RBI eases investment regulations for banks and NBFCs in AIF schemes
New Delhi / Mumbai, July 29, 2025
RBI caps exposure at 20% for banks, NBFCs in AIF schemes, excluding equity investments from provisions, with new guidelines effective from January 2026
The Reserve Bank of India (RBI) on Tuesday eased norms for investments by regulated entities (REs) in Alternative Investment Funds (AIFs), capping the cumulative exposure of banks and non-banking financial companies (NBFCs) in AIF schemes at 20 per cent, with the contribution of a single RE capped at 10 per cent of the scheme’s corpus.
Additionally, RBI has excluded equity instruments as part of downstream investments made by REs in AIFs from the purview of these provisions.
Previously, in May, RBI, in a draft circular, had proposed an overall cap on investment by REs in any AIF scheme at 15 per cent, with the contribution of a single RE capped at 10 per cent of the scheme’s corpus.
The new directions will come into effect on 1 January 2026, or from any earlier date as decided by an RE, according to its internal policy.
Furthermore, in the directions issued on Tuesday, the RBI stated that if a RE contributes more than 5 per cent to the corpus of an AIF scheme that has downstream investments—excluding equity instruments—in a debtor company of the RE, then the RE must make a 100 per cent provision for its proportionate investment in the debtor company through the AIF, subject to a cap equal to its direct loan and/or investment exposure to that company.
The RBI also stated that if a RE’s contribution to an AIF is in the form of subordinated units, the entire investment must be deducted from its capital funds, proportionately from both Tier-1 and Tier-2 capital.
In December 2023, the RBI had barred REs from investing in AIFs with investments in existing and recent borrowers, after market regulator Securities and Exchange Board of India (SEBI) found instances of evergreening of loans and circumvention of other market regulations through different AIF structures.
Following this, several AIFs approached the regulators with concerns that REs were struggling to honour capital calls due to the restrictions. Later, in March 2024, the RBI eased provisioning norms.
“The major changes that the industry requested and the RBI has graciously provided are: the carve-out of equity investments from the guidelines, and companies in which banks/NBFCs have made equity investments are also excluded from the definition of ‘debtor company’,” said Siddarth Pai, Co-Chair, IVCA Regulatory Affairs Council.
“By excluding equity investments and equity instruments, investors in AIFs will gain much comfort in knowing that the banking regulator is once again permitting regulated entities to invest in equity AIFs. The safeguards for private credit leave an opportunity for change if the RBI gets comfortable with this matter,” he added.
As of March 2025, total commitments made to AIFs stood at ₹13.49 trillion, while total investments made amounted to ₹5.38 trillion. Investments made in equity and equity-linked securities stood at ₹3.5 trillion.
Of the total ₹5.63 trillion raised, domestic investors accounted for ₹4.08 trillion. Real estate led the sectors in terms of investments, with ₹69,896 crore, followed by IT, financial services, and NBFCs.
"The directions from the RBI have some positives, such as clarifying that equity instruments will include CCPs and CCDs, which was an industry request. The overall RE exposure has also been kept at a reasonable 20%. The fact that this only takes effect from January 2026 is a welcome move, as it gives fund managers sufficient time to plan their ongoing fundraising efforts," said Pallabi Ghosal, Partner, Trilegal.
“The guidelines are now aligned with SEBI's due diligence and investment guidelines to ensure uniformity and clarity. The guidelines directly address the concern about the misuse of the AIF route for the evergreening of loans and advancing by using AIFs to finance stressed loan portfolios,” said Sudhir Chandi, Director at Resurgent India.
[The Business Standard]
