RBI directive on investment in alternative funds may impact NBFCs
Informist, Wednesday, Dec 20, 2023
By Kshipra Petkar
MUMBAI – The Reserve Bank of India's directive to regulated entities against investing in alternative investment funds that have investments, either directly or indirectly, in a debtor company of the regulated entities has thrown banks and non-banking financial companies in a quandary. This is because they are the biggest and the main sponsors of such funds.
"It will kill the AIF industry," said Punit Shah, partner of Dhruva Advisors, a compliance advisory firm.
The Move Would Have The Most Impact On Non-bank Lenders, As They Have More Exposure To Alternative Investment Funds, Say Banking Analysts.
Alternative investment funds are privately pooled investment vehicles, collecting funds from sophisticated investors, either domestic or foreign.
The curb on investments by regulated entities in alternative investment funds is aimed at addressing concerns relating to possible evergreening through this route.
Evergreening is a practice of extending new or additional loans to a borrower who is unable to repay the existing loans, thereby concealing the true status of the non-performing assets or bad loans.
This came to light after certain transactions of regulated entities involving alternative investment funds raised regulatory concerns.
The circular issued by RBI on Tuesday said that if an alternative investment fund scheme, in which a regulated entity is already an investor, makes a downstream investment in any debtor company, then the regulated entity will have to liquidate its investment in the scheme within 30 days from the date of such downstream investment by the alternative investment fund.
"The 30-day period to liquidate the investments is the most ridiculous thing because there are just too many restrictions. There could be closed-ended funds, lock in periods, there are too many things to look out for," Shah said. He said the regulations in their current form are very damaging, and the industry is hoping for some revisions.
In case the regulated entities are unable to liquidate their investments within the next 30 days, they will have to fully provide for such investments.
Data available with the Securities and Exchange Board of India shows the total commitments raised by alternative investment funds as on Jun 30 stood at 8.45 trln rupees and the investments made stood at 3.50 trln rupees. Most commitments were raised by Category-II alternative investment funds totalling to 6.96 trln rupees as on Jun 30.
Industry players said out of the three categories, Category-II alternative investment funds would be more vulnerable as they tend to have higher lender participation. Funds in this category can only invest in unlisted companies or in units of other alternative investment funds.
"Since Category-III AIFs are mostly invested in listed companies, it (the circular) is not going to have any meaningful impact on us," said Vineet Bagri, chief executive officer of Athena Investments, which is Trust Group's Category III alternative investment fund.
IMPACT ON NBFCs
The RBI move would have the most impact on non-bank lenders, as they have more exposure to alternative investment funds, banking analysts said.
"We believe that this circular will have two immediate impact, one--we will see some NBFCs looking to divest some of their units in AIFs and second--AIFs down-selling some of their common exposure," said Prakash Agarwal, a senior finance professional who was the former head of financial institutions at India Ratings. Some of the mid-sized non-bank lenders whose exposure to alternative investment funds could be material to their balance sheet would be affected more, he said.
As banks and non-bank lenders divest their units in alternative investment funds, these units would be available at a discount, making fresh fundraising difficult for such entities in the near term.
In reaction to the RBI's circular, which came after market hours, shares of non-bank lenders such as Piramal Enterprises today fell by nearly 8% to 885.35 rupees on the National Stock Exchange and those of Indiabulls Housing Finance fell by 11.2% to 202.95 rupees. Shares of IIFL Finance fell by 6.7% to 619.25 rupees and those of L&T Finance Holdings fell by 5.9% to 150.10 rupees. End
