In order to prevent possible evergreening of loans via investments in schemes of alternative investment funds (AIFs), the Reserve Bank of India (RBI) on Tuesday tighthened norms for lenders.
The RBI said while regulated entities (REs) make investments in units of AIFs as part of their regular investment operations, it has come to the regulator’s notice that certain transactions were not in line with regulatory norms. Accordingly, “in order to address concerns relating to possible evergreening through this route”, it said the REs shall not make investments in any scheme of AIFs which has downstream investments — either directly or indirectly — in a debtor company of the respective RE.
The norms are applicable to all commercial banks, including small finance banks, local area banks, regional rural banks, co-operative banks, non-banking financial companies (NBFCs) and financial institutions.
According to Veena Sivaramakrishnan, partner at Shardul Amarchand Mangaldas & Co, while it is usually rare for RBI to call out specific structures, it does not necessarily come as a surprise as the central bank has always been concerned with hidden bad loans and evergreening as a principle.
“The priority/senior — junior structures adopted by certain entities would fall squarely within the purview of this circular and given the timelines prescribed, they would need to be quickly relooked for alternative structuring,” she said.
Separately, the RBI said if an AIF scheme already has a RE as an investor, and still makes a downstream investment in any debtor company of the RE, then the RE shall have to liquidate their position in the scheme within 30 days from the date of such downstream investment by the AIF.
“If REs have already invested into such schemes having downstream investment in their debtor companies as on date, the 30-day period for liquidation shall be counted from date of issuance of this circular. REs shall forthwith arrange to advise the AIFs suitably in the matter,” it said.
In case REs are not able to liquidate their investments within the prescribed time limit, they shall make 100% provision on such investments. RBI added that investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ shall be subject to full deduction from RE’s capital funds.
Jyoti Prakash Gadia, MD, Resurgent India, said the move is timely and will prevent the usage of funds for evergreening of debt of group concerns or related parties. “The AIF is invested in riskier debt and other unquoted instruments that have lesser transparency, and there is a likelihood of it being used for payment of existing stressed loans earlier given by the banks,” he said.
Further, the directive is also aimed at plugging the loophole of wrong usage of additional borrowed funds under the AIF route to circumvent the norms relating to the restructuring of advances and declaration of NPA. REs will now need to make 100% provision on such outstanding debt, which will likely act as a big deterrent to irregularities, he said.
Recently, in August, the Kotak Mahindra Bank Group had said it will combine its alternate fund management and investment advisory businesses into an entity with $18 billion under management, Reuters reported. The entity, which was named Kotak Alternate Asset Managers (KAAM), will include $8.9 billion in alternate investment funds and the advisory business with $9.1 billion under management.