What was ushered in as a new era of legal reforms in the country, with keen interest from all over the world, is now a bruised, battered structure, even before it cuts its cake for the 10th time.
The BLRC Vision
When the Bankruptcy Law Reforms Committee first put the Insolvency and Bankruptcy Code, 2016 (“IBC”) into its mould, they envisaged it as a tool in the hands of creditors who should decide on the fate of a defaulting firm. As they put it, “The appropriate disposition of a defaulting firm is a business decision, and only the creditors should make it.” Needless to say, they also recognised that decision-making has to be quick – as delays lead to value destruction. Indeed, the design and structure of IBC was promising enough – a unique categorisation of creditors as financial and operational creditors (found no-where in the world) with financial creditors, a creditor-driven resolution process, strict hardbound timelines, an irreversible liquidation outcome, a well-thought of priority waterfall, and a court-appointed liquidator taking the corporate debtor to the death pyre.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-08-11 19:13:362025-08-15 17:41:29Done, dented, damaged: The IBC edifice, even before it’s 10
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-08-09 15:09:402025-08-12 10:17:37Lending Together Rewinded
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-08-08 13:01:122025-09-03 15:45:3512 hours Certificate Course on Nuts and Bolts of Related Party Transactions
The Directions definitively eliminate discretionary co-lending arrangements (CLM-2 model), mandating that any cherry-picking or selective loan purchase arrangements must comply with Transfer of Loan Exposures (TLE) Directions rather than co-lending provisions. The Directions are uniformly applicable to priority sector lending as well as any other lending, thereby having a harmonised regulatory framework.
In each case, a minimum funding share of fundamental restructuring requires each co-lending partner to maintain a minimum 10% (lowered from the previous requirement of 20% in case of the PSL co-lending arrangement) risk retention, ensuring genuine skin-in-the-game for all participants. In addition to the minimum 10% funding share, the Originating RE (even in non-digital lending cases) may also provide a Default Loss Guarantee (DLG) up to 5% of the “outstanding loans” (see discussion below – this expression has to be read in consonance with DLG framework). The Directions, however, explicitly prohibit subordination, waiver, or deferral of servicing fees thereby limiting credit enhancements in any other manner, but the flavour of the regulations seems to restrict credit support to DLG, for promoting transparent DLG structures only.
Unpacking the Highlights
As is always the case, some operational complexities have been addressed, while some have been created. There are also enhanced disclosure requirements, mandating clear segregation of roles and responsibilities in loan agreements, identification of single customer interface points and comprehensive Key Facts Statement (KFS) disclosures.
The Directions introduce borrower-level asset classification synchronization, requiring real-time information sharing (latest by next working day) when either lender classifies an exposure as SMA/NPA, creating significant operational challenges for lenders’ systems and processes. While KYC requirements have been streamlined to allow partner REs to rely on originating REs for customer identification as per the provisions of the KYC Master Directions, 2016, Credit Information Company (CIC) reporting is explicitly stipulated for each lender, which, in our view, is both unnecessary and undesirable. This results in continuing operational complexities for multiple reporting mechanisms.
Website disclosure requirements now mandate listing all active CLA partners (removing previous blended rate disclosure obligations), while financial statement disclosures shift to quarterly/annual basis aligned with applicable RE reporting cycles. The framework retains provisions for unrealized profit recognition “if applicable,” though, in our view, being pre-agreed and non-discretionary, the transfer of the Partner RE’s share is merely a consummation of what was anyways concluded, and therefore, there is no case of “transfer” in case of co-lending. If there is no sale, there is no case for booking of a gain on sale. And in our view, Co-lending structures typically wouldn’t trigger gain-on-sale accounting.
Customer protection is enhanced through mandatory prior intimation requirements for any changes in customer interface, ensuring continuity and transparency throughout the loan lifecycle. These comprehensive changes reflect RBI’s intent to create a more transparent, operationally robust, and prudentially sound co-lending ecosystem while addressing past regulatory ambiguities and market practices.
Please find below our highlights for an easy read.
The RBI’s framework for partial credit enhancement for bonds has significant improvements over the last 2015 version
The RBI has released a new comprehensive framework for non-fund based support, including guarantees, co-acceptances, as well as partial credit enhancement (PCE) for bonds. The guidelines with respect to non-fund based facilities other than PCE are not applicable on NBFCs. The PCE framework has been significantly revamped, over its earlier 2015 version.
Note that PCE for corporate bonds was mentioned in the FM’s Budget 20251, specifically indicating the setting up of a PCE facility under the National Bank for Financing of Infrastructural Development (NaBFID).nd
The highlights of the new PCE framework are:
What is PCE?
Partial Credit Enhancement (PCE) is a risk-mitigating financial tool where a third party provides limited financial backing to improve the creditworthiness of a debt instrument. Provision of wrap or credit support for bonds is quite a common practice globally.
PCE is a contingent liquidity facility – it allows the bond issuer to draw upon the PCE provider to service the bond. For example, if a coupon payment of a bond is due and the issuer has difficulty in servicing the same, the issuer may tap the PCE facility and do the servicing. The amount so tapped becomes the liability of the issuer to the PCE provider, of course, subordinated to the bondholders. In this sense, the PCE facility is a contingent line of credit.
A situation of inability may arise at the time of eventual redemption of the bonds too – at that stage as well, the issuer may draw upon the PCE facility.
Since the credit support is partial and not total, the maximum claim of the bond issuer against the PCE provider is limited to the extent of guarantee – if there is a 20% guarantee, only 20% of the bond size may be drawn by the issuer. If the facility is revolving in nature, this 20% may refer to the maximum amount tapped at any point of time.
Given that bond defaults are quite often triggered by timing and not the eventual failure of the bond issuer, a PCE facility provides a great avenue for avoiding default and consequential downgrade. PCE provides a liquidity window, allowing the issuer to arrange liquidity in the meantime.
Who can be the guarantee provider?
PCE under the earlier framework could have been given by banks. The ambit of guarantee providers has been expanded to include SCBs, AIFIs, NBFCs in Top, Upper and Middle Layers and HFCs.
As may be known, entities such as NABFID have been tasked with promoting bond markets by giving credit support.
Who may be the bond issuers?
The PCE can be extended against bonds issued by corporates /special purpose vehicles (SPVs) for funding all types of projects and to bonds issued by Non-deposit taking NBFCs with asset size of ₹1,000 crore and above registered with RBI (including HFCs).
What are the key features of the bonds?
REs may offer PCE only in respect of bonds whose pre-enhanced rating is “BBB minus” or better.
REs shall not invest in corporate bonds which are credit enhanced by other REs. They may, however, provide other need based credit facilities (funded and/ or non-funded) to the corporate/ SPV.
To be eligible for PCE, corporate bonds shall be rated by a minimum of two external credit rating agencies at all times.
Further, additional conditions for providing PCE to bonds issued by NBFCs and HFCs:
The tenor of the bond issued by NBFCs/ HFCs for which PCE is provided shall not be less than three years.
The proceeds from the bonds backed by PCE from REs shall only be utilized for refinancing the existing debt of the NBFCs/ HFCs. Further, REs shall introduce appropriate mechanisms to monitor and ensure that the end-use condition is met.
What will be the form of PCE?
PCE shall be provided in the form of an irrevocable contingent line of credit (LOC) which will be drawn in case of shortfall in cash flows for servicing the bonds and thereby may improve the credit rating of the bond issue. The contingent facility may, at the discretion of the PCE providing RE, be made available as a revolving facility. Further, PCE cannot be provided by way of guarantee.
What is the difference between a guarantee and an LOC? If a guarantor is called upon to make payments for a beneficiary, the guarantor steps into the shoes of the creditor, and has the same claim against the beneficiary as the original creditor. For example, if a guarantor makes a payment for a bond issuer’s obligations, the guarantor will have the same rights as the bondholders (security, priority, etc). On the contrary, the LOC is simply a line of liquidity, and explicitly, the claims of the LOC provider are subordinated to the claims of the bondholders.
If the bond partly amortises, is the amount of the PCE proportionately reduced? This should not be so. In fact, the PCE facility continues till the amortisation of the bonds in full. It is quite natural to expect that the defaults by a bond issuer may be back-heavy. For example, if there is a 20% PCE, it may have to be used for making the last tranche of redemption of the bonds. Therefore, the liability of the PCE provider will come down only when the outstanding obligation of the bond issuer comes to less than the size of the PCE.
Any limits or restrictions on the quantum of PCE by a single RE?
The previous PCE framework restricted a single entity to providing only 20% of the total 50% PCE limit for a bond issuance. The sub-limit of 20% has now been removed, enabling single entity to provide upto 50% PCE support.
Further, the exposure of an RE by way of PCEs to bonds issued by an NBFC/ HFC shall be restricted to one percent of capital funds of the RE, within the extant single/ group borrower exposure limits.
Who can invest in credit-enhanced bonds?
Under the earlier framework, only the entities providing PCE were restricted from investing in the bonds they had credit-enhanced. However, the new Directions expand this restriction by prohibiting all REs from investing in bonds that have been credit-enhanced through a PCE, regardless of whether they are the PCE provider. The new regulations state that the same is with an intent to promote REs enabling wider investor participation.
This is, in fact, a major point that may need the attention of the regulator. A universal bar on all REs from investing in bonds which are wrapped by a PCE is neither desirable, nor optimal. Most bond placements are done by REs, and REs may have to warehouse the bonds. In addition, the treasuries of many REs make opportunistic investments in bonds.
Take, for instance, bonds credit enhanced by NABFID. The whole purpose of NABFID is to permit bonds to be issued by infrastructure sector entities, by which banks who may have extended funding will get an exit. But the treasuries of the very same banks may want to invest in the bonds, once the bonds have the backing of NABFID support. There is no reason why, for the sake of wider participation, investment by regulated entities should be barred. This is particularly at the present stage of India’s bond markets, where the markets are not liquid and mature enough to attract retail participation.
What is the impact on capital computation?
Under the new Directions the capital is required to be maintained by the REs providing PCE based on the PCE amount based on applicable risk weight to the pre-enhanced rating of the bond. Under the earlier framework, the capital was computed so as to be equal to the difference between the capital required on bond before credit enhancement and the capital required on bond after credit enhancement. That is, the earlier framework ensured that the PCE does not result into a capital release on a system-wide basis. This was not a logical provision, and we at VKC have made this point on various occasions2.
Securitisation Transactions in India are primarily governed by:
The RBI Securitisation of Standard Assets Directions, 2021 (in case the originator is regulated by RBI)
SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008, which become applicable if the securitisation notes are listed.
Consequently, an RBI regulated originator will be required to adhere to both the SSA Directions as well as the SDI Framework in case it intends to go for listing of the securisation notes.
Here, we have discussed the additional prohinitions and compliance requirements for RBI regulated originators which becomes applicable in case of listing of securitisation notes.
Additional Prohibitions under the SEBI SDI Framework for RBI Regulated Originators
Para Ref
Relevant Regulatory Provision
Our Comments
Single Asset Securitisation not permitted
19A(a)
“No obligor shall have more than twenty-five percent in asset pool at the time of issuance.”
An RBI regulated originator will not be able to undertake single asset securitisation if it intends to list the securitisation notes, though the same is permitted under the RBI regulations (proviso to para 5(s) of the SSA Directions). Comments: Single asset securitisation is not a very common practice, but this is explicitly permitted under RBI regulations
All assets to be homogenous
19A(b)
“Assets comprising the securitisation pool shall be homogeneous.”
The RBI SSA Directions only require the assets to be homogeneous in case of simple, transparent, and comparable securitisation transactions (STC Transactions). STC transactions are currently not very common, and in any case, is an investor classification, not that of issuer.For non-STC cases, there is no such requirement. Therefore, originators will be required to ensure that the assets comprising the pool are homogeneous in case they intend to go for listing of the securitisation notes. Comment: Homogeneity may be subjective
SPV can only be constituted in the form of a trust
9(1)
“The special purpose distinct entity shall be constituted in the form of a trust the constitutional document whereof entitles the trustees to issue securitised debt instruments.”
The RBI SSA Directions (para 5(w)) allow SPVs to be constituted in the form of a company, trust or other entity. Comment: Not a very big pain, as SPVs in India are almost always in the trust form.
Originator and Trustee not be under the same group or control.
10(3)
“No special purpose distinct entity shall acquire any debt or receivables from any originator which is part of the same group or which is under the same control as the trustee.”
This requirement, although essential to maintain independence, is not a part of the RBI SSA Directions. Accordingly, the same will be required to be ensured.
Additional Compliances applicable to RBI regulated Originators under the SEBI SDI Framework
Para Ref
Relevant Regulatory Provision
Our Comments
Registration of Trustees under the Securities and Exchange Board of India(Debenture Trustees) Regulations, 1993
4(b)
“(1) On and from the commencement of these regulations, no person shall make a public offer of securitised debt instruments or seek listing for such securitised debt instruments unless –XX(b)all its trustees are registered with the Board under 26[the Securities and Exchange Board of India(Debenture Trustees) Regulations, 1993];XX”
Accordingly, the trustees will be required to comply with the SEBI Debenture Trustee regulations. Comment: This is a useful provision, and mostly, the SPV trustees are registered debenture trustees. Hence, it is a useful regulatory requirement.
Contents of the Instrument of Trust
Schedule IV
Schedule IV of the SEBI SDI Framework prescribes the minimum contents of the instrument of trust.
The contents prescribed under the SDI Framework are more detailed as compared to the RBI SSA Directions, which only indicate the contents of the trust deed. Comment: Useful regulation, serving the purpose of proper disclosures. Notably, disclosures are the domain of the securities regulator.
Quarterly reports to the trustee about the performance of the underlying pool and auditor certificate
10A(1) and (2)
“(1) The originator shall provide the periodic reports to the trustee regarding the performance of the underlying asset pool, at least on a quarterly basis. (2) The originator shall provide a certificate from its auditor (s) regarding the disclosures of underlying asset pool assigned to the securitization trust, as made by the originator, on quarterly basis.”
The RBI SSA Directions (para 114 and 115) require semi-annual disclosures to be made. Further, there is no requirement to provide an auditor’s certificate under the RBI Directions. Comment: Useful regulation, serving the purpose of investor information. These disclosures are typically part of the securities regulators’ domain.
Minimum Ticket Size for subsequent transfers
30A(2)(i)
“The minimum ticket size for subsequent transfers of a securitised debt instrument shall be as follows:(i)for originators which are not regulated by the Reserve Bank of India, the minimum ticket size shall be rupees one crore.”
In case of public offer of SDIs, the minimum ticket size is Rs. 1 Crore even for subsequent transfers of SDIs. This requirement is more stringent as compared to the RBI SSA Directions (para 28), which only requires the minimum ticket size of Rs. 1 Crore to be seen at the time of issuance. Comments: The requirement has only been introduced for the public offer of SDIs. Public issue of SDIs is howe,ver not a common practice currently. Accordingly, this may not seem to be a major concern for RBI regulated originators.
Other miscellaneous provisions – offer period, allotment period, dematerialisation
29, 31(1)
Offer Period: No public offer of securitised debt instruments shall remain open for less than two working days and more than ten working days. Allotment Period:The securitised debt instruments shall be allotted to the investors within five days of closure of the offer. Further, the securitises will need to be issued mandatorily in demat form.
Comments: These requirements are applicable only in case of public offers.
Facility to avail electronic bidding platform
Master Circular dated May 16, 2025
On issue and listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper and on Review of provisions pertaining to Electronic Book Provider (EBP) platform to increase its efficacy and utility
The facility of using EBP has been extended to SDIs too. Comment: This is an optional facility, and as of now, very limited issuers have made use of this.
LODR Requirements – Chapter III
Disclosure by KMPs, directors, etc
Reg 5
5. The listed entity shall ensure that key managerial personnel, directors, promoters or any other person dealing with the listed entity, complies with responsibilities or obligations, if any, assigned to them under these regulations 51[:]52[Provided that the key managerial personnel, directors, promoter, promoter group or any other person dealing with the listed entity shall disclose to the listed entity all information that is relevant and necessary for the listed entity to ensure compliance with the applicable laws.]
This requires the concerned officers of the Listed Entity (in this case, the SPV] to make requisite disclosures for the purpose of complying with the law. Comment: Does not seem to be practically relevant, as Originators’ KMPs mostly do not have interest in the SPV. However, where needed, it is a useful disclosure.
Compliance officer to be appointed.
Reg 6, Chap III
6. (1) A listed entity shall appoint a qualified company secretary as the compliance officer Other provisions of the regulation
An issuer of SDIs is required to appoint a Compliance Officer. Comments: The requirement may be complied with at SPV level.
Share Transfer Agent
Reg 7
(1)The listed entity shall appoint a share transfer agent or manage the share transfer facility in-house:Other requirements of the regulation
The requirement to appoint a share transfer agent is typically part of the securities regulators’ domain. Comment: Mostly not relevant as the securities are offered in demat form.
Information to intermediaries
Reg 8
The listed entity, wherever applicable, shall co-operate with and submit correct and adequate information to the intermediaries registered with the Board such as credit rating agencies, registrar to an issue and share transfer agents, debenture trustees etc, within timelines and procedures specified under the Act, regulations and circulars issued there under:Provided that requirements of this regulation shall not be applicable to the units issued by mutual funds listed on a recognised stock exchange(s) for which the provisions of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 shall be applicable.
Requirement to share information with the information agencies. Comment: In case of listed SDIs, this is a part of the information eco system.
Policy for preservation of documents
Reg 9
The listed entity shall have a policy for preservation of documents, etc.
Useful for preservation of documents.
Filing of reports, statements and other documents
Reg 10
(1) The listed entity shall file the reports, statements, documents, filings and any other information with the recognised stock exchange(s) on the electronic platform as specified by the Board or the recognised stock exchange(s).Other provisions of the regulation
This is a general filing requirement for filing of information on the stock exchanges.
Scheme of arrangement to not violate, affect or override the provisions of securities law
Reg 11
The listed entity shall ensure that any scheme of arrangement /amalgamation /merger /reconstruction /reduction of capital etc. to be presented to any Court or Tribunal does not in any way violate, override or limit the provisions of securities laws or requirements of the stock exchange(s):.
Mostly not relevant for SDIs
Use of electronic mode of payments
Reg 12
The listed entity shall use any of the electronic mode of payment facility approved by the Reserve Bank of India, in the manner specified in Schedule I, for the payment of the following:(a) dividends;(b) interest;(c) redemption or repayment amounts:
Provides for mode of payments to investors. Not a cumbersome requirement as it refers to RBI-permitted payment systems to be used.
SCORES
Reg 13
(1) 61[The listed entity shall redress investor grievances promptly but not later than twenty-one calendar days from the date of receipt of the grievance and in such manner as may be specified by the Board.]Other provisions of the Regulation
This relates to use of the SCORES mechanism for settling investor issues
Payment of Fees and charges
Reg 14
The listed entity shall pay all such fees or charges, as applicable, to the recognised stock exchange(s), in the manner specified by the Board or the recognised stock exchange(s).
This mandates payment of listing fees. Usual provision for all listed securities
LODR Regulations – Chapter VIII
The entire Chapter is dedicated to listed SDI issuance.
Reg 81
Applicability(1) The provisions of this chapter shall apply to Special Purpose Distinct Entity issuing securitised debt instruments and trustees of Special Purpose Distinct Entity shall ensure compliance with each of the provisions of these regulations.(2) The expressions “asset pool”, “clean up call option”, “credit enhancement”, “debt or receivables”, “investor”, “liquidity provider”, “obligor”, “originator”, “regulated activity”, “scheme”, “securitization”, “securitized debt instrument”, “servicer”, “special purpose distinct entity”, “sponsor” and “trustee” shall have the same meaning as assigned to them under [Securities and Exchange Board of India (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008]555;
Specifies applicability of the Chapter and refers to meaning of relevant expressions
Intimation and filings with stock exchange(s)
Reg 82
(1) The listed entity shall intimate the Stock exchange, of its intention to issue new securitized debt instruments either through a public issue or on private placement basis (if it proposes to list such privately placed debt securities on the Stock exchange) prior to issuing such securities.(2) The listed entity shall intimate to the stock exchange(s), at least two working days in advance, excluding the date of the intimation and date of the meeting, regarding the meeting of its board of trustees, at which the recommendation or declaration of issue of securitized debt instruments or any other matter affecting the rights or interests of holders of securitized debt instruments is proposed to be considered.(3) The listed entity shall submit such statements, reports or information including financial information pertaining to Schemes to stock exchange within seven days from the end of the month/ actual payment date, either by itself or through the servicer, on a monthly basis in the format as specified by the Board from time to time:Provided that where periodicity of the receivables is not monthly, reporting shall be made for the relevant periods.(4) The listed entity shall provide the stock exchange, either by itself or through the servicer, loan level information, without disclosing particulars of individual borrowers, in manner specified by stock exchange.
This regulation is equivalent of reg 29 in case of listed equities, and provides for prior intimation to investors for certain critical actions on the part of issuers.
Disclosure of information having bearing on performance/operation of listed entity and/or price sensitive information
83 read with Part D of Schedule III
(1) The listed entity shall promptly inform the stock exchange(s) of all information having bearing on the on performance/operation of the listed entity and price sensitive information.(2) Without prejudice to the generality of sub-regulation(1), the listed entity shall make the disclosures specified in Part D of Schedule III.Explanation.- The expression ‘promptly inform’, shall imply that the stock exchange must be informed must as soon as practically possible and without any delay and that the information shall be given first to the stock exchange(s) before providing the same to any third party.
This regulation is to ensure the regular flow of information from issuers to investors, to maintain information symmetry. This is typical for all listed securities – for example, Reg 30 in case of listed equities, and reg 51 in case of listed non convertible debt securities.
Credit Rating to be periodically reviewed and any revision to be notified
Reg 84
(1) Every rating obtained by the listed entity with respect to securitised debt instruments shall be periodically reviewed, preferably once a year, by a credit rating agency registered by the Board.(2) Any revision in rating(s) shall be disseminated by the stock exchange(s).
This Regulation requires a mandatory annual review of credit ratings on the SDIs by a SEBI-registered CRA, and intimation of any revision to the stock exchanges.
Information to Investors
Reg 85
(1) The listed entity shall provide either by itself or through the servicer, loan level information without disclosing particulars of individual borrower to its investors.(2) The listed entity shall provide information regarding revision in rating as a result of credit rating done periodically in terms of regulation 84 above to its investors.(3) The information at sub-regulation (1) and (2) may be sent to investors in electronic form/fax if so consented by the investors.(4) The listed entity shall display the email address of the grievance redressal division and other relevant details prominently on its website and in the various materials / pamphlets/ advertisement campaigns initiated by it for creating investor awareness.
This clause requires certain pool level information; useful information for the poolComment: As in case of other jurisdictions, the disclosure requirements are typically laid by the securities regulations
Terms of Securitized Debt Instruments
Reg 86
(1) The listed entity shall ensure that no material modification shall be made to the structure of the securitized debt instruments in terms of coupon, conversion, redemption, or otherwise without prior approval of the recognised stock exchange(s) where the securitized debt instruments are listed and the listed entity shall make an application to the recognised stock exchange(s) only after the approval by Trustees.(2) The listed entity shall ensure timely interest/ redemption payment.(3) The listed entity shall ensure that where credit enhancement has been provided for, it shall make credit enhancement available for listed securitized debt instruments at all times.(4) The listed entity shall not forfeit unclaimed interest and principal and such unclaimed interest and principal shall be, after a period of seven years, transferred to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009.(5) Unless the terms of issue provide otherwise, the listed entity shall not select any of its listed securitized debt instruments for redemption otherwise than on pro rata basis or by lot and shall promptly submit to the recognised stock exchange(s) the details thereof.(6) The listed entity shall remain listed till the maturity or redemption of securitised debt instruments or till the same are delisted as per the procedure laid down by the BoardProvided that the provisions of this sub-regulation shall not restrict the right of the recognised stock exchange(s) to delist, suspend or remove the securities at any time and for any reason which the recognised stock exchange(s) considers proper in accordance with the applicable legal provisions.
This requires prior approval of the stock exchange to be obtained for making any material modification to the structure of SDIs. It also requires the originator to ensure timely payments of interest and for the credit enhancement to be available at all times.
Record Date
Reg 87
(1) The listed entity shall fix a record date for payment of interest and payment of redemption or repayment amount or for such other purposes as specified by the recognised stock exchange(s).(2) The listed entity shall give notice in advance of atleast seven working days (excluding the date of intimation and the record date) to the recognised stock exchange(s) of the record date or of as many days as the Stock Exchange may agree to or require specifying the purpose of the record date.
This is for fixation of record date for payouts; useful for investor decisions for entry or exit.
Disclosure of Information having bearing on performance/ operation of listed entity and/ or price sensitive information
Part D of Schedule III
Several disclosure requirements for significant events and developments
See comments under reg 83
Other Resources: Buy our book on Securitised Debt Instruments here.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-08-06 12:10:422025-08-06 12:17:05Listed and Restricted? Additional Compliances and Prohibitions for listing of SDIs by RBI regulated Originators
SEBI rolls out Consultation Paper: Materiality threshold for RPTs to be scale-based, Industry Standard to get softer, de minimis exemptions
Since 2021, the RPT framework for listed entities has been witnessing repetitive changes, and the current year 2025 has seen SEBI on a regulatory fast track in relation to RPTs. Be it the launch of RPT Analysis Portal, offering unprecedented visibility into RPT governance data, or the Industry Standards Note (‘ISN’), requiring seemingly a pile of information w.r.t RPTs, both in the month of February, 2025. Originally scheduled to be effective from FY 25, the applicability of ISN was later pushed on to July 1, 2025, and while on the verge of becoming effective, on June 26, 2025, SEBI notified Revised RPT Industry Standards, prescribing tiered but somewhat simplified disclosure formats effective September 1, 2025.
Even before the ISN could become effective, a 32-pager consultation paper proposing further amendments to RPT provisions has been rolled out by SEBI on August 4, 2025.
Based on the “Ease of Doing Business” theme, the Consultation Paper proposes amendments in the RPT framework, based on recommendations from the Advisory Committee on Listing Obligations and Disclosures (ACLOD). The proposals aim to address practical challenges faced by listed entities while maintaining robust governance standards.
Below we present the proposed amendments and our analysis of the same.
1. Materiality Thresholds: From One-Size-Fits-All to several sizes for short-and-tall
Proposal in CP
A scale-based threshold mechanism is proposed through a new Schedule XII to LODR Regulations, such that the RPT materiality threshold increases with the increase in the turnover of the company, though at a reduced rate, thus leading to an appropriate number of RPTs being categorized as material, thereby reducing the compliance burden of listed entities. The maximum upper ceiling of materiality has been kept at Rs. 5,000 crores, as against the existing absolute threshold of Rs. 1000 crores.
Proposed materiality thresholds:
Annual Consolidated Turnover of listed entity (in Crores)
Proposed threshold (as a % of consolidated turnover)
Maximum upper ceiling (in Crores)
< Rs.20,000
10%
2,000
20,001 – 40,000
2,000 Crs + 5% above Rs. 20,000 Crs
3,000
> 40,000
3,000 Crs + 2.5% above Rs. 40,000 Crs
5,000 (as proposed)
Back-testing the proposal scale on RPTs undertaken by top 100 NSE companies show a 60% reduction in material RPT approvals for FY 2023-24 and 2024-25 with total no. of such resolutions reducing from 235 and 293, to around 95 to 119. The 60% reduction may itself be seen as a bold admission that the present framework is causing too many proposals to go for shareholder approval.
Historical Benchmark
The absolute threshold of Rs. 1000 crores, for determination of RPTs as material was brought pursuant to an amendment in November 2021, following the recommendations of the Working Group on RPTs. The proposal of WG was based on the data between the years 2015 to 2019, which showed that only around 70 to 91 resolutions were placed for material RPT approvals by the top 500 listed entities.
Our Analysis and Comments
Turnover as a single metric is not a measure of materiality: Scale-based tests align materiality with turnover, introducing proportionality, but the question remains whether turnover itself is at all an appropriate yardstick to measure materiality.
Turnover is an inadequate metric for determining the materiality of RPTs. Materiality should reflect the likely financial impact of a transaction, which may have little or no correlation with turnover. For instance, transactions involving investments, asset acquisitions or disposals, or borrowings pertain to the balance sheet rather than the revenue-generating side of operations. Even if an item pertains to revenues, there are businesses where gross profits ratios are low, and therefore, turnover will be high. Globally, jurisdictions like the UK adopt a more nuanced, consonance-based approach [Refer Annex 1 of UKLR 7] using different parameters viz. gross assets test, consideration test, and the gross capital test for different transaction types to ensure relevance and proportionality. Section 188 of the Companies Act, 2013 also adopts a similar multi-metric approach, applying turnover and net worth, depending on the nature of the transaction.
It is also critical to recognise the wide disparity in asset-turnover ratio across industries. A trading company might turn its assets over 20 times annually, while a manufacturing entity with a 90-day working capital cycle may show a turnover approximately four times its assets. On the other hand, entities in the financial sector, such as NBFCs and banks, generate turnover largely through interest income, which is barely 6 to 10 percent of the asset base. Therefore, applying a turnover-based threshold to such entities results in thresholds being disproportionately low when compared to the actual scale of transactions, thereby distorting the materiality assessment.
Given these sectoral variations and the diversity of transaction types, a flat turnover-based threshold oversimplifies the assessment and may result in both overregulation and underreporting. A more calibrated, transaction-specific materiality framework, drawing on consonance-based criteria as seen in Regulation 30 of the LODR Regulations, would offer a more balanced and effective approach. SEBI may consider moving towards such a harmonised model to ensure that materiality thresholds meaningfully reflect the substance of transactions, rather than relying on a single yardstick.
Regulatory Lag: It took SEBI almost 4 years, i.e., from 2021 to 2025, to conclude that the threshold of ₹1,000 crores is too small, and that it requires an upward revision, which is now proposed to be increased to ₹5,000 crores. In the context of India’s rapidly growing economy, where turnover figures are expected to rise steadily, even this upwardly revised absolute threshold may soon lose relevance. Frequent threshold shifts risk “chasing” market realities rather than anticipating them. SEBI’s decision to cap at ₹5,000 crore reflects caution but may quickly become outdated.
2. Significant RPTs of Subsidiaries: Plugging Gaps with Dual Thresholds
Existing provisions vis-a-vis Proposal in CP
Pursuant to the amendments in 2021, RPTs exceeding a threshold of 10% of the standalone turnover of the subsidiary are considered as Significant RPTs, thus, requiring approval of the Audit Committee of the listed entity. The CP proposes the following modifications with respect to the thresholds of Significant RPTs of Subsidiaries:
‘Material’ is always ‘Significant’: There may be instances where a transaction by a subsidiary may trigger the materiality threshold for shareholder approval, based on the consolidated turnover of the listed entity, but still fall below the 10% threshold of the subsidiary’s own standalone turnover. As a result, such a transaction would escape the scrutiny of the listed entity’s audit committee. This inconsistency highlights a regulatory gap and reinforces the need to revisit and revise the threshold criteria to ensure comprehensive oversight in a way that aligns with evolving group structures and scale of operations. RPTs of subsidiary would require listed holding company’s audit committee approval if they breach the lower of following limits:
10% of the standalone turnover of the subsidiary or
Material RPT thresholds as applicable to listed holding company
Exemption for small value RPTs: The threshold for Significant RPTs is subject to an exemption for small value RPTs based on the absolute value of Rs. 1 crore. Thus, where a transaction between a subsidiary and a related party (of the listed entity/ subsidiary), on an aggregate, does not exceed Rs. 1 crore, the same is not required to be placed for approval of the Audit Committee of the listed entity, even if the aforesaid limits are breached.
Net Worth Alternative: For newly incorporated subsidiaries which are <1 year old, consequently not having audited financial statements for a period of at least one year, the threshold for Significant RPTs to be determined as below:
10% of standalone net worth of the subsidiary (or share capital + securities premium, if negative net worth),
as on a date not more than 3 months prior to seeking AC’s approval
certified by a practising CA
Our Analysis and Comments
● De-minimis exemption for significant RPTs of subsidiaries
The exemption for RPTs up to Rs. 1 crore in absolute terms might provide some relief for the holding entities, particularly, entities having various small subsidiaries, which, on a standalone basis, may not be material for the listed entity at all – however, the RPTs being significant at the subsidiary’s level still required approval of the parent’s audit committee. However, still the exemption threshold may be further enhanced to a higher limit, as a de minimis exemption of Rs. 1 crore entails the subsidiary having a turnover of mere Rs. 10 crores, which, from the perspective of a listed entity is a not a very practically beneficial scenario.
For newly incorporated companies not having a financial track record, linking the significant RPT threshold with net worth brings additional compliance burden in the form of certification requirements from PCA. Net worth alternative introduces valuation and certification burdens for newly incorporated entities, in which case It may be considerable to extend a blanket first year exemption of upto Rs. 5 crore, to balance ease of doing business for newly incorporated subsidiaries, the very decision of which would be stemming from the management of the parent listed entity. In fact, insisting on the net worth certificate itself seems unnecessary, as the net worth is mostly based on paid up capital, which does not warrant certification.
● Need for easing inclusion of RPs of subsidiaries as RPs of listed entity
First of all, a statement of fact. The number of related parties of listed entities went for a significant explosion in November, 2021, where the definition of RP of a listed entity included RPs of subsidiaries. For any diversified group, there are typically several subsidiaries, each of them with their own independent boards.
While the proposals pertain to significant RPTs of subsidiaries, the most crucial component of the RPT framework lies in identification of RPs, which, under the current framework, covers RPs of subsidiaries as well. These RPs may be, many a times, companies in which the directors of the subsidiaries are holding mere directorships, often, an independent directorship. There is absolutely no scope of conflict of interests in dealing with companies where a person is interested, solely on account of his directorship where there is no direct or indirect shareholding or ownership interest. Such a situation has an explicit carve out under the Ind AS 24 as well, where an entity does not become a RP by the mere reason of having a common director or KMP [Para 11(a) of Ind AS 24]. While the Companies Act treats a company as an RP based on common directorship (in case of a private company), however, the extension of such definition to RPs of subsidiaries is pursuant to the provisions of SEBI LODR and hence, appropriate exclusions may be specified for under LODR.
3. Tiered Disclosures: Balancing Transparency and Burden
Existing provisions vis-a-vis Proposal in CP
The Industry Standards Note on RPTs, effective from 1st September, 2025 provides an exemption from disclosures as per ISN for RPTs aggregating to Rs. 1 crore in a FY. The proposal seeks to provide further relief from the ISN, by introducing a new slab for small-value RPTs aggregating to lower of:
1% of annual consolidated turnover of the listed entity as per the last audited financial statements, or
Rs. 10 crore
In such cases, the disclosures are proposed to be given in the Annexure-2 of the Consultation Paper. The disclosure as per the Annexure is in line with the minimum information as is currently required to be placed by the listed entity before its Audit Committee in terms of SEBI Circular dated 22nd November, 2021 (currently subsumed in LODR Master Circular dated November 11, 2024). In the event of the same becoming effective, disclosures would be required in the following manner as per LODR:
Value of transaction
Disclosure Requirements
Applicability of ISN
< Rs. 1 crore
Reg 23(3) of SEBI LODR
NA – exempt as per ISN
> Rs 1 crore, but less than 1% of consolidated turnover of listed entity or Rs. 10 crores, whichever is lower (‘Moderate Value RPTs’)
Other than Moderate Value RPTs but less than Material RPTs (specified transactions)
Part A and B of ISN
Yes
Material RPTs (specified transactions are material)
Part A, B and C of ISN
Yes
Other than Moderate Value RPTs but less than Material RPTs (other than specified transactions)
Part A of ISN
Yes
Our Analysis and Comments
The proposal would result in creation of multiple reference points with respect to disclosure requirements. As per the existing regulatory requirements, the disclosure requirements before the Audit Committee comes from the following sources:
Rule 6A of Companies (Meetings of Board and its Powers) Rules, 2014 – for listed entities incorporated as a company
Reg 23(3)(c) of SEBI LODR – for omnibus approvals
SEBI Circular dated 26th June, 2025 read with Industry Standards Note on RPTs – effective from 1st September 2025, for all RPTs other than exempted RPTs (aggregate value of upto Rs. 1 crore)
The proposal leads to an additional classification of RPTs into moderate value RPTs where limited disclosures in terms of the draft Circular will be applicable. While the introduction of differentiated disclosure thresholds aims to rationalise compliance, care must be taken to ensure that the disclosure framework does not become overly template-driven. RPTs, by nature, require contextual judgment, and a uniform disclosure format may not always capture the nuances of each case. It is therefore important that the regulatory design continues to place trust in the informed discretion of the Audit Committee, allowing it the flexibility to seek additional information where necessary, beyond the prescribed formats.
4. Clarification w.r.t. validity of shareholders’ Omnibus Approval
Existing provisions vis-a-vis Proposal in CP
The existing provisions [Para (C)11 of Section III-B of LODR Master Circular] permit the validity of the omnibus approval by shareholders for material RPTs as:
From AGM to AGM – in case approval is obtained in an AGM
One year – in case approval is obtained in any other general meeting/ postal ballot
A clarification is proposed to be incorporated that the AGM to AGM approval will be valid for a period of not more than 15 months, in alignment with the maximum timeline for calling AGM as per section 96 of the Companies Act.
Further, the provisions, currently a part of the LODR Master Circular, are proposed to be embedded as a part of Reg 23(4) of LODR.
5. Exemptions & Definitions: Pruning Redundancies
Problem Statement
Proviso (e) to Regulation 2(1)(zc) of the SEBI LODR Regulations exempts transactions involving retail purchases by employees from being classified as Related Party Transactions (RPTs), even though employees are not technically classified as related parties. Conversely, it includes transactions involving the relatives of directors and Key Managerial Personnel (KMPs) within its ambit. Additionally, Regulation 23(5)(b) provides an exemption from audit committee and shareholder approvals for transactions between a holding company and its wholly owned subsidiary. However, the term “holding company” used in this context has remained undefined, leaving ambiguity as to whether it refers only to a listed holding company or includes unlisted ones as well.
Proposal in CP
The Consultation Paper proposes two key clarifications:
The exemption related to retail transactions should be expressly limited to related parties (i.e., directors, KMPs, or their relatives) to grant the appropriate exemption.
The exemption for transactions with wholly owned subsidiaries should apply only where the holding company is also a listed entity, thereby excluding unlisted holding structures from this relaxation
Our Analysis and Comments
Under the existing framework, retail purchases made on the same terms as applicable to all employees are exempt when undertaken by employees, but not when made by relatives of directors or KMPs. This has led to an inconsistent treatment, where similarly situated individuals receive different regulatory treatment solely on the basis of their relationship with the company. The proposed language attempts to streamline this by including such relatives within the exemption, but it introduces its own drafting concern.
The phrasing – “retail purchases from any listed entity or its subsidiary by its directors or its employees key managerial personnel(s) or their relatives, without establishing a business relationship and at the terms which are uniformly applicable/offered to all employees and directors and key managerial personnel(s)” – creates a potential loophole. As worded, the exemption could be interpreted to cover purchases made on favourable terms offered to directors or KMPs themselves, rather than being benchmarked against terms applicable to employees at large. The intended spirit of the provision seems to be to exempt only those transactions where the terms are genuinely uniform and non-preferential. A more appropriate construction would make it clear that the exemption is intended to apply only where such transactions mirror employee-level retail transactions, not privileged arrangements for senior management.
Regarding the exemption under Regulation 23(5)(b) for transactions between a holding company and its wholly owned subsidiary, this clarification seeks to align the treatment under Regulations 23(5)(b) and 23(5)(c). While this provides helpful interpretational guidance, incorporating the word “listed” directly into the text of the Regulation itself could offer greater precision and eliminate the need for retrospective explanations. Since unlisted holding companies are not subject to LODR, they are unlikely to have interpreted the exemption as applicable in the first place. As such, a simple prospective clarification might serve the purpose more effectively.
Conclusion
SEBI’s August 2025 proposals are largely aimed at relaxation, though in some cases, the ability to think beyond the existing track of the law seems missing. With the new leadership at SEBI meant to rationalise regulations, it was quite an appropriate occasion to do so. However, at many places, the August 2025 proposals are simply making tinkering changes in 2021 amendments and fine-tuning the June 2025 ISN. In sum, SEBI’s iterative approach to RPT governance demonstrates commendable responsiveness but calls for a holistic RPT policy road-map, harmonizing LODR regulations, circulars, and guidelines. Only a forward-looking, principles-based framework, will deliver the twin objectives of ease of doing business and investor protection in the long run.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-08-05 15:54:582025-08-05 16:20:44Repetitive Overhaul: RPT regime to get softer
The RBI’s regulatory approach to investments by Regulated Entities (REs) in Alternate Investment Funds (AIFs) has undergone a remarkable transformation over the past two years. Initially, the RBI responded to the risks of “evergreening”, where banks and NBFCs could mask bad loans by routing fresh funds to existing debtor companies via AIF structures, by issuing stringent circulars in December 20231 and March 20242 (collectively known as ‘Previous Circulars’). The December 2023 circular imposed a blanket ban on RE investments in AIFs that had downstream exposures to debtor companies, while the March 2024 clarification excluded pure equity investments (not hybrid ones) from this restriction. This stance aimed to strengthen asset quality but quickly highlighted significant operational and market challenges for institutional investors and the AIF ecosystem. Many leading banks took significant provisioning losses, as the Circulars required lenders to dispose off the AIF investments; clearly, there was no such secondary market.
In response to the feedback from the financial sector, as well as evolving oversight by other regulators like SEBI, the RBI undertook a comprehensive review of its framework and issued Draft Directions- Investment by Regulated Entities in Alternate Investment Funds (‘Draft Directions’) on May 19, 20253. The Draft Directions have now been finalised as Reserve Bank of India (Investment in AIF) Directions, 2025 (‘Final Directions’) on 29th May, 2025. The Final Directions shift away from outright prohibitions and instead introduce a carefully balanced regime of prudential limits, targeted provisioning requirements, and enhanced governance standards.
Comparison at a Glance
A compressed comparison between Previous Circulars and Final Directions is as follows –
Particulars
Previous Circulars
Final Directions
Intent/Implication
Blanket Ban
Blanket ban on RE investments in AIFs lending to debtor companies (except equity)
No outright ban; investments allowed with limits, provisioning, and other prudential controls
Move from a complete prohibition to a limit-based regime. Max. Exposures as defined (see below) taken as prudential limits
Definition of debtor company
Only equity shares excluded for the purpose of reckoning “investment” exposure of RE in the debtor company
Therefore, if RE has made investments in convertible equity, it will be considered as an investment exposure in the counterparty – thereby, the directions become inapplicable in all such cases.
Individual Investment Limit in any AIF scheme
Not applicable (ban in place)
Max 10% of AIF corpus by a single RE, subject to a max. of 5% in case of an AIF, which has downstream investments in a debtor company of RE.
Controls individual exposure risk. Lower threshold in cases where AIF has downstream investments.
Collective Investment Limit by all REs in any AIF scheme
Would require monitoring at the scheme level itself.
Downstream investments by AIF in the nature of equity or convertible equity
Equity shares were excluded, but hybrid instruments were not.
All equity instruments
Exclusions from downstream investments widened to include convertible equity as well. Therefore, if the scheme has invested in any equity instruments of the debtor company, the Circular does not hit the RE.
Provisioning
100% provisioning 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 or 30-day liquidation, if breach
If >5% in AIF with exposure to debtor, 100% provision on look-through exposure, capped at RE’s direct exposure5 (see illustrations below)
No impact vis-a-vis Previous Circulars. For provisioning requirements, see illustrations later.
Subordinated Units/Capital
Equal Tier I/II deduction for subordinated units with a priority distribution model
Entire investment deducted proportionately from Tier 1 and Tier 2 capital proportionately
Adjustments from Tier I and II, now to be done proportionately, instead of equally.
Investment Policy
Not emphasized
Mandatory board-approved6 investment policy for AIF investments
One of the actionables on the part of REs – their investment policies should now have suitable provisions around investments in AIFs keeping in view provisions of these Directions
Exemptions
No specific exemption. However, Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds were excluded from the scope of circulars.
Prior RBI-approved investments exempt; Government notified AIFs may be exempt
Provides operational flexibility and recognizes pre-approved or strategic investments.No specific mention of investments through MFs/FoFs – however, given the nature of these funds, we are of the view that such exclusion would continue.
Transition/Legacy Treatment
Not applicable
Legacy investments may choose to follow old or new rules
See discussion later.
Key Takeaways:
Detailed analysis on certain aspects of the Final Directions is as follows:
Prudential Limits
Under the Previous Circulars, any downstream exposure by an AIF to a regulated entity’s debtor company, regardless of size, triggered a blanket prohibition on RE investments. The Final Directions replace this blanket ban with prudential limits:
10% Individual Limit: No single RE can invest more than 10% of any AIF scheme’s corpus.
20% Collective Limit: All REs combined cannot exceed 20% of any AIF scheme’s corpus; and
5% Specific Limit: Special provisioning requirements apply when an RE’s investment exceeds 5% of an AIF’s corpus, which has made downstream investments in a debtor company.
Therefore, if an AIF has existing investments in a debtor company (which has loan/investment exposures from an RE), the RE cannot invest more than 5% in the scheme. But what happens in a scenario where RE already has a 10% exposure in an AIF and the AIF does a downstream investment (in forms other than equity instruments) in a debtor company? Practically speaking, AIF cannot ask every time it invests in a company whether a particular RE has exposure to that company or not. In such a case, as a consequence of such downstream investment, RE may either have to liquidate its investments, or make provisioning in accordance with the Final Directions. Hence, in practice, given the complexities involved, it appears that REs will have to conservatively keep AIF stakes at or below 5% to avoid the consequences as above.
Now, consider a scenario – where the investee AIF invests in a company (which is not a debtor company of RE), which in turn, invests in the debtor company. Will the restrictions still apply? In our view, it is a well-established principle that substance prevails over form. If a clear nexus could be established between two transactions – first being investment by AIF in the intermediate company, and second being routing of funds from intermediate company to debtor company, it would clearly tantamount to circumventing the provisions. Hence, the provisioning norms would still kick-in.
Provisioning Requirements
Coming to the provisioning part, the Final Directions require REs to make 100 per cent provision to the extent of its proportionate investment in the debtor company through the AIF Scheme, subject to a maximum of its direct loan and/ or investment exposure to the debtor company, if the REs exposure to an AIF exceeds 5% and that AIF has exposure to its debtor company. The requirement is quite obvious – RE cannot be required to create provisioning in its books more than the exposure on the debtor company as it stands in the RE’s books.
The provisioning requirements can be understood with the help of the following illustrations:
Scenario
Illustration
Extent of provisioning required
Existing investment of RE in AIF Scheme (direct loan and/or investment exposure exists as on date or in the past 12 months)
For example, an RE has a loan exposure of 10 cr on a debtor company and the RE makes an investment of 60 cr in an AIF (which has a corpus of 800 cr), the RE’s share in the corpus of the AIF turns out to be 7.5%. The AIF further invested 200 cr in the debtor company of the RE.
The proportionate share of the RE in the investment of AIF in the debtor company comes out to be 15 cr (7.5% of 200 cr). However, the RE’s loan exposure is 10 crores only. Therefore, provisioning is required to the extent of Rs. 10 crores.
Existing investment of RE in AIF Scheme (direct loan and/or investment exposure does not exist as on date or in the past 12 months)
Facts being same as above, in such a scenario, the provisioning requirement shall be minimum of the following two:-15 cr(full provisioning of the proportionate exposure); or-0 (full provisioning subject to the REs direct loan exposure in the debtor company)
Therefore, if direct exposure=0, then the minimum=0 and hence no requirement to create provision.
Some possible measures which REs can adopt to ensure compliance are as follows:
Maintain an up-to-date, board-approved AIF investment policy aligned with both RBI and SEBI rules;
Implement robust internal systems for real-time tracking of all AIF investments and debtor exposures (including the 12-month history);
Require regular, detailed portfolio disclosures from AIF managers;
appropriate monitoring and automated alerts for nearing the 5%/10%/20% thresholds; and
Establish suitable escalation procedures for potential breaches or ambiguities.
Further, it shall be noted that the intent is NOT to bar REs from ever investing more than 5% in AIFs. The cap is soft, provisioning is only required if there is a debtor company overlap. But the practical effect is, unless AIFs develop robust real-time reporting/disclosure and REs set up systems to track (and predict) debtor overlap, 5% becomes a limit for specifically the large-scale REs for practical purposes.
Investment Policy
The Final Directions call for framing and implementing an investment policy (amending if already exists) which shall have suitable provisions governing its investments in an AIF Scheme, compliant with extant law and regulations. Para 5 of the Final Directions does not mandate board approval of that policy, however, Para 29 of the RBI’s Master Directions on Scale Based Regulations stipulates that any investment policy must be formally approved by the Board. In light of this broader governance requirement, it is our view that an RE’s AIF investment policy should similarly receive Board approval. Below is a tentative list of key elements to be included in the investment policy:
Limits: 10% individual, 20% collective, with 5% threshold alerts;
Provision for real-time 12-month debtor-exposure monitoring and pre-investment checks;
Clear provisioning methodology: 100% look-through at >5%, capped by direct exposure; proportional Tier-1/Tier-2 deduction for subordinated units; and
Approval procedures for making/continuing with AIF investments; decision-making process
Applicability of the provisions of these Directions on investments made pursuant to commitments existing on or before the effective date of these Directions.
Subordinated Units Treatment
Under the Final Directions, investments by REs in the subordinated units7 of any AIF scheme must now be fully deducted from their capital funds, proportionately from Tier I and Tier II as against equal deduction under the Previous Circulars. While the March 2024 Circular clarified that reference to investment in subordinated units of AIF Scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units; the same has not been clarified under the Final Directions. However, the scope remains the same in our view.
What happens to positions that already exist when the Final Directions arrive?
As regards effective date, Final Directions shall come into effect from January 1, 2026 or any such earlier date as may be decided as per their internal policy by the REs.
Although, under the Final Directions, the Previous Circulars are formally repealed, the Final Directions has prescribed the following transition mechanism:
Time of making Investments by RE in AIF
Permissible treatment under Final Directions
New commitments (post-effective date)
Must comply with the new directions; no grandfathering or mixed approaches allowed
Existing Investments
Where past commitments fully honoured: Continue under old circulars
Partially drawn commitments: One-time choice between old and new regimes
Closing Remarks
The RBI’s evolution from blanket prohibitions to calibrated risk-based oversight in AIF investments represents a mature regulatory approach that balances systemic stability with market development, and provides for enhanced governance standards while maintaining robust safeguards against evergreening and regulatory arbitrage.
Of course, there would be certain unavoidable side-effects, e.g. significant operational and compliance burdens on REs, requiring sophisticated real-time monitoring systems, comprehensive debtor exposure tracking, board-approved investment policies, and enhanced coordination with AIF managers. Hence, there can be some challenges to practical implementation. Further, the success of this recalibrated regime will largely depend on the operational readiness of both REs and AIFs to develop transparent monitoring systems and proactive compliance frameworks.
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