The Reserve Bank of India (“RBI”) issued revised draft directions relating to investments by the Regulated Entities (“REs”) in Alternative Investment Funds (“AIFs”) on May 19, 2025, inviting comments from the public and stakeholders until June 8, 2025. The original guidelines were issued on December 19, 2023, and subsequent clarifications on March 27, 2024, which aimed at mitigating risks of evergreening and improving financial discipline among REs.
The guidelines issued in December 2023 were drafted with the objective of preventing REs from indirectly supporting stressed entities through AIFs—an act considered as “evergreening.” These efforts have been effective, bringing about greater financial discipline. The Securities and Exchange Board of India (“SEBI”) has also released guidelines mandating enhanced due diligence by AIFs regarding both their investors and the nature of their investments, aiming to prevent misuse of AIFs to bypass regulatory frameworks.
In light of these regulatory developments, the RBI has reviewed and updated its stance and now proposes a revised framework to govern REs’ investments in AIFs more effectively, balancing investment freedom with systemic stability.
Key Proposals in the Revised Directions
🔸 Investment Limits:
An individual RE’s investment in a single AIF scheme is proposed to be capped at 10% of the total corpus of that scheme. A combined investment ceiling of 15% is proposed for all REs together in any one AIF scheme.
🔸 Unrestricted Investments up to 5%:
Investments by a RE up to 5% of the corpus of an AIF scheme can be made without any restrictions.
🔸 Provisions for Exceeding 5% Investment:
If a RE’s investment exceeds the 5% threshold and the AIF scheme makes downstream debt investments in companies that are also debtor companies to that RE, 100% provisioning will be required.
The downstream investments considered for provisioning include all debt instruments except equity shares, compulsorily convertible preference shares (CCPS), and compulsorily convertible debentures (CCDs). This move is to avoid potential conflict of interest and backdoor funding of stressed companies.
🔸 Exemptions:
The RBI retains the discretion to exempt certain AIFs set up for strategic purposes in consultation with the Government of India.
🔸 Prospective Implementation:
The revised directions will apply only to future investments. Existing investments or commitments made by REs before the issuance of these revised directions will continue to be governed by the earlier norms.
The RBI has invited feedback on these draft directions to ensure inclusivity in the regulatory process. Comments can be submitted online via the ‘Connect 2 Regulate’ section on the RBI’s official website. Alternatively, stakeholders can send feedback by post or email to the Chief General Manager, Credit Risk Group, Department of Regulation, Central Office, RBI, Mumbai.
Conclusion
The proposed changes underscore the RBI’s commitment to strengthening the regulatory framework around AIF investments by REs, aligning with broader financial stability objectives and reinforcing accountability. These measures aim to close regulatory gaps that could potentially allow backdoor funding of stressed or defaulting companies, ensuring AIFs serve their intended purpose as high-risk capital channels without undermining the health of the financial system.
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