RBI tweaks investment rule for lenders with AIF exposures
RBI on Wednesday said it has made the change after receiving representations from various stakeholders, and to ensure uniformity in implementation among regulated entities (REs).
However, at least two industry executives were unhappy about the central bank keeping hybrid instruments out of the purview of the relaxation.
According to Siddharth Pai, executive council member of the PE/VC industry body Indian Venture and Alternate Venture Capital Association, while the changes provide some operational and regulatory clarity, they also raise new questions.
“The exclusion of equity shares from the definition of downstream investments works only for investments in listed companies. It fails to account for private equity and venture capital investments, which are in the form of compulsory convertible instruments such as CCPS and CCDs. The industry is debating as to whether they would need to convert all their hybrid secured to equity to allow REs to stay invested in their funds,” said Pai.
“Furthermore, there is still ambiguity as to whether existing REs can still honour capital calls to AIFs who do not meet the specific criteria in the new circular. The industry will reach out for further clarity on the matter,” he added.
Gopal Srinivasan, chairman of TVS Capital Funds said the changes provide a boost to fund of funds (FoFs), which will provide additional comfort for the banks’ investment in AIFs.
“We are also hoping that RBI will treat compulsory convertible instruments in accordance with Fema (Foreign Exchange Management Act) definition and treat them as equity, which can then be excluded from these guidelines, as hybrid instruments seem to be. Additionally, we expect all new funds sanctioned for AIFs from banks, as well as drawdowns held up due to the December circular to go through.”
RBI also excluded lenders investing in AIFs through intermediaries such as fund of funds or mutual funds.
In the third quarter, five private banks made provisions worth ₹2,334 crore against their AIF portfolios, with HDFC Bank setting aside maximum of ₹1,220 crore, followed by ICICI Bank with ₹627 crore. State Bank of India had made a provision of ₹240 crore against its total exposure of ₹1,000 crore.
Among non-banks, Piramal Enterprises had written down its entire investment in AIFs, resulting in a consolidated loss of ₹2,377.59 crore.