The Reserve Bank has further tightened the rules for investment in Alternative Investment Funds for banks and all financial institutions associated with them.
The Reserve Bank has tightened the conditions for investment in Alternative Investment Fund (AIF) for banks and the financial institutions under it. RBI has said that no financial institution will invest in any AIF which is linked to any debtor of the bank. According to the circular of the Reserve Bank, if a bank or a loan disbursing institution has invested in any AIF. And if he invests in the company of any debtor of AIF bank or loan disbursing institution, then he will have to sell his investment.
Who is the debtor?
If a bank has investments in an AIF which is a debtor to the bank, then within 30 days from today’s appreciation the bank will have to sell its investment in the AIF. If banks or financial institutions are unable to sell their investments made in AIF. So they will have to make provisioning equal to 100% of the amount invested. Provisioning means keeping money aside.
According to the circular, the rules of the Reserve Bank will come into effect with immediate effect. The Reserve Bank has made it clear that anyone to whom the bank has given any loan in the last 12 months will be considered a debtor.
Information was received about misuse of AIF
In fact, the Reserve Bank had received complaints from SEBI that the AIF route was being misused. Banks were giving money to those people to whom they were not able to give loans directly, by purchasing units of AIF of such people. In this way, there was a possibility of money being diverted instead of actual repayment of the loan. Criteria have also been suggested to banks for definition of debtor.
Outcry in the capital sector due to new rules of RBI
However, the new circular of the Reserve Bank has created an uproar in the venture capital sector. Because there is a possibility of a severe hit to the funding of the entire sector. Many banks and financial institutions have investments in startups and other such ventures. But after the circular of the Reserve Bank, it will now become difficult for banks to not only invest in such institutions. Rather, existing investments will also be affected. Due to the condition of exit in 30 days, there is also a fear that a situation of distress sale may arise. A founder associated with venture capital said on the condition of anonymity that, “The Reserve Bank’s circular is in a way an attack on the system of AIFs. Instead of dealing with a few irregularities, a circular has been brought that will cause huge damage to the entire ecosystem of AIF.
It is believed that soon people associated with venture capital and AIF will inform the Finance Ministry, Reserve Bank and SEBI about the problems arising from this circular. According to industry sources, a risk weightage of 150 percent is applicable on investment in AIF. In such a situation, if there will be a rule of 100 percent provision if banks are unable to exit within 30 days, then why will banks and financial institutions invest in AIF.
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