Alternative Investment Funds (AIFs)

Why in News? The Reserve Bank of India (RBI) released revised draft guidelines on May 19, 2025, to regulate investments by banks, non-banking financial companies (NBFCs), and other regulated entities (REs) in Alternative Investment Funds (AIFs).

Relevance : UPSC Pre & Mains

Prelims :  AIFs/REs

Mains :  GS 3

Objectives :

The move aims to balance financial discipline with increased capital flow into high-growth sectors like startups and infrastructure, following tighter norms introduced in December 2023 to curb evergreening of loans.

Key Points of the Revised Draft:

• The draft proposes a cap on a single RE’s investment in an AIF scheme at 10% of the fund’s corpus, with a collective limit of 15% for all REs in a single scheme, though some sources suggest a push to raise this to 25% for more domestic capital
• Investments up to 5% of the corpus face no restrictions, but if an RE exceeds this and the AIF has downstream debt exposure to a debtor company of the RE, 100% provisioning is required for the proportional exposure. Certain AIFs set up for strategic government purposes may be exempted after consultation.
• The rules apply only to new investments, leaving existing ones under prior norms. The RBI notes that earlier restrictions have instilled financial discipline, and SEBI’s stricter due diligence complements these efforts to prevent regulatory loopholes.