News Excerpt:
The Reserve Bank of India has directed Banks, NBFCs, and lenders to avoid investing in alternative investment funds (AIFs) with downstream investments in a debtor company to curb evergreening of stressed loans.
About:
- The Reserve Bank of India (RBI) has advised regulated entities (REs) to avoid investing in AIF schemes that have downstream investments in debtor companies of regulated entities.
- Some entities have used the AIF route to evergreen loans under stress, delaying their classification as non-performing assets (NPA).
- The RE creates an AIF structure to provide funding to its borrower which is likely to become an NPA.
- The AIF, created by the RE along with other investors, invests in the stressed company, which uses the same money to repay to the lender.
- These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs.
- The RBI said that if an AIF scheme, in which RE is already an investor, makes a downstream investment in any such debtor company, then -
- The RE should liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF.
- In case the REs are not able to liquidate their investments within the prescribed time limit, they will have to make a 100% provision on such investments.
- With the new amendments, RBI has regulated the investment by its regulated entities into AIFs and set down principles of what the AIF cannot do if it has an RBI regulated entity as its unitholder.
