Direct Tax, FEMA

April 2024

Investment in Alternative investment Funds (AIFs) by Regulated Entities (REs)

RBI vide Circular DOR.STR.REC.58/21.04.048/2023-24 dt. December 19, 2023 issued instructions to address certain regulatory concerns relating to investment by regulated entities (REs) in the AIFs.

In order to ensure uniformity in implementation of said instructions among the REs and in order to address concerns raised by various stakeholders in this respect, RBI has come with up with new circular DOR.STR.REC.85/21.04.048/2023-24 dt. March 27, 2024.

Inferences drawn from the combined reading of these circulars are as under:-

1. RE cannot make investments in any scheme of AIFs which has downstream investments in equity shares of the debtor company of the RE (any company to which the RE has or had a loan or investment exposure at any time during last 12 months). Investments in other cases are permitted such as where the scheme of the AIF has downstream investment in the hybrid instruments of the debtor company of the RE.

2. If a scheme of AIF makes a downstream investment in equity shares of debtor company of the RE, the RE shall liquidate its investment within 30 days of such downstream investment.

3. If RE is already an investor in a scheme of AIF having downstream investment in equity shares of debtor company of the RE, the RE shall liquidate its investment within 30 days of issuance of circular DOR.STR.REC.58/21.04.048/2023-24 i.e. upto January 17, 2024.

4.If RE fails to liquidate its investment within specified time, it shall make provision only to the extent of investment by RE in that AIF scheme which is further invested by AIF in debtor company of the RE.

5. RE can make investment in the subordinated units of AIF scheme including all forms of subordinated exposures (including investment in the nature of sponsor units) with a ‘priority distribution model’ provided said AIF scheme does not have downstream investment in debtor company of RE. The same shall be subject to full deduction from RE’s capital funds (equally from both Tier-1 and Tier-2 capital).

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