AIF Deals Worth Rs 20,000 Crore May Be Hit By RBI's New Norms To Curb Evergreening

On Tuesday, the RBI said that regulated entities including banks and non-bank finance companies cannot invest in alternative investment funds which have downstream investments in debtor companies. If banks or NBFCs have such investments in AIFs, they have been given 30 days to liquidate their holdings or make 100% provisions against them.

Debtor companies include borrowers who have availed loans or investments from banks or NBFCs in the last 12 months.

The new rules will "address concerns relating to possible evergreening through this route," the central bank said in its circular. Evergreening involves a lender finding an alternate route to finance a non-performing borrower to repay itself.

According to the first person quoted above, tens of AIFs involved in total deals worth Rs 20,000-25,000 crore have been found to be in violation of existing regulatory directions. The banking regulator had been reviewing these transactions in recent months to check for any major violations, this person said.

While evergreening is an issue with these transactions, other small and large regulatory violations were also noted, the second person quoted above said. Both the people spoke on the condition of anonymity.

Under RBI's new norms, any investments by regulated entities under the priority distribution model shall be subject to full deduction from the lender's capital funds.

A priority distribution model refers to situations where an AIF creates two classes of investors where one gets superior rights over the other. While senior investors may get a higher return, the junior investors may take on higher losses.

In May, the Securities and Exchanges Board of India released a consultation paper which proposed to completely remove these preferential or priority distribution schemes.

SEBI has also been investigating such AIFs to check for any violations, the first person quoted above said.