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On 19 December 2023, RBI had issued a circular, wherein certain instructions were issued to address the regulatory concerns relating to investment by Regulated Entities (REs) in the AIFs.

In order to ensure uniformity in the implementation of the aforesaid instructions among the REs, RBI, vide a notification dated 27 March 2024 has stated that:

  • Downstream investments should exclude investments in equity shares of the debtor company4 The debtor company of the RE means any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months of the RE, but must include all other investments (including investment in hybrid instruments)
  • Provisioning5 In case REs are not able to liquidate their investments within the prescribed time limit, they should make 100 per cent provision on such investments should be required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme
  • Paragraph 36 Paragraph 3 of the RBI circular dated 19 December 2023 discusses investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ of the circular dated 19 December 2023 would only be applicable in cases where the AIF does not have any downstream investment in a debtor company of the RE
  • Proposed deduction from capital should take place equally from both Tier-1 and Tier-2 capital and reference to investment in subordinated units of the AIF scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units
  • Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the RBI circular dated 19 December 2023

To access the text of the notification, please click here

Action points for auditors

  • It is to be noted that the exemption is currently only given for equity shares and not convertible instruments (i.e., investments convertible into equity shares).
  • This notification could have a significant impact on an RE’s impairment computation. Accordingly, auditors should check whether the management of REs has ensured compliance with the circular dated 19 December 2023 read with this notification when performing the impairment loss computation on investment in AIFs.
  • REs that have fully provided for their investments in AIFs in a particular quarter, would need to assess the impact of the circular on the provision computation, and disclosure of the reversal of provision (if any) in the March’24 quarterly results.

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