RBI Issues Draft Directions on Investments in AIFs by Regulated Entities

On May 19, 2025, the Reserve Bank of India (RBI) issued the draft RBI (Investment in AIF) Directions, 2025 (Directions) to relax investment norms for regulated entities such as commercial banks, co-operative banks, financial institutions, and non-banking financial companies (REs) with respect to their investments in alternative investment funds (AIFs). The proposed relaxations reflect the financial discipline demonstrated by REs in their AIF investments and take into account the Securities and Exchange Board of India’s circular dated October 8, 2024, which introduced specific due diligence requirements for AIFs and their investors.

The following keys changes are proposed by RBI:

• no RE may contribute more than 10% of the corpus of an AIF scheme on an individual basis, and the aggregate contribution by all REs to a scheme of an AIF must not exceed 15% of its total corpus;
• no restrictions apply to REs making investments of upto 5% of the corpus. However, if this limit exceeds in an AIF scheme that has made a downstream investment (other than in equity instruments such as equity shares, compulsorily convertible preference shares, or compulsorily convertible debentures) in a debtor company of the RE, the RE is required to make 100% provision for its proportionate investment in the debtor company through the AIF scheme; and
• if an RE’s investment in an AIF is through subordinated units under the priority distribution model, the entire investment must be deducted from its capital funds—equally from both Tier-1 and Tier-2 capital, as applicable.

Further, all REs shall incorporate provisions within their investment policies to ensure that their investments in schemes of AIFs comply with the regulatory framework, in both letter and spirit. Such investments must be subjected to the test of evergreening.

Upon coming into effect, the Directions will substitute the existing circulars dated December 19, 2023 and March 27, 2024 (Circulars). However, existing investments and any subsequent drawdowns pursuant to commitments made before the issuance of final Directions will continue to be governed by the provisions of the Circulars.

Additionally, the RBI may exempt certain AIFs (particularly funds set up for strategic purposes) from the applicability of the provision on ‘Limits on Investments and Provisioning’, in consultation with the Government of India.

Conclusion:

The Directions mark a significant step towards strengthening the regulatory oversight of investments by Regulated Entities in AIFs, with a particular emphasis on safeguarding capital adequacy and preventing evergreening of loans through complex fund structures.