RBI Tightens norms on evergreening of loans

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Regulated entities (REs) ( Banks and NBFCs ) make investments in units of Alternative Investment Funds (AIFs) ( Venture capital funds, angle funds, infrastructure funds, private equity funds and hedge funds, among others ) as part of their regular investment operations. However, certain transactions of REs involving AIFs that raise regulatory concerns have come to our notice. These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs.

In order to address concerns relating to possible evergreening through this route, RBI, through its order ( RBI/2023-24/90   DOR.STR.REC.58/21.04.048/2023-24 ), barred REs from making any investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company of the RE.

The debtor company of the RE, for this purpose, shall mean any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months.

Order further states  If an AIF scheme, in which RE is already an investor, makes a downstream investment in any such debtor company, then the RE shall liquidate its investment 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.

In case REs are not able to liquidate their investments within the above-prescribed time limit, they shall make 100 percent provision on such investments.

In addition, 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.

‘Priority distribution model’ shall have the same meaning as specified in the SEBI circular SEBI/HO/AFD-1/PoD/P/CIR/2022/157 dated November 23, 2022.

Reference:

  1. RBI
  2. About Evergreening of Loans

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