In the aftermath of the Reserve Bank of India’s (RBI) recent tightening of norms for banks and non-banking financial companies (NBFCs) investing in alternative investment funds (AIFs), the Indian Venture and Alternate Capital Association (IVCA) has engaged with the government to request the easing of restrictions, as reported by Inc42.
The Regulatory Shift:
On December 19, the RBI issued guidelines instructing regulated entities, including banks and NBFCs, to cease investments in any AIFs that have invested in a borrower or investee of that lender. The move was prompted by instances of misuse where non-bank financiers were channeling loans through the AIF route, a practice known as evergreening loans.
Industry Seeking Clarity:
IVCA, along with other entities such as SIDBI and multiple AIFs, has sought ‘clarity or relief’ from the sudden directives issued by the RBI. The finance ministry is reportedly examining the concerns raised by industry players, and discussions are ongoing to address the situation.
Industry Concerns:
Critics argue that the RBI’s attempt to curb misuse of AIFs might inadvertently impact the entire investment ecosystem. Some industry experts deem the guidelines impractical and potentially detrimental to investments in AIFs.
Potential Impact on Capital Flow:
The tightening of norms could affect the flow of domestic capital, with potential repercussions on smaller venture funds, especially those dependent on commercial banks for funding. The move may pose challenges for development financial institutions such as NIIF and SIDBI, which rely on banks and NBFCs for various projects.
Monitoring Issues and Economic Implications:
Implementation of the policy might raise monitoring issues at banks and impact fintech startups that heavily rely on such institutions. Critics have also raised concerns about the 30-day liquidation mandate imposed by the RBI, which could impact assets under management and potentially disrupt the entire AIF structure.
Calls for Exemptions and Consideration:
Industry insiders suggest exemptions for banking and financial institutions like SIDBI, NABARD, and Exim Bank. Additionally, calls have been made for exposure norms for NBFCs to prevent excessive investment in sponsor AIFs.
