Reserve Bank of India (RBI) has released draft directions for public feedback regarding investments by regulated entities (REs) in Alternative Investment Funds (AIFs). This follows earlier circulars issued in December 2023 and March 2024, aimed at curbing risks such as evergreening. The revised draft, issued on May 19, 2025, incorporates SEBI’s updated regulations requiring due diligence on AIFs and their investors. Key proposals include capping individual RE investment in any AIF scheme at 10% of the fund’s corpus, and a collective cap of 15% for all REs combined. Investments by an RE up to 5% will remain unrestricted. However, if an RE invests more than 5% in an AIF that has a downstream debt exposure (excluding equity instruments) to a debtor company of the RE, a 100% provision must be made for the RE’s proportional exposure. Additionally, investments in subordinated units under the Priority Distribution Model must be fully deducted from capital funds. The RBI may exempt certain strategically important AIFs, in consultation with the Government of India. These new directions will apply prospectively, while existing investments and commitments will continue under current norms. The draft also sets clear definitions for terms such as “debtor company” and “equity instrument” and outlines applicability to commercial banks, co-operative banks, financial institutions, and NBFCs, including housing finance companies. Public comments on the draft are invited until June 8, 2025, through the RBI’s website or by email/post. The proposed changes are intended to enhance regulatory clarity and strengthen financial discipline around RE participation in AIFs.
Reserve Bank of India
India’s Central Bank
Press Releases
Date : May 19, 2025
Revised Directions on Investment by Regulated Entities in Alternate Investment Funds – Draft for Comments
The Reserve Bank had, on December 19, 2023, issued guidelines relating to investment by the regulated entities (REs) in Alternative Investment Funds (AIFs), with the objective of addressing certain concerns relating to possible evergreening through this route. Subsequently, certain clarifications were issued vide circular dated March 27, 2024.
2. On a review, it is observed that the regulatory measures undertaken by the Reserve Bank have brought financial discipline among the REs regarding their investment in AIFs. Meanwhile, SEBI has also issued guidelines requiring inter alia specific due diligence with respect to investors and investments of the AIFs, to prevent facilitation of circumvention of regulatory frameworks. In view of these developments, the Reserve Bank of India has issued the revised draft Directions today.
3. The key proposals are as under:
- A single RE’s contribution to any AIF scheme shall be capped at 10 percent of its corpus. Collectively, a ceiling of 15 per cent shall apply for investment by all REs in an AIF scheme.
- Investments by a RE upto five per cent of the corpus of a AIF scheme shall be allowed without any restriction.
- If the investment by any RE exceeds five per cent of the corpus of the scheme, and if the scheme has a downstream debt investment in a debtor company of the RE (excluding equity shares, compulsorily convertible preference shares and compulsorily convertible debentures), then the RE shall be required to make 100 per cent provisions to the extent of its proportionate exposure.
- RBI may exempt certain AIFs, in consultation with the Government, that have been set up for strategic purposes.
- The revised Directions will be applicable prospectively. Existing investments or commitments will follow the extant norms.
4. The comments on the draft Directions are invited from public/stakeholders till June 8, 2025. Comments/ feedback may be submitted through the link under the ‘Connect 2 Regulate Connect 2 Regulate’ Section available on the RBI’s website or may alternatively be forwarded to:
The Chief General Manager
Credit Risk Group
Department of Regulation, Central Office
Reserve Bank of India, 12/13th Floor,
Shahid Bhagat Singh Marg,
Fort Mumbai – 400 001
or
by email
(Puneet Pancholy)
Chief General Manager
Press Release: 2025-2026/366
Reserve Bank of India
India’s Central Bank
Draft Reserve Bank of India (Investment in AIF) Directions, 2025
DRAFT FOR COMMENTS
RBI/2025-26/–
DOR.STR.REC.–/21.04.048/2025-26
___, 2025
Reserve Bank of India (Investment in AIF) Directions, 2025
The Reserve Bank had issued the circular no.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 (“existing circulars”), prescribing the regulatory guidelines in respect of the investment by the regulated entities (REs) in Alternative Investment Funds (AIFs). The above guidelines have been reviewed, inter alia taking into account the regulations issued by the Securities and Exchange Board of India (SEBI) relating to specific due diligence of investors and investments of AIFs.
Accordingly, in exercise of powers conferred under Sections 21 and 35A of the Banking Regulation Act, 1949 read with Section 56 of the Banking Regulation Act, 1949; Chapter IIIB of the Reserve Bank of India Act, 1934 and Sections 30A, 32 and 33 of the National Housing Bank Act, 1987 the Reserve Bank of India being satisfied that it is necessary and expedient in the public interest to do so, hereby issues these Directions hereinafter specified.
2. Short title and commencement
a. These Directions shall be called the Reserve Bank of India (Investment in AIF) Directions, 2025.
b. These Directions shall come into force from the date of final issue (‘effective date’), substituting the existing circulars.
Provided that, all outstanding investments as on the effective date, or subsequent drawdowns out of commitments made prior to the effective date, shall continue to be guided by the provisions of the existing circulars.
3. Applicability
These Directions shall be applicable to investments by the following REs in units of AIF Schemes:
i. Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks)
ii. Primary (Urban) Co-operative Banks/State Co-operative Banks/ Central Co-operative Banks
iii. All-India Financial Institutions
iv. Non-Banking Financial Companies (including Housing Finance Companies)
4. Definitions
For the purpose of these Directions, following definitions apply:
i. ‘Debtor company’ of the RE shall imply any company to which the RE currently has or previously had a loan or investment exposure (excluding equity instruments) anytime during the preceding 12 months.
ii. ‘Equity instrument’ shall refer to equity shares, compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCD).
5. General Requirements
All REs shall put in place suitable provisions as part of their investment policy to ensure that investments in an AIF Scheme comply, in letter and spirit, with the extant regulatory norms. In particular, such investments shall be subject to the test of evergreening.
6. Limits on Investments and Provisioning
a. No RE shall individually contribute more than 10 per cent of the corpus of an AIF Scheme.
b. Collective contribution by all REs in any AIF Scheme shall not be more than 15 per cent of the corpus of that scheme.
c. If an 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 per cent provision to the extent of its proportionate investment in the debtor company through the AIF Scheme.
d. Notwithstanding paragraph 6(c), if the RE’s contribution is in the form of subordinated units under the Priority Distribution Model (PDM), it shall deduct the entire investment from its capital funds – equally from both Tier-1 and Tier-2 capital (wherever applicable).
7. Exemptions
The Reserve Bank may, in consultation with the Government of India, exempt certain AIFs from the applicability of paragraph 6 of these Directions. Such exempted AIFs shall be enlisted in the Annex to these Directions, as updated from time to time.
Annex
List of AIFs under “Exemption Category”
To be finalised, in consultation with the Government of India, before the issuance of final circular.