C&M E-Alert: RBI Releases Draft Directions on Investments by Regulated Entities in Alternate Investment Funds

On May 19, 2025, the Reserve Bank of India (“RBI”) released Draft Directions on Investment by Regulated Entities in Alternate Investment Funds, 2025 (“Draft Directions”) concerning investments by Regulated Entities (“REs”) in Alternate Investment Funds (“AIFs”). These Draft Directions follow the RBI's guidelines issued on December 19, 2023 (“RE Investment in AIF Guidelines”), which aimed to address concerns regarding the potential evergreening of loans.

 BACKGROUND

The RE Investment in AIF Guidelines were initially introduced due to apprehensions arising from REs investing in AIFs that had downstream investments in entities indebted to those same REs. The rationale was to prevent REs from indirectly facilitating the evergreening of loans extended to their debtors through such arrangements. The guidelines, therefore, imposed restrictions on REs' investments in AIF units where the AIF had downstream investments in the debtors of such REs.

Following the RE Investment in AIF Guidelines, the RBI had also issued a clarification on March 27, 2024 (“Clarification”).  The Clarification amongst others specifies that equity shares of the debtor company of the RE are excluded from the scope of ‘downstream investments’ for the purpose of the restrictions and that the investments by REs through intermediaries such as funds of funds or mutual funds are excluded from the scope of RE Investment Guidelines.

What’s New

The key changes proposed are tabulated below:

Heading	RE Investment in AIF Guidelines	Draft Directions
Effectiveness	Will stand substituted. However, existing investments or commitments will continue to follow the RE Investment in AIF Guidelines. Thus, all the outstanding investments as on the effective date (of the RE Investment in AIF Guidelines), or subsequent drawdowns out of commitments made prior to the effective date continue to follow RE Investment in AIF Guidelines.	Effective from the date of final issue (‘effective date’) and applies prospectively. To this extent Draft Directions substitute the RE Investment in AIF Guidelines.
Limitation on REs	REs cannot make investments in any schemes of AIFs which have downstream investments, directly or indirectly, in a debtor company of the RE.	RE cannot individually contribute more than 10% of the corpus of an AIF scheme. Further, collective contribution by all REs in any AIF scheme cannot be more than 15% of the corpus of that scheme.
Exceptions for REs	Downstream investment by any scheme of AIFs that are made in equity shares. Investment by REs in AIFs through intermediates such funds of funds or mutual funds.	Downstream investment by any scheme of AIFs that are in any equity instruments, i.e. equity shares, CCPS and CCDs. Investments in notified AIFs. [Note: The exempted AIFs will be notified in consultation with the Government and likely to be those that have been set up for strategic purposes.]
Breach	If RE invests in AIFs which make downstream investments into debtors of the RE, then REs must liquidate the investment in the AIF scheme and if not able to do so, then make 100% provision for such investments. Note: Investment by REs in the subordinated units of any AIF scheme with a Priority Distribution Model is subject to deduction from RE’s capital funds.	If RE contributes more than 5% of the corpus of an AIF Scheme, then RE must make 100% provision to the extent of its proportionate investment in the debtor company through the AIF Scheme. Note: If RE’s contribution is in the form of subordinated units under the Priority Distribution Model, then entire investment from its capital funds to be deducted.

The Draft Directions underscore the RBI's focus on managing risk for REs through proposed provisioning requirements and investment ceilings. Initial feedback from stakeholders appears favourable, as the Draft Directions seem to move away from the blanket restrictions on RE investments in AIFs and introduce more liberal provisions.

The RBI is currently inviting comments from members of public and stakeholders till 8 June 2025 on the Draft Directions before finalising the Draft Directions.

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