The Reserve Bank on Wednesday modified its circular on regulated entities’ (RE) investments in alternative investment funds (AIFs), dialling down on some of the requirements after a feedback.

The central bank said the revisions have been made with a view to ensure “uniformity in implementation among the REs, and to address the concerns flagged in various representations received from stakeholders”.

The Reserve Bank of India (RBI) had in December 2023 come out with the circular governing investments by banks, non-bank lenders and other REs to the AIF sector, following concerns of the route being used for the evergreening of loans.

As per the initial concerns, REs’ investments in AIFs were used as a route to repay loans that would otherwise have to be classified as non-performing, wherein the AIF gives a succour to a bank’s borrower.

Following the clarification, provisioning will 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.

It can be noted that REs had to provide 100 per cent against the entire stock of their AIF investments and many entities experienced a hit to profits because of this requirement.

The revised circular further said that “downstream investments” will exclude investments in equity shares of the debtor company of the RE, but shall include all other investments, including investment in hybrid instruments.