RBI proposes 10 per cent cap on RE investments in AIFs

IANS May 19, 2025 394 views

The Reserve Bank of India has introduced draft guidelines capping regulated entities' investments in Alternative Investment Funds. These new regulations aim to strengthen financial discipline and prevent potential regulatory circumvention. Under the proposed rules, a single regulated entity can invest up to 10% in an AIF scheme, with a collective ceiling of 15%. The RBI will accept public comments on these draft directions until June 8, 2025, demonstrating a transparent regulatory approach.

"On a review, it is observed that the regulatory measures undertaken by the Reserve Bank earlier have brought financial discipline" - RBI Official Statement
RBI proposes 10 per cent cap on RE investments in AIFs
Mumbai, May 19: The Reserve Bank of India proposes to cap a single regulated entity's (RE) contribution to any Alternative Investment Funds (AIF) at 10 per cent of its corpus while collectively, a ceiling of 15 per cent will apply for investment by all REs in an AIF scheme, in the revised draft directions issued on Monday.

Key Points

1

RBI limits single RE investment to 10% in AIF schemes

2

Investments above 5% require 100% provisions for debt exposure

3

Existing investments will follow current norms

Regulated entities like banks, pension funds, and insurance companies often invest in AIFs for diversification.

The RBI revised draft directions, aimed at tightening oversight and preventing potential misuse of the investment route, also stipulate that investments by an RE of up to five per cent of the corpus of an AIF scheme will be allowed without any restriction.

However, if the investment by any RE exceeds five per cent of the corpus of the scheme, and if the scheme has a downstream debt investment in a debtor company of the RE (excluding equity shares, compulsorily convertible preference shares, and compulsorily convertible debentures), then the RE will be required to make 100 per cent provisions to the extent of its proportionate exposure.

The proposals further state that the RBI may exempt certain AIFs, in consultation with the government, that have been set up for strategic purposes.

The revised directions issued by the RBI will be applicable prospectively. Existing investments or commitments will follow the extant norms, according to the official statement.

Explaining the rationale for the new directions, the RBI said: "On a review, it is observed that the regulatory measures undertaken by the Reserve Bank earlier have brought financial discipline among the REs regarding their investment in AIFs."

Besides, "SEBI has also issued guidelines requiring inter alia specific due diligence with respect to investors and investments of the AIFs, to prevent facilitation of circumvention of regulatory frameworks", the RBI statement added.

The comments on the draft directions have been invited from the public/stakeholders till June 8, 2025. Comments may be submitted through the link under the 'Connect 2 Regulate' Section available on the RBI's website or may alternatively be forwarded to the Chief General Manager, Credit Risk Group of the RBI.

Reader Comments

P
Priya M.
Good move by RBI to bring more transparency in AIF investments. 10% cap seems reasonable to prevent concentration risk. But I hope this doesn't discourage institutional investors too much - we need capital flowing into alternative assets for economic growth. 🇮🇳
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Rahul K.
Finally! Some much-needed regulation in this space. I've seen how some banks were using AIFs to hide bad loans. The 100% provisioning requirement for debt investments is especially important. Hope SEBI and RBI keep coordinating like this on other financial regulations too.
A
Anjali S.
As someone working in mutual funds, I think the 5% threshold is too low. Many institutional investors want meaningful exposure to alternative assets. Maybe RBI should consider 7-8% instead? Otherwise pension funds might struggle to get decent returns for retirees.
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Vikram J.
The devil is in the details - what counts as "strategic purposes" for exemptions? RBI should clearly define this to prevent misuse. Otherwise, big players will find loopholes as usual. Overall though, good step towards financial stability. Jai Hind!
S
Sanjay P.
Why is RBI being so conservative? At this rate, Indian investors will keep putting all money in FDs and gold. We need to encourage smart risk-taking if we want to compete with China's financial markets. The 15% collective cap is especially restrictive for smaller AIFs.

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Tags:
RBI Alternative Investment Funds Banking Regulations Financial Oversight Investment Caps