New Guidelines for Investments in Alternative Investment Funds (AIFs)

28 March 2024

In the previous circular, REs were advised against investing in any AIF scheme with downstream investments in debtor companies of the RE. If such an investment occurred, the RE had to swiftly liquidate its stake within 30 days or make a 100 percent provision on the investment. Additionally, investments in subordinated units of AIFs with a 'priority distribution model' required full deduction from RE's capital funds. However, a new circular brought changes to these rules. Downstream investments, previously strictly regulated, were now defined differently. Equity shares of debtor companies were excluded from this definition, but all other investments, including hybrid instruments, were included.

Provisioning requirements were also revised. REs now only needed to provision for the extent of their investment in the AIF scheme that was further invested in the debtor company, not the entire investment in the scheme. The new circular also clarified that the deduction from capital funds would be split equally between Tier 1 and Tier 2 capital. It extended the scope to include all forms of subordinated exposures, not just sponsor units. Furthermore, the circular exempted investments made through intermediaries such as fund of funds or mutual funds from its scope.