OVERVIEW
The Reserve Bank of India ('RBI') has issued the Reserve Bank of India (Investment in AIF) Directions, 2025 wherein it has revised the regulatory framework for investment in Alternative Investment Funds( 'AIFs') by Regulated Entities ('REs'). These new Directions shall supersede RBI's earlier circulars dated 19 December 2023 and 27 March 2024 on this matter.
These revised Directions have been formulated taking into account industry feedback and SEBI regulations related to due diligence of AIF investors and investments. These directions have been summarised below for your reference
KEY HIGHLIGHTS OF THE DIRECTIONS
- Effective Date: 1 January 2026, or an earlier date as per the RE's internal policy.
- Applicability: The Directions apply to the
following REs investing in AIF units:
- Commercial Banks (including Small Finance Banks, Local Area Banks, Regional Rural Banks)
- Primary (Urban) Co-operative Banks /State Co-operative Banks /Central Co-operative Bank
- All-India Financial Institutions
- Non-Banking Financial Institutions (including Housing Finance Companies)
- Investment limits:
- IndIvidual investment by RE capped at 10% of AIF scheme's corpus
- Collective investment by all REs in AIF scheme capped at 20% of the corpus
- An RE investing over 5% of the corpus of an AIF that has downstream investment (excluding equity instruments) in a debtor company of the RE, then the RE shall be required to make 100% provision for its proportionate investment in that debtor company, subject to maximum of the direct loan and / or investment exposure of the RE to the debtor company.
- Where an RE's contribution is in the form of subordinated units, it shall deduct the entire investment amount from its capital funds, proportionately from both Tier-1 and Tier-2 capital
- Exemptions:
- Outstanding investments or commitments made with prior RBI approval under earlier directions shall be exempt from the investment caps, whereas,
- RBI, in consultation with the Government, shall exempt certain AIFs from the scope of the existing circulars and revised Directions
- Transitional relief:
- Any outstanding investment by a RE in an AIF Scheme, where its commitment has been fully met as on the date of the Directions, shall continue to be governed by the existing circulars
- For any investment made by a RE in an AIF Scheme under an existing commitment as on the date of these Directions, or a new commitment made before the effective date, the RE shall fully comply with either the existing circulars or the revised Directions, in toto
This marks a significant shift in the overall regulatory landscape governing RE investments through AIFs. While the transitional provisions offer some relief to existing Funds where commitments have already been fulfilled, it is crucial for new Funds to carefully assess the implications of these Directions on upcoming fund-raising activities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
