The RBI vide its Notification dated July 29, 2025, has reviewed its existing circulars, which prescribe the regulatory guidelines in respect of investment by the Regulated Entities (REs) such as Commercial Banks, Co-operative Banks, All-India Financial Institutions, and NBFCs, in Alternative Investment Funds (AIFs). Through this revision, the RBI has erected a ceiling on investments and provisioning by directing that from January 01, 2026 onwards:
- No RE shall individually contribute more than 10% of the corpus of an AIF Scheme, and collective contribution by all REs in any AIF Scheme shall not be more than 20% of the corpus of that scheme. However, this contribution limit will not apply to outstanding investments or commitments of a RE, if it was made with prior approval from the RBI under the provisions of its Master Direction (Financial Services provided by Banks) 2016.
- If a RE contributes more than five per cent of the corpus of an AIF Scheme, which also has downstream investment (excluding equity instruments) in a debtor company of the RE, then the RE shall be required to make 100% provision to the extent of its proportionate investment in the debtor company through the AIF Scheme, subject to a maximum of the direct loan and/ or investment exposure of the RE to the debtor company.
- If a RE’s contribution is in the form of subordinated units, then it shall deduct the entire investment from its capital funds proportionately from both Tier-1 and Tier-2 capital.
Additionally, the Central Bank has emphasized that Circulars concerning investment in AIFs, namely DOR.STR.REC.58/21.04.048/2023-24 dated December 19, 2023, and DOR.STR.REC.85/21.04.048/2023-24 dated March 27, 2024, shall stand repealed from the effective date of the instant directions, and any new commitment by a RE for contribution to an AIF scheme, made after the effective date, shall be governed in terms of the revised Directions.
However, the Regulator made it clear that outstanding investment by a RE, on the date of issuance of these Directions, in an AIF Scheme in which it has fully honoured its commitment, shall be governed by the provisions of the existing circulars.