Under the revised norms, provisioning is required only for the portion of the bank or finance company’s investment in the AIF scheme that is further invested in the debtor company, and not the entire investment in the AIF scheme as required earlier.Also, investment by lenders in AIFs through intermediaries such as fund of funds or mutual funds are not affected.
In Dec 2023, RBI had asked banks to fully provide for investments in AIFs, which went on to invest in companies that the banks had lent to. The rules were aimed at preventing ‘evergreening’ – an underhand practice where lenders provide more funds to the borrower to repay instalments so that the loans do not have to be classified as bad loans.
“The exclusion of equity shares from the definition of downstream investments works only for investments in listed companies. It fails to account for private equity and venture capital investments which are in the form of compulsory convertible instruments such as CCPS and CCDs. The industry is debating as to whether they would need to convert all their hybrid secured to equity to allow REs to stay invested in their funds,” said Siddarth Pai, co-chair, Indian Venture and Alternate Capital Association.
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