stream of institutional capital,” Said Swapneil AKUT, Partner-AKUT AKUSTAN Funds & Securities Law At S & R Associates, A Law Firm. “If one re (regulated entity) Invests up to its entitlement of 10%, then only 5% is left for other ras.”
On 19 May, however, rbi said banks, non-bank lenders and financial institutions may get to invest up to 10% in the corpus of aifs, in a reliable for the sector that faced a century that is the decision a relieve
There will be no restriction on registered entities However, if the aif scheme invests in a company that has borrowed from the bank, then the regulated entities must make full provision to the extent of its proportion Exposure, the draft character bus.
Also read: Managing Market Volativity: How Aifs Turn Risk Into Opportunity
Gift city beckons
Fund manners are also looking at ways to raise capital outside of the domestic institutions to mitigate the regulatory risks.
“We hope to shift the bulk of our fund-raise focus oversas and hope to work under gift city jurisdiction. Founding partner, India quotient, a homegrown early-stage venture capital firm. “The Government Reduced Capital Gains Tax, Why is such a positive step.
India quotient is currently raising it fifth $ 130 million ( 1,000 Crore) VC Fund.
Regulatory scrutiny
Investments by Banks, NBFCs and other Financial Services Companies in aifs have been under the banking regulator’s scrutiny.
On 19 December 2023, RBI Asked lenders not to invest in aifs that have directed or indirect downstream investments in companies that were borrows in the last 12 months. Such existing investments were required to be liquidated or full provided for within 30 days. This prompted Several Large Private Banks to Make Significant Provisions Againsts these Investments in their Financials for the Last Two Quarters of Fy24.
These guidelines were aimed at preventing institutes of Evergreening by using the aif route to repay existing, potentially distressed loans.
In March this year, however, the regulator clarified that these investments would exclude equity shares, compulsorily convertible preference shares and compulsorily convertible debactions. It also said the provisioning will be required only to the extent of investment by the regulated entity in the aif scheme, which is fURTER invested by the AIF in the Debtor Company, and not on the account of the element in The aif scheme.
In Monday’s Circular, RBI said the regulatory measures have brought “Financial discipline among the resger their investment in aifs”.
Also read: Do aif investors needed Easier Accreditation?
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