The National Payments Corporation of India (NPCI), vide its notification NPCI/2024-25/e-KYC/003 dated 10 March 2025, formally introduced the e-KYC Setu facility. As outlined on NPCI’s official platform, e-KYC Setu enables Aadhaar-based e-KYC authentication under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (Aadhaar Act), without disclosing the individual’s Aadhaar number to the requesting (verification-seeking) entity.
Designed as a one-stop onboarding solution for regulated financial-sector entities, e-KYC Setu leverages Aadhaar-based e-KYC services while ensuring compliance with privacy safeguards under the Aadhaar Act. A key feature and a significant compliance advantage is that regulated entities using e-KYC Setu are not required to obtain a separate notification under Section 11A of the Prevention of Money-laundering Act, 2002 (PMLA). This allows financial sector regulator entities to conduct Aadhaar-based authentication without directly collecting Aadhaar numbers or integrating with UIDAI as a licensed AUA/KUA, thereby reducing both operational complexity and regulatory burden.
In this article, we examine the regulatory implications for RBI-regulated entities, the legal permissibility for non-AUA/KUA entities to conduct authentication through e-KYC Setu, process how e-KYC setu operatives and the operational and business benefits of adopting this framework.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Finservhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Finserv2025-08-14 19:23:492025-08-19 19:04:30Setu-ing the Standard: NPCI’s New Path to Aadhaar e-KYC
Since its introduction in 2021, the concept of Accredited Investors (AIs) has been through some changes. A Consultation Paper was published on 17th June, 2025 to provide for certain flexibilities in the accreditation framework. Now, vide another recent Consultation Paper dated 8th August 2025(‘AI CP’), SEBI proposes to bring light-touch regulations for AIF schemes seeking investments from only AIs. The CP also proposes to extend various exemptions currently available to Large Value Funds (LVFs) on AIs only scheme.
Further, vide another Consultation Paper(‘LVF CP’), some relaxations are also proposed to be extended to Large Value Funds (LVFs) for AIs.
Accredited Investors – who are they?
An AI is considered as an investor having professional expertise and experience of making riskier investments. Reg 2(1)(ab) of AIF Regulations defines an accredited investor as any person who is granted a certificate of accreditation by an accreditation agency, and specifies eligibility criteria. The eligibility criteria is as follows:
Further, certain categories of investors are deemed to be AIs, that is, certificate of accreditation is not required, such as, Central and State Governments, developmental agencies set up under the aegis of the Central Government or the State Governments, sovereign wealth funds and multilateral agencies, funds set up by the Government, Category I foreign portfolio investors, qualified institutional buyers, etc.
‘Accreditation’ as a measure of risk sophistication
AIFs are investment vehicles pooling funds of sophisticated investors, and not for soliciting money from retail investors. The measure of sophistication, as specified in the AIF Regulations currently, is in the form of the ‘minimum commitment threshold’. Reg 10(c) of the Regulations require a minimum investment of Rs. 1 crore, except in case of investors who are employees or directors of the AIF or of the Manager.
There are certain shortcomings of considering the minimum commitment threshold as the metric of risk sophistication of an investor, such as:
May not necessarily lead to an actual draw-down, thus exposing to the risk of onboarding investors with inflated commitments. As per the data available on SEBI’s website, out of the total commitment of Rs. 13 lac crores for the quarter ended 31st March 2024, only about Rs. 5 lac crores worth of funds were actually drawn down. Similarly, for the quarter ended 31st March 2025, the value of commitment vis-a-vis funds raised
Does not consider the investor’s financial health (income, net worth etc), hence, a potential risk of the investor putting majority of its wealth in AIFs, a riskier investment class.
The concept of AIs, as proposed in February 2021, was to introduce a class of investors who have an understanding of various financial products and the risks and returns associated with them and therefore, are able to take informed decisions regarding their investments. Accreditation of investors is a way of ensuring that investors are capable of assessing risk responsibly.
The June 2025 CP indicated that it is being examined to move AIFs gradually in an exclusively for AIs approach, starting with investments in angel funds and in framework for co-investing in unlisted securities of investee companies of AIFs. Accordingly, the present CP has proposed a gradual and consultative transition from ‘minimum commitment threshold’ to ‘accreditation status’ as a metric of risk sophistication of an investor.
Proposed flexibilities for AIs-only schemes
The CP also proposes a light-touch regulatory framework, from investor protection viewpoint, considering that the AIs have the necessary knowledge and means to understand the features including risks involved in such investment products. The following relaxations are proposed to be extended to an AIs – only scheme:
Proposed to be exempted subject to a waiver provided by each investor
This facilitates differential rights to different classes of investors within a scheme.
Extension of tenure of close-ended funds [reg 13(5)]
up to two years subject to approval of two-thirds of the unit holders by value of their investment in AIF
up to five years subject to approval of two-thirds of the unit holders by value of their investment in LVF
Same as LVFs
This facilitates a longer tenure extension to an existing close-ended scheme, if suited to investors.
Certification criteria for key investment team of Manager [reg 4(g)(i)]
Atleast one key personnel with relevant NISM certification
No exemption currently, similar exemption proposed under the LVF CP
Proposed to be exempted
The investors, being accredited, the reliance on key investment team of the Manager is comparatively low.
Maximum number of investors [reg 10(f)]
No scheme can have more than 1000 investors
No exemption currently, similar exemption proposed under the LVF CP
Proposed to be exempted
This may not be very relevant, given that in practice, the number of investors in an AIF is much lower than 1000.
Responsibilities of Trustee [reg 20 r/w Fourth Schedule]
Applicable where the AIF is formed in the form of a trust
No exemption
Proposed to be fulfilled by the manager itself, subject to terms of agreement between the Trustee and the Manager and the fund documents
The investors, being accredited, the reliance on Trustee for investor protection is comparatively low.
The exemptions are also proposed to be extended to LVFs, if not already available.
Large Value Funds: a sub-category of AIs only scheme
The concept of LVF was also introduced in 2021, along with the concept of AIs. An LVF, in fact, is an AIs only fund, with a minimum investment threshold. Reg 2(1)(pa) of the AIF Regulations defines LVF as:
“large value fund for accredited investors” means an Alternative Investment Fund or scheme of an Alternative Investment Fund in which each investor (other than the Manager, Sponsor, employees or directors of the Alternative Investment Fund or employees or directors of the Manager) is an accredited investor and invests not less than seventy crore rupees.
LVFs, thus, are in fact an AIs only scheme. Thus, whatever exemptions are available to an AIs only scheme, will naturally be available with an LVF, although the converse is not true.
Exemptions available to LVFs (other than as proposed for AIs only scheme)
In addition to the relaxations that are proposed to be extended to an AIs only scheme, there are additional exemptions available to an LVF. These are:
Regulatory reference
Topic
Exemption for LVF
Reg 12(2)
Filing of placement memorandum through merchant banker
Not applicable
Reg 12(3)
Comments of SEBI on PPM through merchant banker
Not applicable, only filing with SEBI required
Reg 15(1)(c)
Investment concentration for Cat I and Cat II AIFs – cannot invest more than 25% of investable funds in an investee company, directly or through units of other AIFs
May invest upto 50% of investable funds in an investee company, directly or through units of other AIFs
Reg 15(1)(d)
Investment concentration for Cat III AIFs – cannot invest more than 10% of investable funds in an investee company, directly or through units of other AIFs
May invest upto 25% of investable funds in an investee company, directly or through units of other AIFs
Proposed reduction in minimum investment size for AIFs
The LVF CP has proposed a reduction of the minimum investment threshold from Rs. 70 crores to Rs. 25 crores, based on the recommendations of SEBI’s Alternative Investment Policy Advisory Committee (AIPAC). The rationale is to lower entry barriers to facilitate improved fund raising, without compromising on the level of investor sophistication. The reduction of investment thresholds would also facilitate investments by regulated entities having a strict exposure limit, such as insurance companies.
Exemptions from requiring specific waivers for certain provisions
The format of PPM is specified under Annexure 1 read with the requirements specified under various other circulars from time to time. Further, in order to ensure that the activities of the AIF are in compliance with the terms of PPM, an annual audit of the terms of PPM is required to be done. The Regulations currently permit waiver of the same for AIFs/ Schemes with each investor having a minimum commitment of Rs. 70 crores (USD 10 mn or equivalent).
Similarly, the responsibilities of the Investment Committee may be waived by the investors (other than the Manager, Sponsor, and employees/ directors of Manager and AIF), if they have a commitment of at least Rs. 70 crores (USD 10 billion or other equivalent currency), by providing an undertaking to such effect, in the format as provided under Annexure 11 of the AIF Master Circular, including a confirmation that they have the independent ability and mechanism to carry out due diligence of the investments.
It is proposed that the LVFs continue to be exempt from such requirements even after the proposed reduction in minimum investment size, and without any specific waiver, considering the blanket undertaking they are required to provide.
The exemption without specific waiver requirement is based on the fact that AIs are already required to provide an undertaking for the purpose of availing benefits of ‘accreditation’. The undertaking, as per the format given in Annexure 8 of the AIF Master Circular states the following:
(i) The prospective investor ‘consents’ to avail benefits under the AI framework.
(ii) The prospective investor has the necessary knowledge and means to understand the features of the investment Product/service eligible for AIs, including the risks associated with the investment.
(iii) The prospective investor is aware that investments by AIs may not be subject to the same regulatory oversight as applicable to investment by other investors.
(iv) The prospective investor has the ability to bear the financial risks associated with the investment.
Transition to existing eligible AIFs
One of the proposals of the LVF CP is to permit eligible AIFs, not formed as an LVF, to convert themselves into an LVF and avail the benefits available to LVF schemes. The conversion shall be subject to obtaining positive consent from all the investors.
Conclusion
The proposals are a step towards providing a lighter regulatory regime for AIFs, meant for sophisticated investors, capable of making well-informed decisions. LVFs are practically a sub-set of AIs only AIFs, with a larger value of investment from each investor. As such, even if the proposals under the Consultation Papers get approved, LVFs will continue to enjoy more relaxations than an exclusive accredited investor AIF. However, the move is expected to witness more schemes focussed on AIs only, and thus, facilitate the move towards an AIs only regime for AIFs.
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
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.
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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.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-07-31 17:45:492025-08-05 11:10:55Round-Tripping Reined: RBI Rolls Out Relaxed Rules for Investments in AIFs
I was giving a collateral-free loan only, but the borrower didn’t agree – he voluntarily came and pledged family gold and silver jewellery!
This is perhaps the way Banks will be reacting after the RBI Clarificatory circular on Voluntary Pledge of Gold (‘Voluntary Pledge Circular’). The Voluntary Pledge Circular dated July 11, 2025 which addresses all Scheduled Commercial Banks (including RRBs & SFBs), State Co-operative Banks, District Central Co-operative Banks states that a a voluntary pledge of gold or silver as collateral by a borrower for an agricultural or MSME loan shall not amount to a violation of the Reserve Bank of India (Lending Against Gold and Silver Collateral) Directions, 2025 (‘Gold Lending Directions’), provided that the sanctioned amount is within the collateral-free limit laid down in the earlier RBI guidelines.
It may be noted that as per separate RBI circulars dated December 6, 2024 and July 24, 2017 farm lending upto Rs. 2 lacs and MSE lending upto Rs. 10 lacs shall be done without collateral.
This clarification by the regulator may enable lenders to circumvent the regulations by categorizing collateral as a voluntary pledge for loans within the collateral-free caps, whereas in reality, the borrower may have been directly or indirectly compelled to offer such collateral.
Further, the circular also makes reference to the Gold Lending Directions. A question may arise if the Gold Lending Directions will apply even in the case of voluntary pledge of gold.
The Gold Lending Directions should apply in all such cases of voluntary pledges to avoid a situation of regulatory arbitrage, where lenders could potentially bypass regulatory guidelines merely by categorizing the pledge as voluntary.
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