On December 19, 2023, the Reserve Bank of India ("RBI") notified all commercial banks, All India Financial Institutions, non-banking financial companies and primary (urban) co-operative banks/ state co-operative banks/ central co-operative banks ("REs") and issued directions regarding investment in units of alternative investment funds ("AIFs") which have invested in a company ("Downstream Investment") to which the RE currently has, or had, during the preceding 12 months, a loan or investment exposure ("Debtor Company").
To check evergreening through downstream investment in Debtor Companies, the RBI has issued following directions:
- REs cannot invest in schemes of AIFs that have directly or indirectly, made Downstream Investment in a Debtor Company.
- In case such Downstream Investment is made by an AIF in which the RE is already an investor, the RE shall liquidate its investment in the AIF within 30 days of the Downstream Investment.
- Similarly, in case any Downstream Investment in Debtor Companies already exists on the date of this notification, the RE is obligated to liquidate its investment in such AIF within 30 days from the issuance of this notification.
- In case REs are not able to liquidate their investments within the above-prescribed time limit, they shall make 100 percent provision on such investment.
- 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.
The aforementioned was notified vide notification dated December 19, 2023 (available here).
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